You must have heard about the famous 'Blockchain' concept and may have benefited from the altcoin transactions. You must have also learned about the poor performance by tax authorities to data management and identify tax fraud, in particular, fraud pertaining to value added tax. But have you ever visualised the possibility to defense dishonest people with blockchain technology? This is happening in Shenzhen, a smart city in South China.
Blockchain arise from the classic arithmetic issue, Byzantine Failures. There are ten Byzantine forces sieging one strong enemy and can only beat it with at least 6 forces attacking together. In order to win the battle, the ten commanders are supposed to act in consensus, by fully communication with the support of signalmen. However, there are rats among the signalman group that could give wrong fade info to ruin the plan. Compared with picking up the rats one by one at incredibly high costs but low efficiency, the commanders exploit an alternative to defense the impact of the rats, or the info fraud.
This is realized by an arithmetic design: Commander B who receives a message from Commander A will sign his own name on the message (probably a piece of parchment) before sending it to the rest commanders other than Commander A. In this way, all commanders sign the message received before delivering to all other commanders other than the info sender. In this way, the commanders are able to act under harmonized instructions if the number of rats does not exceed one third of the number of Commanders.
Blockchain is designed in a similar way: people pack info during certain period (including data and code) into a block with a timestamp, then connect the block to the previous one with a Hash value attached. Subsequently, new content may be written into the page to create new blocks and make it a traceable chain. Info recorded in the chain is open to everyone and every PC, but not changeable. One must own at least 51% of the computing capacity of the entire internet to revise the data restored in existing blocks, resulting in a higher cost than outcome of revising the data. Despite that altcoins, or cryptocurrencies, have troubled tax authorities all around the world with its unique decentralized and encrypted characters, it is only the application of blockchain tech at an early stage, or Blockchain 1.0. In theory, Blockchain tech may be applied to and benefit all property transactions, irrespective of tangible assets or intangible assets, financial assets or non-financial assets, as well as Internet governance.
These days China has been frequently heard due to its development and penetration of the mobile internet tech. Now, the tax authority has been increasingly involved in the informatized trend.
On May 24, 2018, the Chinese State Administration of Tax in Shenzhen announced to cooperate with Tencent, one of the three Internet tech giants in China, to establish the alleged “Intelligent-Tax Lab (ZhiShui)”. The ZhiShui will support tax administration in terms of electronic invoice application, tax risks warning, tax service optimization and tax system design based on aritificial intelligence, blockchain and big data tech.
The first goal for ZhiShui is to tackle the invoice fraud issue with blockchain tech. It is frequently observed in practice that taxpayers received fake invoice without realizing it. In this case, the traceable and unchangeable characters of blockchain tech perfectly matches the need for the invoice administration, controlling fake invoices and developing invoice issuing process. With the blockchain solution, each interested party and individuals of one invoice can be connected and traced back, which eases the identification of fake invoice. This solves the issue of multiple deduction with one invoice, deduction with fake invoice, and difficulties to identify the fake invoice. In addition, this reduces the administrative and compliance costs, as well as preventing data leak.
Since 2017, tax amount collected in China exceed the pace of GDP growth, with a significant part coming from VAT and transfer pricing inspection. Blockchain invoice by Shenzhen SAT is the first step. Other tax tech, such as tax administrative platform backed by big data, artificial intelligence based on knowledge graph and governmental smart decision-making system based on big data, are expected in ZhiShui to help in the tax administration. While modernize the tax administration system, all these tax tech are releasing a common signal: never be dishonest.
Webinar | September 19, 2019 - "How To Do A Beps Compliant Qualitative And Quantitative Value Chain Analysis"
Webinar | October 10, 2019 - "Global Tax Controversy Management - Focus: Digital Economy"
TPA Global is pleased to invite you to International Tax Review’s 19th annual Global Transfer Pricing Forum in Amsterdam (NL).