At the moment the subject of Tax & Technology is hot and highly debated. The debate usually centers on the possible application possibilities, the practical and legal consequences and themes, like privacy, transparency, etc. In this blog article, I would like to give a short overview of the possible future application of blockchain technology in the field of Transfer Pricing.
Blockchain technology could perhaps be described as a shared database which holds digital information and allows it to be distributed directly between participants, without the use of any intermediaries. It is a self-auditing system which reconciles every transaction (block) making it continuously up to date, verifiable, transparent for its users and almost incorruptible. Almost, because it is possible to change the data if more than 50% of the users agree to do so, or, if the first input of data, was false from the beginning.
Bitcoins are the most prominent example of the possible use of Blockchain technology. But it is not the only way the blockchain technology could be used. Blockchain technology can be used for virtually everything of value. It has the ability to track transactions, automate calculations, increase transparency, accuracy and is easy to combine with big data analytics. Thus making it an interesting tool for all kinds of (business) purposes, including tax purposes like Customs, VAT or Transfer Pricing.
Possible Transfer Pricing applications of Blockchain Technology
Blockchains can not only be created for public purposes where access is granted to everybody who wants to join, but also for private purposes in which case access is granted only to a limited selection of people (or entities). Especially in this context, it is an interesting tool to re-think the processes of the inter-company group transactions.
One example is to alleviate the administrative burden of recording inter-company transactions. The Private Blockchain of an organization can, for example, track the complete life cycle of their products (design, manufacturing, distribution, marketing, sales, etc.) and the accompanying intercompany transactions. Due to the transparency and high level of reliability of the Blockchain technology, a lot of time which is spent on verifying data can be avoided. It can, therefore, be a good tool for the preparation of Transfer Pricing documentation.
The use of Private Blockchain technology could perhaps provide a solution for cash-pooling arrangements. Blockchain technology can be combined with the concepts of ‘smart contracts’ (which work on an ‘if this happens – do that’ element), ‘smart payments’, Transfer Pricing policy, terms and conditions of the intercompany transactions and possibly even profit remuneration can be programmed into the Private Blockchain. This could make it much easier to track the contribution of, and attribute the appropriate remuneration to each participant of the cash pool. In a similar way, Blockchain technology could perhaps be interesting in the context of developing and/or using IP (determination and collection of royalty payments).
Lastly, it could be possible to grant (partial) excess to the Private Blockchain to non-related third parties, like for example Tax Authorities, for compliance purposes.
The first challenge is to create the ‘right’ algorithm, accurately reflecting everything that needs to happen. Leaving the technical difficulties aside, the main challenge will probably be to find consensus upfront about the reliability of data which will be the starting point of the Blockchain, the parameters used and the method of interpretation.
For Transfer Pricing purposes it would be best if this consensus should not only be reached between the related entities, but also with the Tax Authorities of the countries involved. Therefore, I think it is safe to presume that most topics we are used to debating on a retrospective basis, now will have to be discussed at the ‘beginning’ of the business and/or compliance process.
In our tax practice, we already come across on a regular basis digitalized, e-commerce businesses, cryptocurrencies, etc. Personally, I think that the possible usage and remuneration of Blockchain technology is an incredibly interesting topic. I would love to meet someone who knows how to build a Blockchain. Perhaps to create a Blockchain for Transfer Pricing purposes, together?
This Blog article is written by Julia Ninck Blok, inspired by the Transfer – Pricing Conference of the WU Transfer – Pricing Research Centre, held on 7 – 9 February 2018.