The potential of blockchain technology is enormous in various fields, such as taxation. In this post we discuss some use cases where blockchain is used for transfer pricing and combating tax fraud.
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The transfer price is the price that two associated companies agree to transfer, between them, goods, services or rights. The tax regulations on transfer pricing that have been approved in many countries around the world try to prevent related companies (parent company and subsidiaries, for example) from manipulating the prices under which they exchange goods or services, in such a way that they increase their costs or deductions, or decrease their taxable income to the detriment of the tax collection of the country that implements the rule.
In this field, blockchain looks very promising. The systematization and automation of processes could provide benefits for the application, documentation and defense of transfer pricing. Especially, considering both the greater complexity of transactions between companies, as well as the greater transparency requirements. This has the potential to significantly reduce the effort and time that Tax Administrations invest in tax audits.
One example is Ernst & Young’s (“EY”) collaboration with SAP. In 2019, EY announced its collaboration with SAP to drive digital transformation. One area of collaboration is exploring the use of blockchain to transform intercompany accounting processes for transfer pricing (Digital Taxation – A Comparative Study Between The OECD UN Proposals).
In 2020, Grant Thronton (‘GT’) announced the launch of ‘inter.x’, which uses blockchain technologies to bring transparency to business-to-business transactions. Inter.x offers real-time data analytics dashboards that monitor intercompany transactions, including transfer pricing compliance and treasury management.
Blockchain could also be used to address one of the most common data problems in transfer pricing: data asymmetry between legal entities of the multinational group of companies. This asymmetry often leads to a number of hours spent reconciling data between companies. As well as lack of understanding of the value chain and difficulties in implementing transfer pricing policies, affecting transfer pricing compliance.
To this could be added the use of smart contracts to carry out transactions between the various entities of the group in the world, which, without a doubt, will bring transparency. Also information in real time and immutable, key aspects for the correct determination of transfer prices.
Blockchain technology could be used to improve transfer pricing audit handling. Tax authorities may have access to the blockchain network of the consortium of a given multinational group. This would allow tax audits to be performed in real time by ensuring transparent, immutable, and up-to-date transaction records.
China and false invoices
For example, in China blockchain is being used to combat false invoices. Electronic invoices that use the blockchain make use of smart contracts and encrypted algorithms to guarantee the resistance of the issuance, storage, transmission, security and the fight against falsification of documents. The system offers complete traceability and tamper resistance, ensuring that data cannot be changed after the fact.
Through a hybrid private or public-private chain, the system acts as an intermediary between the TA, the issuer and the receiver of the invoices, supervising the circulation, reimbursement and reporting process.