How Blockchain Could Help Fight—Or Even End—VAT Fraud

A common mugger might snatch an iPhone from your hand, or swindle you out of the cash in your wallet. But all the muggers in Europe probably couldn't steal the value that EU countries lose to VAT fraud, and that's because that number is estimated to be a staggering €40-100 billion per year.

Estimates say that 9% of VAT owed in Spain never makes it to the Spanish government. In Greece, it's as high as 28%.[1] This is no small problem, obviously, and in the current age of tax transparency and digital power, percentages like these seem embarrassingly anachronistic.

Like many of my colleagues I'm a FinTech and RegTech fanatic, and as such have been following (and, where possible, using and helping develop) the newest technologies of this exciting epoch in which we're living. More officially, I'm a tax expert who's been in the business for over 25 years. These interests combined, I can't help but notice when technology poses an elegant solution to a significant tax problem, and that brings me to blockchain and VAT fraud.

A huge use-case for blockchain

It seems that every use-case for blockchain or digital ledger technology (DLT), is huge, and all that huge potential can be overwhelming, but in the area of VAT the elements involved are simple. DLT exists, has been tested, and works. It is essentially a permanent and immutable record of transactions—in real time—within a network. What mostly remains is a shift in mindset, to such a degree that institutions as large as multinational companies and European governments must feel confident about putting real money towards a real blockchain product.

Before we get that far, however, it's worth discussing exactly how a blockchain could plug the leaks in the system that fraudsters currently exploit. Every sale implicates a number of players: the buyer, the seller, a bank, maybe multiple banks, and tax authorities, to name a non-exhaustive list. Let's imagine that, to each good or service which is subject to consecutive sales transactions, a ledger is associated. At every step of the chain, each player or "node", including the tax authorities, would have to confirm the transaction. Each validated transaction would then add a block to the ledger. Before a transaction would be authorised and carried out, and the related invoice issued, it would have been validated by the tax authorities who would have all the information needed to detect and eliminate any risk of irregular transaction, such as missing trader...