=Paper=
{{Paper
|id=Vol-2542/MOD-DLT3
|storemode=property
|title=Blockchain-based Decentralized Validation of Tax Processes (invited paper)
|pdfUrl=https://ceur-ws.org/Vol-2542/MOD-DLT3.pdf
|volume=Vol-2542
|authors=Filip Fatz,Philip Hake,Peter Fettke
|dblpUrl=https://dblp.org/rec/conf/modellierung/FatzHF20
}}
==Blockchain-based Decentralized Validation of Tax Processes (invited paper)==
https://ceur-ws.org/Vol-2542/MOD-DLT3.pdf
Joint Proceedings of Modellierung 2020 Short, Workshop and Tools & Demo Papers
48 Int. Workshop on Conceptual Modeling for Distributed Ledger Technologies
Blockchain-based Decentralized Validation of Tax Processes
Filip Fatz1,2, Philip Hake1,2, Peter Fettke1,2
Abstract: Law obliges businesses to take effective measures to ensure tax compliance. Non-compliance
may have serious consequences, ranging from fines to criminal sanctions. Recently, the application
of distributed ledger technology has been proposed to facilitate tax compliance for businesses, but
also to increase the efficiency of tax administrations. In this work, we propose the use of distributed
ledger technology to enable efficient information exchange between businesses, tax administrations,
and auditors. In our solution, tax process models serve as the basis for implementing smart contract
logic. Finally, we discuss the challenges that hinder the adoption of distributed ledger technology in
practice and give an outlook on decentrally enforced compliance
Keywords: blockchain; tax compliance; tax technology
1 Motivation
Ensuring tax compliance is vital for businesses. A violation of tax laws may have far-reaching
consequences including financial penalties and criminal charges. Tax compliance not only
comprises a process execution according to regulations but also a documentation of the
process execution. For instance, German law requires businesses to verify the validity of a
business partner’s value-added tax identification number (VAT id) before issuing an invoice.
Moreover, the businesses are expected to document the verification process and provide the
documentation to the authorities upon request. Furthermore, the required documentation
must comply with the principles for the proper bookkeeping and storage of books, records
and documents in electronic form and data access3. These principles include rather basic
concepts such as availability and immutability of information and apply to different types of
taxes and related documentation obligations. Since state financing depends on taxes, the
legislator justifies these stringent regulations to avoid tax fraud and tax evasion. However,
on the businesses’ side, these regulations result in additional efforts.
1 German Research Center for Artificial Intelligence, Campus D 3 2, 66123 Saarbrücken, Germany, {filip.fatz,
philip.hake, peter.fettke}@dfki.de
2 Saarland University, Campus D 3 2, 66123 Saarbrücken, Germany
3 translation of the original administrative regulation title "Grundsätze zur ordnungsmäßigen Führung und
Aufbewahrung von Büchern, Aufzeichnungen und Unterlagen in elektronischer Form sowie zum Datenzugriff
(GoBD)"
Copyright © 2020 for this paper by its authors.
Use permitted under Creative Commons License Attribution 4.0 International (CC BY 4.0).
Blockchain-based Decentralized Validation of Tax Processes 49
2 Application of Distributed Ledger Technology in Tax Compliance
Recently, the distributed ledger technology (DLT) has been discussed as means to enable
efficient tax compliance for businesses and authorities [AS16, Fa18, FHF19, Od17]. DLT
enables businesses to immutably record transactions that are relevant to tax law. Moreover,
the decentralized structure and data replication ensures the availability of tax information.
Therefore, we propose a DLT-based tax information system which enables the exchange
and validation of tax-relevant information. In our solution, smart contract functions cover
process execution logic as well as the constraints required by tax regulations. Moreover,
we use smart contracts to immutably store documents created or modified during process
execution. This allows auditors to easily trace past business transactions.
3 Challenges
The application of DLT in taxation entails a couple of organizational as well as technical
challenges that hinder a fast adoption in practice. Although DLT is strong in validating
information within the ledger, it does not comprise any mechanisms to ensure that the
information provided matches the real-world business case. In our application, tax process
models serve as the basis for the implementation of smart contracts. Nevertheless, process
modeling languages like BPMN lack DLT-specific concepts. Moreover, the implementation
of a DLT-based information system is always a trade-off between the two opposing goals
of transparency and confidentiality. For example, while the public and tax administrations
benefit from increased tax transparency, businesses are concerned about the disclosure of
sensitive information. More critically, distributing the storage and validation of data across
different actors makes DLT naturally weak in ensuring confidentiality. However, recent
work shows that the introduction of zero-knowledge proof techniques into DLT might help
to overcome this drawback [FHF20, NVV18]. Zero-knowledge proofs enable a party to
demonstrate properties of confidential data to another party without revealing the actual
data. For example, a business could prove that the tax rate of an invoice document is either
7% or 19% without revealing the actual tax rate.
4 Conclusion
Despite the challenges of a decentralized validation of tax processes, DLT represents a
promising solution to ease tax compliance and enforce tax laws. Since taxation logic and
process logic is stored in smart contracts, the logic for processing and analyzing tax data is
publicly verifiable. Thus, the decentralized execution of these smart contracts results in an
unambiguous and comprehensible taxation of businesses. This could lead to a collaboration
of countries in matters of tax that does not rely on the trust in the fulfillment of negotiated
agreements.
50 Filip Fatz, Philip Hake, Peter Fettke
References
[AS16] Ainsworth, Richard Thompson; Shact, Andrew: Blockchain (Distributed Ledger Technol-
ogy) Solves VAT Fraud. SSRN, 2016.
[Fa18] Fatz, Filip; Fettke, Peter; Hake, Philip; Risse, Robert: Potenziale von Blockchain-
Anwendungen im Steuerbereich. HMD Praxis der Wirtschaftsinformatik, 55(6):1231–1243,
2018.
[FHF19] Fatz, Filip; Hake, Philip; Fettke, Peter: Towards Tax Compliance by Design: A Decentralized
Validation of Tax Processes Using Blockchain Technology. In: IEEE 21st Conference on
Business Informatics (CBI 2019). pp. 559–568, 2019.
[FHF20] Fatz, Filip; Hake, Philip; Fettke, Peter: Confidentiality-preserving Validation of Tax
Documents on the Blockchain. In: Proc. 15. Internationale Tagung Wirtschaftsinformatik
(WI 2020). 2020.
[NVV18] Narula, Neha; Vasquez, Willy; Virza, Madars: zkLedger: Privacy-Preserving Auditing for
Distributed Ledgers. In: Proceedings of the 15th USENIX Symposium on Networked
Systems Design and Implementation (NSDI 18). pp. 65–80, 2018.
[Od17] Owens, Jeffrey; de Jong, Julia: Taxation on the Blockchain: Opportunities and Challenges.
Tax Notes International, Aug 7:601–612, 2017.