There are currently no special rules to tax “blockchain” transactions. Existing tax rules can be applied or adapted to tax transactions “on chain” in the same way tax rules are applied to tax transactions “off chain”. The introduction of blockchain (or distributed ledger technology) gives rise to the potential of using tech such as “smart contracts” to change or revolutionise supply chains or relationships between users of various systems in terms of functions, roles and responsibilities which will have tax implications.
Smart contracts can be used, for example, by an authorised supplier to automatically track, detect and re-order stock when the customer’s inventory management system indicates stocks are under a prescribed level. The entire process of order generation, authentication, invoicing and payment can be done electronically using cryptographic signatures.
When all these functions and processes are within the same country no particular tax challenges may arise. However, when the supplier, customer and any intermediaries are based in different countries there may be tension as to where the taxability arises in terms of both direct and indirect tax.
Current EU VAT law requires the permanent presence of both human and technical resources in a particular country in order for a “fixed establishment” to receive or make supplies of goods or services. Similarly, the definition of “permanent establishment” concepts in direct tax law are based on OECD-type model treaties relying upon the presence of physical offices or staff with boots on the ground for a particular time period. Yet blockchain with smart contracts is not reliant on the existence of physical attributes in order to execute transactions. Questions may arise as to whether taxability depends on the contractual “addresses” for the customer, supplier and intermediaries or where the directors or those ultimately responsible for the transactions are located……….. which might be in completely different countries!
As outlined in our other “Digital Economy” articles the OECD and the European Commission have undertaken projects to tackle the challenges posed by the digital economy. We await with interest to see the outcome of these deliberations.