Blockchain solutions for Malta’s taxation system – you must be dreaming! The greatest head­ache or dilemma for any government is whether the Treasury is collecting the right amount of taxes from its people in a fair and effective manner. Furthermore, governments are also interested in reducing the fight against tax evasion through efficient and effective collection methods. However, a blockchain solution for Malta’s taxation system may not be that far-fetched.

Over the years, Malta has been driving its way through this minefield, and while progress has been made, the Ministry of Finance and government at large feel that more can be done, since recouping such loss in revenues could mean better finances for the country, which would lead to improved services and much-needed infrastructural investments.

Blockchain solutions for Malta’s taxation system could revolutionise the ways the government could start collecting its taxes. It could potentially disrupt the way tax payment are processed. Will this happen overnight? The answer is no, since not only would the technology need to be tested to ensure it is working as it should (we are talking about taxes, after all), but also because the implementation of blockchain technology will not only require the integration of government databases and IT systems, but its implementation could potentially affect many other areas, from identity to intellectual property rights as well as the legal infrastructural system of Malta.

Nevertheless, if for a moment we had to put aside the difficulties of its implementation, what would the benefits of having a country’s taxation system on the blockchain be? What are the bockchain solutions for Malta’s taxation system? The first benefit that would come to mind is that a blockchain-based system would allow the implementation of automated real-time tax processes. This would mean that businesses would be able to compute their tax returns in a safe and online environment. Payments to the Inland Revenue could be made in a timely and seamless manner with an immediate confirmation of one’s dues having been settled with the Treasury.

Blockchain solutions for Malta’s taxation system could reduce the burden of VAT calculations which would increase the certainty of amounts due to government

A solution that would benefit both employers and the government is in relation to the payment of tax dues by  employees as well as social security contributions derived from employment income. Currently an employer is responsible for passing onto government the tax due from their employees as well as their social security contributions. Through the development of a system based on smart contracts that would involve the necessary parties, i.e. the Inland Revenue, banks and other entities as deemed necessary, the tax and social security dues would be calculated, paid and passed to the Inland Revenue while the employees would receive their salary net of tax deductions into their bank account.

Such systems could potentially lead to a more cost-effective and real time process.

Another important piece in Malta’s taxa­tion puzzle is Value Added Tax (VAT). VAT provides one of the largest contributions to governmental budgets and is the key driving factor of tax administrations. Many find VAT as a complex and burdensome process that can lead to prohibitive costs in terms of accountancy and VAT compliance services to ensure that the VAT Department is being given its correct dues. VAT calculations are currently highly reliant on businesses themselves to ensure the correct amounts of VAT are being reported and this could be a timely and costly matter for entities.

Blockchain technology could offer industry some benefits that they may wish to consider. Business transactions being carried out by the entity would be recorded on a system based on the blockchain through the use of specifically designed smart contracts. This means that the recording of such transactions can be carried out in real time, which thus reduces the administrative burden on the entity.

From an operational level, blockchain solutions for Malta’s taxation system could reduce the burden of VAT calculations which would increase the certainty of amounts due to government. The risk of fraud and mistakes would be reduced, which in turn would lead to more peace of mind for the business entity, since it would feel safer that the VAT Department has all the correct information and the need for a review or dispute to be settled in the courts would be more of a remote possibility.

On the other hand, the government would be collecting dues in a timelier manner, which would allow it to better manage its finances. Moreover, the level of VAT fraud should also fall since a blockchain based system would allow for multiple checks and verification of transactions from all aspects, which in turn would give government greater serenity that the level of VAT being collected is reflecting the economic reality of day.

Blockchain is providing the opportunity to simplify complex processes and allow businesses and individuals alike to become paperless, through the re­moval of multiple documents needed to formalise the settlement of tax dues to the government.

As aforementioned, it could also  reduce the number of disputes between business, employer, employee or individuals with the relevant government departments, thus allowing businesses to make better use of their cash flows rather than maintaining reserves to cover potential tax disputes, which would ultimately also benefit the economy.

Through such a system the government could bring further integration between the Inland Revenue, VAT Department and Customs, thus also having a clearer picture of its income streams, which would assist in better planning its expenditure, economic forecasts as well as budgeting and investment processes.

This article does not purport to give legal, financial or tax advice. Readers who require further information may send an e-mail to nicholas.warren@csbgroup.com or malcolm.ferrante@csbgroup.com.

Nicholas Warren is CSB Group Senior Manager Financial Services & Blockchain.