What does taxation system look like today?
Our tax has three main essential components: mandatory payment, non-refundable payment and alienation. It is automatically understood in such a way that taxes are something unpleasant. However, in fact, taxes are a combination of various elements, and if you analyze the elements consecutively, then you will see a reasonable system.
The first component is registration of taxable items. Currently there is only one possibility to record that – based on primary documents. If you have this paper, you are lucky and you can record the expense, if you don’t, you can’t. Another thing is the taxation period. We count it using the Gregorian calendar - either a year, a quarter, or a month.
The next component is the way of tax payment. There are several variations here. Firstly, through tax declaration, when you make the tax return yourself and pay it based on what you have written. There is another option based on the source of payment, when the tax agent “takes” a bit from you instead of paying the whole thing: he takes away a portion of that and pays it to the budget. And there is the administrative way, when tax authorities had calculated the tax for you, determined how much you have to pay and sent you the receipt, and you pay it.
Payment discipline is not quite a trivial component of tax, but it can be applied. The idea is that currently you have to transfer a certain amount from your bank settlement account to another settlement account. While doing so, you have indicate a specific budgetary classification code, and if you had accidentally transferred the money to a wrong code, it will be problematic to recover that amount. It often happens that you overpaid one tax, underpaid another, but you can’t set them off in some cases.
How does the system of interaction between the main participants of taxation system work?
Essentially, all the tax components work through interaction – the interaction between tax authorities and taxpayers. In Russia, tax authorities currently prevail. Until 2015 our tax legislation did not have the word “interaction”. What we had was solely tax administration. The main postulate is that it’s a power-based approach: you do as we say. In 2015, we got interaction for a very limited circle of entities. However, regretfully, we still proceed from the the fact that entire tax-related interaction is based on distrust. Tax authorities do not trust the taxpayer. The authority presumes that the taxpayer is either evading tax or somehow tries to reduce it. The taxpayer distrusts the tax authorities because he presumes that they are trying to extract everything from him or at least more than what is due. Taxpayers have another doubt that they use to justify their unwillingness to pay taxes: the disbelief that the taxes paid will be “spent properly” later.
Another basis is entropy. We have a formal taxation institution, all the rights are written, everything is clear, but informal practice leads to the fact that a formal and clear mechanism becomes too variable, which leads to some uncertainties. This leads to complexity in application.
What is blockchain technology and how can it be used in taxation system?
Blockchain is a way of storing data. An important thing is that we store data taking into account the features that this technology provides.
The first core thing in blockchain is the distributed ledger. In a standard setup you store all your data on one computer. In case of blockchain, the data are stored on all computers connected to network. You have some database and it is everywhere. At any point of time you can access it. Thus, we get such feature as publicity. Publicity implies that the data cannot be replaced inconspicuously.
Another property of blockchain is permanence. A block is a record of a transaction in a certain format. All the information in blockchain is recorded in certain blocks, those connect in a long chain, encrypted, written in symbols and closed with a key. The key contains the content of an entire block. When we create another block, it also compresses all the information, encrypts it and again results in compressed information. But the essential thing is that the key of the second block is included in the first block’s key. We do the same thing with the third block: we include the key of the third block in the second block’s key. This is how we get permanence. If we change the information in the first block, then the key of the first block will change. Thus, if the first block’s key changes, then the keys of the second and the third blocks will change. You don’t have to store the entire database. You will see only the third key. If it matches the one that is written in your records, then it means that the blockchain was not changed. If it doesn’t match, then you need to examine the entire blockchain.
Thus, blockchain is a kind of asset, operations/contract with this asset that are put into blocks and the blocks are interconnected through encryption.
What is a bitcoin?
Bitcoin is one of currencies that exists in blockchain and is the main one. The main notion about bitcoin is transaction. A record is a transaction, some transfer. For instance, when I say that I want to transfer two cups of coffee to another table, then I first inform: transfer to that table, second: two cups of coffee, third: I need to show where I got the two cups of coffee, and if I don’t have that, then that table won’t get anything. If I have three cups of coffee and I only send two to that table, then I get one cup “suspended”. But in blockchain there is no such notion that something got “suspended” somewhere. The entire blockchain lives in transactions. If I send two cups to that table, then I need to send that one remaining coffee that is left. And I do, but I send it to myself and receive it. This property enables me to not think about how much and of what I have on my balance. I don’t have the balance, I “dumped” it all, and either got something back or I didn’t. But there is no need for recording, no double-entry bookkeeping.
How are blockchain transactions automated?
The key feature that blockchain gives us is the so-called smart contract. It turns over the functioning of the entire system. It’s an ordinary program code that enables automatic performance of certain actions at certain triggers. Here is how an ordinary contract works: Mr. Petya sold a chair to Mr. Kolya. If Petya gives the chair to Kolya, then Kolya gives Petya 100 rubles. Smart contract works differently. It has “if” but that “if” is indisputable. “If” in the sense of “when”. When Petya sold the chair to Kolya, Kolya automatically gets 100 rubles. As soon as the smart contract gets confirmation that the action was performed, the money follows automatically. So we get the situation when we don’t have to follow up the execution. If everybody has signed up for this and agreed that everybody fits in this smart contract, then it starts working itself.
What does blockchain technology bring for taxation system?
Recording of tax items. In the standard system, we had primary documents. Now we would get the smart contract. No need for primary documents, no paper; the smart contract stipulates that the asset is transferred, the tax is paid, you just watch your money being paid as taxes.
I have mentioned that our taxation period is based on Gregorian calendar. Taxation period with blockchain works on actual basis. Blockchain has no time, it has blocks. Everything is measured by blocks, definitely not by time. But we can say, for instance, let us pay property tax every thousandth block. There is another possibility: taxes can be paid upon the fact of transaction. We don’t need to wait for the end of fiscal year.
Tax payment method – automated taxation. You don’t have to file a tax return and plague the tax agent.
As a result, we combine the three properties of blockchain and get a wonderful thing: automated taxation through smart contracts based on actual activity. Who needs tax authorities? Do business, make money, it all got calculated and sent somewhere.
Now what concerns payment discipline. When we talk about blockchain, there is no such notion as account. On one hand, one might speak of transfer from one account to another. But essentially it is a transfer from one entity to another. I, the taxpayer, paid to the budget.
As a result, we would like to formulate the new notion of tax that would imply a transaction and simultaneous fulfillment of your tax liabilities. It would be convenient both for the taxpayer and for the state.
Where else can blockchain be used apart from taxation system?
There are several ways the blockchain could be used today.
Settlements system. This is the most elaborated system where blockchain technology is developing the most.
Tracking the supply chain. Today, tax authorities are implementing the record of all goods, so the most logical thing is to do that in blockchain. However, no work in this direction is being done yet. A goods chain is when we can completely track what my iPhone is assembled of. Every detail would have a small marker, that enables the “tracking” of this detail, all details will be combined in one, and then we see the entire “history” of the smartphone.
Automated standards. This is about any equipment having regulated wear and tear. A small number of sensors would enable to measure the degree of wear and tear, so we would not have to do maintenance every year, but only when there is actual wear and tear. This would all be put in an open database. Unfortunately, there are no such projects yet.