Taxation & Revenue Collection Working Group’s Docs 01 Projects EXCHANGE OF INFORMATION BETWEEN TAX AUTHORITIES: IS IT TIME FOR TaxE?

The exchange of information for tax purposes between countries is not a new issue. We are witnessing to many ways how the information is exchanging: spontaneous, on request or automatic exchange of information. Quality and speed of the exchange of information between countries are crucial for preventing and minimizing tax frauds. Based on the VAT collection figures available, the total amount of VAT lost across the EU in 2017 is estimated at EUR 137.5 billion! If we look at that amount of the Tax Gap, and only the VAT Tax Gap at European Union level, we see that it is a huge amount of tax that has not been collected. If we add to this the amount of the Tax Gap by all types of tax at world level, the estimate of evaded, unpaid tax is frightening.
All this money could have been spent for the common good of the citizens, improving their economic strength and quality of life.
Data on the Tax Gap, among others, indicates that we need to consider the following most important questions:
are existing ways of exchanging information between countries effective in preventing and minimizing cross-border tax frauds?
how can existing ways of exchanging information be improved?
The time for considering these questions is now!
At the world level, all tax administrations have the same main tasks: timely collecting taxes and effectively preventing tax fraud. In order to fulfill these tasks in a quality and efficient way, it is imperative that tax administrations exchange information in a timely manner. The progress made by the obligation to exchange information automatically between Member States of the European Union, is a major step forward. However, the dynamics of automatic exchange of information as well as the time spent on data pairing require consideration of system improvements. Even more complicated are the procedures and dynamics in the case of spontaneous exchanges of information or information on request.
Tax frauds are becoming more sophisticated every day. In the age of digital evolution, cross border (also domestic) tax frauds happen extremely quickly and often in the virtual world. Without timely (even better in the real time) information, tax administrations cannot adequately and quickly respond to these challenges. Could new technologies be helpful?
Among the EU Member States, Estonia is already leveraging blockchain technology at government-level by developing X-Road, a decentralized information system for all citizens and residents, to which all public services in Estonia have access. Currently, X-Road is also implemented in Finland, Azerbaijan, Namibia and the Faroe Islands. Since June 2017, automatic data exchange has been implemented between Estonia and Finland, leading to the first platform in the world to automatically exchange data between countries.
Blockchain’s core attributes mean that it has significant potential for use in tax :

• Transparency: blockchain provides provenance, traceability and transparency of transactions
• Control: access to permissioned networks is restricted to identified users
• Security: the digital ledger cannot be altered or tampered with once the data is entered. Fraud is less likely and easier to spot
• Real-time information: when information is updated, it’s updated for everyone in the network at the same time.

So, how to use blockchain technology for improving exchange of information? TaxE is (at the moment) a hypothetical system of information exchange between tax administrations of different countries, which should enable faster and better exchange of information. TaxE System is based on blockchain technology using its advantages: real time information, immutable system, control and security. Consensus mechanism is set up in a way that includes Proof of Identity as one of the components. Also, legal framework should follow new tool, especially international agreements between countries or European legislation.

We should become “one nation” for tax purposes to stop tax frauds and tax avoidance. Also, “one nation” tax system could be much easier for doing business, increasing tax compliance and collecting the taxes.

Authors: Ksenija Cipek and Sean Brizendine