But, according to the South African Revenue Service (Sars) and experts, there will probably have to be a huge push for skills and adoption before blockchain becomes a mainstay of the tax system.
Sars is considering using blockchain technology, said the tax agency’s head of technology, Intikhab Shaik.
Sign up for our free daily elections email
This is where we’d usually stop you and ask you to pay to read this story, but this week M&G is free so that everyone can access the information they need in the run up to the municipal elections on 1 November. Find out more here.
A blockchain is a decentralised digital ledger that isn’t tied to a single web server. It is a string of transactions that are validated by a peer-to-peer network rather than a central entity. This allows anything to be traded securely, transparently and without the risk of tampering.
A 2019 PwC report noted that the characteristics of blockchain technology could prove valuable to tax systems in a number of ways.
l The distributed database allows for the secure exchange of information, which means this information can be shared to a tax agency without the need for an auditor.
l The database also allows for real-time payments, which is a way of distributing tax rules and regulations across systems and of continuously monitoring compliance.
According to Shaik, blockchain could be applied to a number of Sars processes, including identity and security management as well as in facilitating import and export value chains.
In the future Sars could use blockchain technology to facilitate value-added tax, payroll tax and transfer pricing, Shaik said.
Transfer pricing is the process in which related multinational corporations set up prices at which they transfer goods and services between different tax jurisdictions. Transfer mispricing has probably cost South Africa billions in revenue losses over the years.
Shaik added that future Sars blockchain use cases would require large scale participation and cooperation with industry.
In recent years, the tax agency has emphasised the effect emerging technologies will have on its operations. Its 2020-2021 annual performance plan noted that the emergence and evolution of new technologies — such as blockchain, 5G, artificial intelligence and cloud computing — “will transform the way we carry out the Sars mandate”.
“Taxpayer and trader interactions will be different and will reduce the compliance burden. We also anticipate a big impact on our employees as current roles will most certainly evolve from largely administrative functions to more analytical work and this will have implications for our staffing model and resource mix.”
According to Shaik, the potential use of blockchain technology was first considered by Sars about two years ago. This was when South Africa’s Intergovernmental Fintech Working Group launched the first phase of Project Khokha, which replicated interbank clearing and settlements using a blockchain network. Sars is a member of the working group.
Shaik said introducing blockchain at Sars requires planning so that the tax agency can establish the capability, build human capacity and conduct the required concept proofing and piloting. This means Sars will probably start out slow, he said.
“The roadmap for the implementation of this technology would start with a less complex use case … and progressively grow in maturity for larger initiatives such as an integrated customs supply chain within the broader South African trade environment.”
A significant challenge faced by entities such as Sars in the full scale application of blockchain is the competition for technically skilled individuals locally, Shaik added.
Sean Sanders, the co-founder of cryptocurrency investment management platform Revix, said Sars does not have the resources at the moment to roll out the full scale use of blockchain. “There is just not the tech talent required, or the knowledge, to be able to build these government-led blockchain programmes,” Sanders said.
He added that tax professionals in South Africa are trained in using traditional ledgers and working in the traditional banking system. Overhauling even a small part of that system would send the tax profession into a tailspin.
“This is naturally a big risk. And Sars would have to scratch their head a little bit harder to say: ‘Well, is this actually the right thing to do over the short term?’,” he said.
“It’s inevitable. Blockchain technology will definitely be integrated in some basic capacity when it comes to tax collection … but is it a case of it happening in five or 10 years time? Realistically I think you’re probably looking at like a 15 to 20-year horizon before any of that sort of thing is fully implemented.”
Lwazi Wali, founder and chief executive of HerHQ, said blockchain technology represents exciting opportunities for tax collection, especially as Africa moves into a more digital economy.
“We look at Uber and Airbnb and this notion of sort of ‘sharing economy’. Now where is the value actually created and who actually owns that asset — is it an asset?” she asked.
“And I think, for me, that’s the opportunity I’d love to see a government or Sars exploring. Moving into the fourth industrial revolution, where the majority of the population is going to be mobile first, the majority of purchases are also very microtransactions that never show up at the Sars level.”
But if blockchain technology were to become a part of the tax system, there would be a wider ecosystem of stakeholders — such as corporates and small, medium and micro enterprises — who would need to get on board, Wali said.
She agrees it will probably take a long time before blockchain technology is fully integrated into the tax system, especially since government institutions already struggle to go fully digital.
“As long as government is still non-digital at a very basic level, it becomes very difficult to think about transitioning to a blockchain environment — at least in the next five to 10 years,” Wali said.
“But that doesn’t mean it is not feasible. Because I think, at least for me, what I love about tech is the leapfrog aspect of it. If government actually puts energy towards this, I think it’s doable. I just worry that in the current landscape we’re in, just from an execution point of view, it would make it very cumbersome and very costly.”
United Kingdom may get its own ‘Britcoin’
Another contender has entered the race by countries to develop their own digital currencies.
This week the Bank of England and the United Kingdom treasury announced the joint creation of a central bank digital currency (CBDC) taskforce.
It will be co-chaired by the Bank of England’s deputy governor for financial stability, Jon Cunliffe, and the treasury’s director general of financial services, Katharine Braddick.
After the announcement, the chancellor of the exchequer, Rishi Sunak, took to Twitter to jokingly dub the country’s future digital money “Britcoin”.
The concept of a CBDC is inspired by cryptocurrency, but is different insofar as it is backed by a country’s government. In the past year, cryptocurrencies such as bitcoin and ethereum have made meteoric market gains, partly sparked by Covid-19, spurring many to take the future of digital money more seriously.
In a CBDC system, a payment is a transfer of a central bank liability, recorded on a ledger. The ledger could be centralised, decentralised — through the use of distributed ledger technology — or a combination of the two. Cryptocurrencies are currently the main users of distributed ledger technology.
In a statement, the Bank of England clarified that it envisions the UK’s CBDC would exist alongside cash and bank deposits, rather than replacing them.
“The government and the Bank of England have not yet made a decision on whether to introduce a CBDC in the UK, and will engage widely with stakeholders on the benefits, risks and practicalities of doing so,” the statement read.
“The taskforce aims to ensure a strategic approach is adopted between the UK authorities as they explore CBDC, in line with their statutory objectives, and to promote close coordination between them.”
The taskforce will also evaluate the potential risks of introducing a CBDC and monitor international developments around digital currencies “to ensure the UK remains at the forefront of global innovation”.
China has already pulled ahead of other major economies by creating and trialling its own CBDC. The People’s Bank of China has been working on the project since 2014.
The Bahamas has its own digital currency, called the Sand dollar, and Brazil has plans to launch its CBDC in 2022.
In March 2019, the South African Reserve Bank invited bids from
private companies to develop CBDC infrastructure. The reserve bank later announced it was looking into the feasibility of a digital currency.
Over the past three years, the Intergovernmental Fintech Working Group — which the South African Reserve Bank is a member of — has been testing the use of distributed ledger technology by financial institutions.
Earlier this year the working group announced the second phase of its Project Khokha, which will issue, clear and settle debentures (a debt instrument companies issue to raise capital) on a distributed ledger using token money.
In October last year a group of seven central banks, including the Bank of England, released a report setting out some of the core features to consider in the development of CBDCs.
The report recommended that CBDCs should exist alongside other forms of money and that central banks should continue providing and supporting cash for as long as there is sufficient public demand for it. The CBDCs should also not pose a threat to monetary and financial stability, the report noted.