Blockchain – will it revolutionise tax?

01 July 2016

A few weeks ago, construction workers in London unearthed hundreds of Roman writing tablets, including some of the earliest known examples of receipts and IOUs. The find reminded us that, essentially, the way in which we record transactions has barely changed in 2,000 years. But will we say the same five or ten years from now?

Blockchain – a secure distributed ledger that simultaneously records transactions on a large number of computers in a network – is about to make the step from the theoretical to the practical. When it does, it will fundamentally change the way businesses, people and governments operate. The technology has the potential to securely record and share information about anything that has value – money, intellectual property, art, land – information that can be trusted because everyone involved has verified it.

The financial and business world is excited about blockchain because it offers the potential of real-time, secure and reliable execution and recording of transactions. But there are many other implications if the technology moves into the business mainstream.  Tax is one area where blockchain could have a profound impact – and we’re going to explore some of the implications for people, governments and business in a series of blogs in the coming weeks. But first, #letstalkabouttax.

In principle, blockchain is just doing what those tablets did two thousand years ago, recording agreement between people. But while the basic idea of commerce hasn’t changed, the way in which we conduct transactions, and record and share information about them, has altered radically and, in turn, tax rules have been developed and adapted to deal with these changes. The problem is that these rules have their foundations in physical transactions and trade, and not in the virtual, digital world of blockchain.

Meet the future: Blocksell.com

Let’s take as an example a fictional company – an enormous, global online marketplace where individuals and businesses can buy and sell goods and services. This marketplace, not unlike an unholy mix of Amazon, Alibaba and ebay, runs on blockchain technology through a web portal and users can either trade in a digital currency –eg Bitcoin – or, on occasion, barter whatever they have for whatever they want. Anyone signing up to the company – we’ll call it Blocksell.com - uses its off-the-shelf ‘smart contracts’ (computer code which automates the ‘if this happens, then do that’ element of written contracts) to manage and execute transactions instantaneously.

We’re going to look at how Blocksell.com might be treated by tax authorities in a future blog but for now, let’s just think in terms of the tax on transactions within it. We’ve written about the problems of applying existing tax law to digital business, but blockchain adds another layer of complexity.

Here are just a few questions that will have to be answered:

    • Where do the transaction take place for tax purposes? Under blockchain, the transaction is recorded in many places simultaneously and the identity or location of the counterparty may not be know
    • What happens when Blocksell.com’s customers barter? What’s the taxable value of the transaction?
    • What’s the taxable value if the transaction is settled in a digital currency?
    • Does VAT have to be accounted for, and is the rate affected by the location of the counterparty? And what about other transaction taxes?

There are many, many more questions and they need to be tackled soon. The rate at which blockchain technology is being tested suggests that a Blocksell.com-type company could be with us fairly soon. And we all – businesses, advisers, tax authorities and governments – need to be ready.

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