One of the many burdens for the financial industry, in terms of processes, is the responsibility of collating tax information and communicating it to the tax authorities. Not minding the number of forms and various data migrations needed, there are different authorities in different jurisdictions to bear in mind, creating dimensions of reporting that can loom large. The process is costly, of course, demanding time and resources from those in the financial services industry. However, it's also demanding for the authorities, who necessarily form the other half of the reporting beast.
It is therefore of little surprise that governments stand to gain immensely from digital ledger technology (DLT), i.e. blockchain, which could be used to automate, centralise, and simplify the entire exchange-of-information process.
The banks say thanks
There will be a host of advantages all round if and when reporting truly becomes blockchain-powered. For example, on the bank side, the costly process of manually collecting and sharing data will be a thing of the past. Instead of the old ways, the primary work will involve setting up an application programme interface (API) to allow authorities to engage directly with the tax data.
Creating an API is something that banks will have to do for client account data anyway, under PSD II.
A natural concern will be whether you can be sure that potentially sensitive tax information is shared only with the right parties. The answer to this will be smart contracts, which are pieces of code within a distributed ledger that define where and how the information is routed. As of yet, this technology is still developing, but we will begin seeing it put to use soon.
A further advantage will be the speed of the informational exchange. Reporting deadlines, along with the late-night form-filling parties held to meet them, will eventually disappear, as relevant tax information will be given to (or, it can equally be said, taken by) authorities in real time. This, in turn, could lead to interesting changes in how companies are run, where competitive advantages are found, and how legislation is made as well.
For example, companies will have to shift their talent pools to include programmers, and also to get in the habit of modifying their business plans (if necessary) very quickly in reaction to new tax legislation, since the timespan from a law's publication to its implementation will be shorter, as companies won't need the time to rev up reporting engines—only time to update their APIs.
The lawmaker's day-maker
As for how legislation is made, governments will need to define how they want to use information before they collect it, since they will need to agree to the smart contract and to programme their own API before doing so.
Ultimately, this is a good thing. DLT will be an enormous asset for governments: they will have access to up-to-date tax data whenever they need it, and it will perhaps free them up to spend more time and energy on determining why they need data and what they'll do with it—rather than on a laborious collection process.
The blockchain gain
Governments and companies alike will benefit from the core advantages of DLT. First to mention is the eradication of human error during the process of information collection, as this will be fully automated. Secondly, the information will be difficult (it has often been said impossible) to hack, due to the decentralised and anonymous nature of blockchain technology's revolutionary verification process.
Asset managers will get closer than ever to double tax treaties
DLT is set to be welcomed by the fund industry too.
Currently, funds have to prove their eligibility to tax authorities before being able to benefit from double tax treaties (DTTs), a process which entails providing details about their investors' countries of residence. However, asset managers are generally unable to access this investor information as they are very often not in direct contact with end-investors, and collecting data about them via intermediaries is too costly and difficult.
As more portions of the fund industry get transferred onto DLT, solutions to problems like that I just mentioned are being found. As part of the purchasing process, for example, the country of residence of the end-investor would be recorded using blockchain, allowing authorities to retrace treaty entitlement and grant benefits on a larger scale. This is potentially an enormous boon and new competitive angle for funds.
Products like FundsDLT, which is intended to automate the entire fund distribution process, are being developed to realise this potential.
Ultimately, in the realms of both tax reporting and funds, DLT offers a digitalised, more transparent opportunity.
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