Blockchain (Distributed Ledger Technology) Solves VAT Fraud

25 Pages Posted: 19 Oct 2016  

Richard Thompson Ainsworth

NYU - Graduate Tax Program; Boston University - School of Law

Andrew Shact

Boston University - School of Law

Date Written: October 17, 2016

Abstract

At the World Economic Forum more than 800 executive and technology experts were asked when they thought a particular “tipping point” would be reached – when would we see a government collect tax with blockchain? The agreed date was 2023 (on average). A full 73% of the respondents however, expected the tipping point to have been reached by 2025.

This paper argues that the EU VAT will be an early adopter, if not the earliest adopter of blockchain. There are a number of reasons why. Blockchain will bring substantial efficiencies to VAT collection. It will reduce costs, and build critical inter-governmental trust relationships. Most importantly, blockchain will immediately end revenue losses well in excess of €50 to €60 billion per year in missing trader intra-community fraud (MTIC).

Blockchain will also be essential for making the EU Commission’s April 2016 Action Plan on VAT work. Blockchain should be a critical part of the detailed legislative proposal (expected in 2017). This plan will bring in a “definitive VAT system” dealing with intra-EU cross-border trade, which will be based on taxation in the country of destination. This paper predicts that the EU will bring in the “definitive system” on the back of blockchain technology.

Blockchain is a revolutionary improvement on any centralized data system. Tax administrations are inherently based upon centralized repositories of taxpayer data. They are prime candidates for the kinds of efficiency improvements that come through blockchain. This is particularly the case for transaction taxes, and even more so for a VAT fraud prevention application, like the Digital Invoice Customs Exchange (DICE), which relies on a real-time exchange of encrypted data.

Keywords: VAT, Blockchain, Permissive blockchain, Distributed Ledger Technology, Bitcoin, DICE, Digital Invoice Customs Exchange, MTIC, Missing Trader Intra-community Fraud, MTEC, Missing Trader Extra-community fraud, EAC, East African Community, GCC, Gulf Cooperation Council

JEL Classification: K10, K19, K34, K39

Suggested Citation

Ainsworth, Richard Thompson and Shact, Andrew, Blockchain (Distributed Ledger Technology) Solves VAT Fraud (October 17, 2016). Boston Univ. School of Law, Law and Economics Research Paper No. 16-41. Available at SSRN: https://ssrn.com/abstract=2853428 or http://dx.doi.org/10.2139/ssrn.2853428

Richard Thompson Ainsworth (Contact Author)

NYU - Graduate Tax Program ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

Boston University - School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

Andrew Shact

Boston University - School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

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