November 18, 2016 | Written by: John Palfreyman
Categorized: Tax & Revenue Management
The fast-growing digital economy is a nightmare for governments looking to maximise tax revenues and minimise tax evasion! A recent report “Tax Challenges in the Digital Economy” from the policy department of the European Parliament states:
“Digital goods are highly mobile or intangible, physical presence of a company in the market country is often not needed in the digital sector, rendering it substantially different from traditional brick-and mortar businesses. New digital business models (subscription, access or advertisement models) and new technologies such as robotics or 3D printing are not confined by national boundaries and can easily escape their tax liabilities by channelling their royalty payments towards a tax haven . .”
The same report quantifies that tax revenue losses due to tax fraud, evasion and avoidance total some EUR 1000 billion, of which EUR 150 billion is from tax evasion.
Imagine a world where the ownership and location of digital assets are reliably captured at asset creation and updated throughout the asset lifetime. All members of the asset management chain – including the government taxation authorities – could share one agreed view of the complete asset location and ownership history. By providing an agreed, tamper proof and complete record of the digital asset ownership history – as it transits the value chain – Hyperledger blockchain could deliver just that.
Let’s look at how this would work in practice across a digital media asset creation, publishing and distribution chain shown in figure 1.
Figure 1 – Digital Asset Management Chain
The media acquisition company creates and populates the new asset registration template, which is loaded onto the Blockchain. The Smart Contract ensures that only an authorised acquisition organisation can do this; the template will include details of the owning organisation, location, duration and technology used in the acquisition process, and privacy services are used to lock the blockchain creation record to the actual digital media.
When the acquisition organisation transfers the asset into Archive system prior to editing / publishing the asset location information on the blockchain is updated accordingly. The smart contract permits the acquisition organisation to do this and the transaction occurs only if all relevant parties agree; a process referred to as consensus.
The digital media is then retrieved from the archive and transferred to a publisher (possibly in a different country, with a change of ownership) by invoking a transaction on the Blockchain on execution of a (Smart) Contract of Sale. The publisher has permission (again by Smart Contract) to add asset history / location information. This update is visible to all members of the chain with the right permission. For example, distributors in the network can see new digital media availability.
Through inclusion in the blockchain business network, government regulation and taxation administrators have full access to the changes in ownership and location of the digital asset. This would eliminate opportunities for tax evasion, and maximise tax revenue collection.
Figure 2 lists the main challenges that the digital economy presents to tax authorities (as itemised in the European Parliament report) with a brief description of how a blockchain based solution could address each challenge.
Figure 2 – Blockchain Value-add to Digital Asset Tracking
The organisational challenges in building and maintaining the business network cannot be underestimated, but the benefits are clear for all (honest) members of the network. This is illustrated by the early projects that IBM are conducting with the Everledger corporation for tracking diamonds across the supply chain, and the Netherlands vehicle licensing organisation for registering and tracking electric bikes. Whilst both projects are in the early stages, the benefits for all participants is very clear.
So the use of blockchain technologies could be transformational for government tax authorities wishing to reduce revenue losses due to tax evasion. But the technology is still in its infancy. Most important right now is for governments to increase their levels of awareness through hands on experimentation and proofs of concept to cut through the considerable hype and understand what blockchain can really do for them.
I’d be very interested in your opinion on this – leave me a comment here or get in touch via twitter or LinkedIn!
Want to know more about blockchain?
- Blockchain for Government
- Proving Provenance with Blockchain
- Blockchain and Cyber Security
- Everledger Project
- Blockchain Education