Blockchain’s ability to disrupt and revolutionize the digital frontier is already underway. Fields like Finance and Accounting are seeing foundational shifts in the way business is conduct. An often overlooked area, however, is ripe for innovation – Value-Added Tax. Like Artificial Intelligence and automation before IT, blockchain potential to revolutionizing the gathering, analyzing, reporting, and recovery of VAT is as inevitable as it is inventive
The Basics of Blockchain and Why it Matters to VAT
Blockchain’s origins began in Bitcoin – an accounting method for the decentralized digital currency often referred to as cryptocurrency. Since then, Blockchain has evolved into a technological powerhouse with a rapidly growing arsenal of applications. Utilizing distributed ledger technology (DLT) in which transactions are processed and stored within nodes, a network of distributed devices – the blockchain can be used to authenticate transactions, store data, provide digital “paper trails,” and ensure updates in real-time. These transactions can represent almost any activity: such as instructions to buy/sell stocks, an actual exchange of funds, and the exchanges of other assets– from stock certificates, bonds, and property deeds.
In regards to VAT technology solutions, blockchain can be vital as a complementary tool to intelligent, deep learning automation solutions, such as VATBox. Even if your business does not intend on processing cryptocurrency transactions, or even planning on accepting or using alternative currencies, there are still countless potential benefits in using blockchains distributed ledger technology. Key to Blockchain technology’s value is its ability to be used as a ledger for information of any kind, with or without cryptocurrency-related business.
Think of Blockchain as something comparable to a database or spreadsheet. However, in this case, identical copies of data are stored on every node, and as a result – there is no central copy that can be hacked or compromised. In this sophisticated database, no transaction is too small, insignificant, large, or consequential – information cannot be put at risk because it is authenticated by a decentralized network, and the possibility of errors is almost impossible. This detail is vital for VAT recovery as VAT compliance requires delicate and accurate collection, analysis, and reporting of transactions involving Value-Added Tax.
Adaptation to tax rules and solutions is necessary, given the rapid changes in technology. Not only is the nature of storing and submitting tax-related information evolving, given the changes in the digital landscape, but consequently – so are the relationships between taxpayers and tax authorities. Tax authorities are encouraged by the potential for greater efficiency and compliance with the application of new digital technologies, and taxpayers are equally encouraged by the promise for an easier, more intuitive filing process. Blockchain is set apart as an innovative solution for advancing VAT technology because of the many attractive features that it boasts.
Blockchain Features Advantageous for VAT
Blockchain technology has several built-in traits which are designed for mitigating errors, increasing efficiency, tracking the most minuscule microtransactions, and maintaining a hacker-free record with real-time updates. With these features, blockchain has the potential to enhance a business’s VAT recovery rate and compliance.
For tax advisors specifically, the potential of blockchain has tailored applications for tracking indirect taxes such as VAT, GST, and sales taxes. These taxes are often preceded by chains of transactions and their tax liabilities. For example – with VAT, where tax is evaluated at each point where value is added for a good or service, the ability to track the chain of transactions in its entirety would simplify the process of ensuring accuracy and compliance. Tax obligations are often caused by key events that need to be documented and securely reported, such as the delivery of goods, the fulfillment of a contract, and the export and import of products and services. Blockchain maintains a comprehensive, tamper-free chain of transaction data, which makes it particularly attractive for tracking tax data.
Taxes can be complicated, but they are a central sound business. The method of determining the nuances of what type of tax applies in any given situation depends on complex knowledge that must be applied accurately for every transaction. Collecting the accurate amount of tax depends on correct, “real-time” data and decision making. Tax errors, lack of information, and fraudulent activity can all have a substantial impact on compliance and recovery. Blockchain technology offers a way for all given parties to have access to accurate, real-time information by ensuring all nodes have identical information at all times.
Real-time tax data is increasingly significant as tax administrators on a global level are demanding real-time data from businesses in order to evaluate and support their VAT and GST liabilities and deductions. From the perspective of a tax administrator, blockchain can greatly increase the speed, accuracy, and ease of gathering relevant tax information, thereby increasing the quality of VAT and GST compliance while decreasing enforcement costs. From the business’s perspective, blockchain can guarantee higher rates of VAT recovery with less burden.
As blockchain becomes more ubiquitous and is applied in various fields, consider how blockchain might impact VAT documentation. The most important document in VAT is the invoice. It’s possible that moving to the blockchain would result in a VAT invoice requiring a digital fingerprint to be considered legitimate. Generated from the VAT blockchain consensus process, a fingerprint would immediately confirm the block in question, and would be permanently linked to the previous and subsequent blocks in the chain. The commercial chain’s entire history could be followed and confirmed by anyone associated with an approved tax-auditing program.
Preventing Tax Fraud and Errors with Blockchain
As a result of blockchains allowing discrete and valuable data to be transferred accurately and securely, it is no surprise that this technology is commonly embedded in common day-to-day business processes while being considered for tax applications across the world.
Tax and customs administrators combat fraudulent attacks by demanding incredibly accurate levels of accounting and reporting to support indirect tax filing and customs declarations.
These stipulations can result in serious compliance burdens for taxpayers and cross-border traders. The rate, efficiency, protection, and transparency of blockchains could mitigate these burdens for taxpayers while also minimizing the risk of fraud.
For instance, blockchain provides transparent and traceable transactions by storing every transaction history detail in blocks, simplifying how all VAT data is accounted for, no matter how insignificant the transaction may be. Data is verified by a consensus of reliable nodes, which means errors are often detected and eliminated before they become problematic; subsequently, devices introducing errors are no longer considered to be reliable nodes. As a result – records cannot be altered or erased because they become part of the chain itself, which makes blockchain an optimal method for combating tax fraud.
There are additional advantages to block as well. Communication can occur across multiple ledgers, ensuring that all related data is integrated. Blockchain affords user controls, so only verified users with appropriate user permissions have access to sensitive information, which is updated in real-time, giving all parties access to up-to-date information. In terms of speed and accuracy, when blockchain is established with specifically programmed incentives for nodes – transactions occur exceptionally quick because the network’s fastest devices are rewarded for their quick response times.
New capabilities for blockchain technology are emerging every day. There are endless innovations and iterations in development that hold the promise for transforming how businesses process, store, and track data. With so many applications possible, utilizing distributed ledger technology as a part of a business’s VAT technology seems all but inevitable. As is the possibility of blockchain-based applications integrating with the artificial intelligence, robotic process automation, deep learning, and the Internet of Things ecosystem.
Investing in blockchain can be the catalyst in implementing real-time, automated tax processes that guarantee compliance, manage security and transparency, and mitigate the burden of tracking and reporting taxes.
To learn more about how VAT automation can help your business, contact VATBox. VATBox has modernized the VAT recovery process, providing businesses and financial institutions with uncontested visibility, compliance, and data integrity. Leveraging the cloud and utilizing full automation, VATBox demonstrates total control of a company’s VAT spending, while making the recovery process more efficient and yielding higher returns. To learn more about how VATBox’s AI-driven solution can help your company thrive in today’s ever-changing financial climate, request a free demo.