As economies shift into intangibles as drivers of economic value, is the present global tax system fit for purpose? Dr Jag Kundi, a Hong Kong–based scholar-practitioner active in the FinTech space, looks at the role that blockchain can play in improving and upgrading the global tax system.

This article will consider how taxation on digital economies is limited in its scope, effectiveness and collectability. This last point of collectability is a real threat to governments around the world as the digital economy knows no borders or sovereign territories. There are big impacts on an economy if tax is not collected correctly. These risks would cover:

  • loss of revenue for government expenditure impacting on reduced public services
  • delayed interest payments on government bonds, which could make sale and holding of government bonds less attractive, and 
  • depreciation of the national currency thereby impacting international trade. 

The role of the blockchain will also be considered as a way of potentially improving and upgrading the tax system.

Is the present tax system fit for purpose?

In today’s world, taxes may be considered as a necessary requirement for any civilised society to function. Originally this was not the case. Tax was used as a ‘temporary’ means by government to finance war. Every war from ancient times to today was paid for by some kind of tax, from the time of Alexander the Great to the American Revolution. You could argue that if you want to end war, end taxes! 

Tax is one area that impacts us all. The famous quotation ‘Nothing can be said to be certain, except death and taxes’ attributed to Benjamin Franklin in 1789 actually has its roots earlier in The Cobbler of Preston by Christopher Bullock (1716) who wrote ‘Tis impossible to be sure of anything but death and taxes’.

Taxation in a ‘bricks and mortar’ based economy is relatively simple. The physical presence or permanent establishment test would be applied and the tax calculated. As a local citizen, individual or corporate, being physically located within a defined territory would be the basis for calculating tax – this became known as a territorial-based tax system, that is, one in which a government would usually only tax income earned in that territory. Gibraltar, Hong Kong, Singapore and Macau are examples of territorial-based tax systems.

An alternative taxation system called ‘worldwide taxation’ simply aggregates all income, regardless of where earned, and taxes it as one lump sum. The US is an example of a worldwide taxation system. The pros and cons of either system are not the focus of this article, as both depend on the physical location of the individual or corporation for the basis of their initial tax assessment.     

This approach worked well for the taxation of tangible assets and physical goods within physical borders as indicators of economic value – who owes/owns what. As long as the underlying assets were tangible, that is observable and measurable, it was perfect for tax authorities to use this as the basis for financial record-keeping and thereafter for tax assessment. 

Consider the industry development timeline below (see Figure 1) and see how the time periods between each successive period of industrialisation are being squeezed. The whole pace has quickened dramatically with the shift to a digital world where the offline world is now becoming more and more connected online. Originally the process was evolutionary in nature taking, time for progression; today it is more revolutionary in nature, due to rapid and disruptive change. The digital world has impacted/ disrupted nearly every industry from media, communication, entertainment, education, finance and logistics. Today physical reality is being displaced by virtual reality and augmented reality.

Industry 4.0 has a host of enabling technologies that promises to usher in a golden era in the digitisation of manufacturing. Enabling technologies include:

  • Internet of Things (IoT)
  • cloud computing
  • artificial intelligence (AI) and machine learning (ML)
  • data analytics, and
  • advanced smart robotics.

Industry 4.0 will take what was started in Industry 3.0 with the adoption of computers and automation, and enhance this with smart and autonomous systems fueled by big data and machine learning – all intangible. As everything is being done faster, cheaper and at scale, these technological innovations are driving marginal costs to near zero, making goods and services priceless, nearly free and abundant and no longer subject to market forces.

The challenge here for national tax systems will be based on a number of factors:

  • absence of physical presence
  • strong dependence on intangible assets
  • complex nature of transactions conducted digitally, and
  • difficulty of qualifying assets, activities and types of income.

In the 21st century, value is being defined, created and shared across digital platforms and much of this value is intangible in nature – such as big data. As part of their digitalisation, companies have been quick to transform part or all of their business operations to a platform where the exchange of value can be done with less friction.       

The platform-based economy

As the tech consultancy firm Applico ( puts it, ‘A platform is a business model that creates value by facilitating exchanges between two or more independent groups, usually consumer and producers. In order to make these exchanges happen, platforms harness and create large, scalable networks of users and resources that can be accessed on demand.’

Consider the following:

  • Alibaba and Amazon are the largest retailers in the world but they don’t own any stock or inventory
  • Uber is the biggest taxi company in the world but it doesn’t own a taxi
  • Airbnb has become the biggest accommodation provider but owns no property, and
  • Facebook is the largest media company in the world but hardly creates any of its own content.

All of these companies are based on ‘digital platforms’ and are examples of Unicorns (relatively new companies that quickly attain a market valuation of more than US$1 billion).

As economies shift into intangibles as drivers of economic value, the present financial system as the basis for assessing tax needs an upgrade. Witness companies like Apple that create significant value out of intangible assets through combining design and software – both intangibles. These are then shaped to give the consumer the ultimate user experience – again an intangible. This may help to explain why Apple had a market value in excess of US$1.3 trillion in December 2019, and why Alphabet (the parent company of Google) and Amazon are close to these breathtaking valuations – both companies heavily vested intangibly.   

With Industry 4.0, the old model of investing in tangible assets (plant, property and equipment) is quickly being replaced with the concept of being lean, agile and ‘asset-light’. A more updated variation of the asset-light model is also referred to as the OPEX model, as opposed to the CAPEX model. CAPEX implies leaders make investments in tangible fixed assets, whereas OPEX implies that, wherever possible, leaders should try to rent, lease or outsource the use of assets, rather than buy themselves. A classic example here would be computer storage – rather than keep buying more physical storage, companies are switching to cloud-based storage such as Amazon Web Services. Instead of buying your personal edition of MS Office productivity software, use it on the cloud via a subscription-based model.   

One last example here shows the full impact this change is having. According to, in 2017 Facebook, Google and Apple employed in total 236,105 full-time employees with a total market capitalisation of about US$2.2 trillion. Compare this to say Walmart employing over 2.3 million people, Volkswagen over 664,000, Hon Hai Precision (Foxconn) over 667,000 and a combined market capitalisation of US$323 billion. The tech companies have a market capitalisation almost seven times that of their old economy peers, but employ 15 times fewer employees. The savings and value dynamics operating here are obvious to the corporates. Now factor in the multiple jurisdictions where intellectual property, cloud storage and a distributed management and employees (recruited via the ‘gig’ economy) can be based – and the savings, with tax included, can be in the order of magnitudes.

Consider Amazon: in 2017 its UK operations, which handle the packing and delivery of parcels and its related customer services, reported an increase in revenues from £1.46 billion to £1.98 billion and pre-tax profits of £72 million. However, it paid just £4.5 million in corporate tax, which works out at a rate of 6.25% compared to actual corporate tax rates in the UK of 19%. To further complicate matters, sales for Amazon’s UK retail sales are reported through a separate company in Luxembourg, but its US filings reveal that UK revenues hit US$11.3 billion last year, a healthy 19% year-on-year rise.

Tax authorities struggle to check and verify the tax liabilities of such global businesses operating worldwide supply lines and complex organisational structures. Many multinational corporations (MNCs), for tax purposes, set up a local operation as an individual company, which then pays the parent (or other subsidiary) company for goods, services and intellectual property. The price they pay is set under a system called transfer pricing. However, the MNC will have an incentive to maximise profits in low-tax jurisdictions and hence pay less tax. The same incentives work in reverse – maximise allowable expenses (for tax purposes) in high-tax jurisdictions.

An example here would be where a French-based subsidiary of an MNC might pay an ‘inflated price’ for services provided via another subsidiary based in a tax haven such as the British Virgin Islands. This would have the impact of reducing the French subsidiary’s tax liability and protect the cash transferred from French tax rates. The overall aim here is to minimise the group tax liability as tax payable involves real cash outflows (to the government) rather than the accounting fiction of tax expenses, which are based on accruals (estimates based on timing differences of cash flows). 

The potential role of blockchain

In this context, rather than fight the digital economy, government could turn to technology as an ally to improve the tax system. Blockchain technology has emerged at a time when many in the tax world are rethinking whether the present tax system is still fit for purpose. As mentioned above, the present tax system was designed for the days when physical goods were traded, bought and sold. Digitalisation of tax is gaining traction with both developed and developing countries adopting various electronic tax reporting schemes. Does it still make sense for tax authorities to collect tax as they always have done in the past? This is more likely a question for tax policy rather than technology.

Blockchain provides digital trust. It is a distributed and decentralised ledger technology that permanently and securely records every transaction made on its network. Combined with smart contracts (contracts in the form of computer code that are activated automatically on a blockchain, without the need of a third party, such as a lawyer or bank, when certain conditions are met), blockchain has the potential to revolutionise governance by making the transaction of money, property and shares transparent and conflict free amongst its users. These benefits can be categorised as set out below.

  • Transaction processing and data storage costs can be reduced, and
    a decentralised network can be faster and do more than a centralised server.
  • It is almost impossible to overwrite or make changes to the ledger without the related network members being aware or agreeing to such changes. The secure cryptography also improves security.
  • Accountability and transparency is enhanced by making the origin of every transaction known and public, which in turn will assist in making the tax computation easier and indisputable.
  • Automation of tax transactions driven by smart contracts will make the process of tax compliance less of a worry. Smart contracts can automate the execution transactions upon the satisfaction of predetermined and mutually agreed-upon conditions.
  • Blockchain has the potential to make tax payments more secure, and with the addition of artificial intelligence and robotic process automation will also help increase compliance and reduce fraud.

Because blockchain is an objective, mutually agreed-upon record of transactions, multiple parties can verify every step of a process. This will enable a blockchain-based financial ecosystem to carry out all financial transactions in an objective, transparent and decentralised manner. This would imply that the record of every single transaction is visible to anyone on the network. Such records are unchangeable. The implication of this is startling, as when the financial details of every transaction become traceable, the ownership of assets and money can be easily determined and tax due thereon easily calculated – not just easily calculated but also automatically! Thus reducing the opportunity for minimising tax liabilities and reducing costly tax disputes. The ‘tsunami-like’ impact this will have on the financial, accounting and legal industry cannot be understated.

A further development here would be to automate the tax collection via the smart contracts on the blockchain, resulting in instant settlement of sales tax, value-added tax (VAT) or goods and services tax (GST). For example, a supermarket group could bring together supply, sales and tax within a distributed ledger that records all transactions and automatically pays the associated sales tax/VAT/GST. This approach is gaining interest in the European Union (EU). In November 2018, the European Parliament Special Committee on financial crimes, tax evasion and tax avoidance published a draft report which contains recommendations on fighting cross-border VAT fraud. The report encourages member states to explore the possibility of a plan to place cross-border transactional data on a blockchain and to use a secure digital currency that can only be used for VAT payments.

Smart contracts can be programmed by government or their appointed regulators to act in accordance with the local tax laws. The smart logic of such contracts can allow them to be programmed to maximise all the allowable claims and deductions available to the taxpayer. This means that neither party then needs to keep track of their finances and potential tax liabilities, as the smart contract will automatically handle this by making the relevant deduction (or refund) to the taxpayer’s account. Real-time tax reporting and collection would be the logical extension of the smart contracts here. 

Another advantage arises from the use of the blockchain-based approach. Corporate fraud can be prevented or significantly reduced, as such systems can account for every transaction, making it easy for tax authorities to calculate taxable earnings and bill them accordingly. This approach will also provide the evidence in case of non-compliance or tax avoidance to support legal action. And in the face of strong, immutable proof such as that offered by blockchain records, trust and fairness will prevail.

While blockchain may provide governments with an alternate method to tax the digital economy, several challenges lie ahead.

  1. Due to the decentralised nature of a public blockchain, the computer code is held on many computers/ servers simultaneously. To protect and preserve the blockchain data integrity it would rarely be based in just one jurisdiction – most likely the data would be held on multiple computers/ servers and based in multiple jurisdictions. Additional issues would arise here around where the severs are located and also the ‘miners’ who mine (validate) the blocks on the blockchain. So where is the value-added created and where are the assets based for tax purposes?    
  2. A further complication would be the question of who owns the blockchain. A public blockchain could have multiple ledger owners and therefore this could create potential controversy around the income attributable to participants, and also ownership of the underlying database assets.
  3. Linked to point (2) above is the creation of intangible assets – how to measure the value created in different market jurisdictions by the users of the platforms and the digital infrastructures. 

Points 1 and 2 above relate to how tax rights can be attributed to any tax jurisdiction when the digital economy can generate profits without physical presence and without setting up a permanent establishment. Governments and regulators facing the challenge of digitalisation of their economy are attempting to deal with these vexing issues both collectively and individually.

In May 2019, the OECD released a document known as ‘Programme of Work to Develop a Consensus Solution to the Tax Challenges arising from the Digitalisation of the Economy’. This is currently under discussion among members and should give rise to a final technical paper in December 2020.

The EU in March 2018 issued two proposals that would have delivered new ways to tax the digital economy:

  1. an interim measure focused on a Digital Sales Tax (DST) based on 3% gross revenue, followed by
  2. a longer-term approach addressing taxation of profits when a company has no physical presence in a country.

To date the EU has not managed to get unanimous agreement from member states and the above proposals have been delayed. However, this has led to individual EU member states moving forward with their own DSTs. Austria, Belgium, France, Italy, Spain and the UK are all in the process of moving forward individually in this respect.   

Non-EU countries are also considering ways to tax the digital economy. In October 2018, Australia issued its own discussion paper, followed by New Zealand in February 2019, on how to tax the digital economy. However, to date nothing has been implemented. Governments are wary of introducing a patchwork of similar but different measures.

For now building an entirely new tax system around blockchain is not realistic – we need to start small and look for the human problems that need to be solved. We are in the early stages of understanding how and what blockchain can do for businesses, for consumers and for the world of tax. Similarly tax is not the main priority when businesses think about using blockchain. Although the focus is blockchain’s potential to reduce transactional costs, add digital trust and improve transparency, a resulting more streamlined, efficient and effective tax function would be a significant bonus. 

In conclusion, as our businesses migrate more and more onto digital platforms with tax authorities likely to follow, there will be some interesting dilemmas for the regulators. Should they accept digital currencies such as Bitcoin for the payment of tax? As more artificial intelligence and machine learning perform routine employment tasks and gradually replace human workers, then should a robot tax be introduced? How should governments tax the digital natives who work across borders and receive payment for their services in digital currencies?

Even though blockchain is lauded as a revolutionary technology that will impact every industry, and may address some of the above concerns, to be truly transformative on a global scale, then the real advantage will come from a unified global financial platform that companies can ‘plug and play’ into. This will raise all kinds of national sovereignty issues. As such this would appear some way off in the future. For now, continued investment in this technology and application of wider tax-use-case examples can help speed up the mainstream acceptance and adoption
of blockchain. 

Dr Jag Kundi

The author can be contacted by email:, or via LinkedIn: Look out for the final part of Dr Kundi’s series of articles in CSj exploring the interaction of emerging technologies of the digital era with governance and ethics in a future edition of this journal.