Governmental Incentives for Implementing Distributed Databases

reverseacid (56)in #blockchain • 6 years ago (edited)

Tax avoidance and Distributed databases

Intro

In the foggy world of tax collection and auditing, it is generally considered by established tax authorities, a rule of thumb to always assume that taxes are being non-proportionally shifted and bounced from one haven to another, and not paid to the country that deserves it the most. The list of tax havens is long; Malta, Cyprus, Mauritius, British Isles, Panama etc. And the cost of shifting accounts is increasingly low. In today’s digital age, with a few clicks and a series of database shifting, Corporate entities can conduct ‘Accounting Wizardry’ to sway away from increasing their tax liability. The greatest advantage for Corporations, which also appears to be the greatest liability for Collection Authorities is that, Global Taxation laws are foggy, complex and non-compliant across jurisdictions. Moreover, bureaucracy has to be maintained in international data transfer; a rigid, inefficient process which makes ascertaining tax liability immensely time-consuming. Governments have to follow a pre-defined procedure of individually putting in a data requests from other countries, which solely depends on the relationship between the pair. A solution for this could be a shared database system, tailor made for a group of volunteer countries who can come together and voluntarily submit and extract accounting information of mutual concerns.

Organizations such as IMF, with the help of the G20 (Group of 20) have established the OECD (Organization for Economic Co-operation and Development) to specifically look into this matter – a shared database is maintained and updated periodically to look into the matter concerning each member state’s interests. But a lot of drawbacks and national security concerns can be associated with this model of sharing information. Certain countries, such as Russia, can be a little hostile when it comes to giving away national information to say the USA, but will probably be comfortable when India or Japan use the same.

Tax Liability Avoidance Mechanisms

Source: Melville Book House

Ever since the early 1900s and possibly even before that, wealthy individuals have put their money in countries known as ‘tax havens’. This is a term most people are familiar with; it is a regional jurisdiction in which money can essentially be hidden and is kept without paying substantial amounts of tax. Bermuda, Mauritius, Cayman Islands, and Monaco are a few examples, but Switzerland is the most infamous tax haven along with Panama.

Tax havens these days gather a lot of attention and are subject to constant criticism from the general public for allowing the extraordinarily wealthy folk to continue contributing less and less to society in the form of taxes. While catering to individuals, the larger proportion of tax avoidance is done by corporations, in the form of ‘profit shifting’. Profit shifting involves using subsidiaries in other countries to reduce or avoid a portion of your actual tax burden. The most infamous case of this method involves Apple and a country not many know to be a corporate tax haven – the Republic of Ireland.

Despite being a common practice before 2015, when Apple’s use of the methods came to the attention of the mainstream media the entire concept was widely criticized by the EU insofar as even interfering in Irish tax law, which is technically not allowed as per EU norms. While companies like Google, Adobe, Facebook, and General Electric (just a few of many) used it to avoid a significant yet small portion of the tax (between €10-30 billion), Apple took it to a whole new level by avoiding nearly €120 billion in taxes. All of this came to light only when renown economist Paul Krugman described the 34% growth in Irish GDP in 2015 as ‘Leprechaun Economics’.

The details of how it went down are quite straightforward and simple. Apple’s legal counsel just used very differing tax laws in two jurisdictions to its advantage in retaining a major portion of their tax liability. Apple Inc. is a company registered in the United States of America. In Ireland, Apple had two subsidiaries; Apple Operation Ireland, which was a holding company structured to provide internal financing, and Apple Sales Ireland which was a pure non-financial subsidiary. Now, Apple Operations was an Irish registered company operating in Ireland but Apple Sales was Irish registered and claimed to be managed from Bermuda. This created a huge amount of conflict in tax laws from America and Ireland. As per the USA, the tax of Apple Sales Ireland was taxable outside of the USA’s jurisdiction (hence in Ireland) but as per Ireland, it was not liable to pay its taxes in Ireland as it wasn’t managed and controlled from within the country. This led Apple Sales to pay no tax as it was not registered in Bermuda or the USA so it wasn’t liable to pay tax there and it wasn’t liable to pay tax in Ireland as their laws require control and management from within the country. As a result, they used Apple Sales Ireland as the destination for all non-USA sales of their products.

Governmental Initiatives

Events like this which happened before the financial crisis of 2008 were the reason for the United States passing FATCA in 2010. FATCA requires all countries around the world and their banks to report to the US government any information and balances of any account held with them by US nationals, be it an individual or a corporation. Profit shifting has proved to actually benefit the US at the cost of other countries due to their wide tax base and their thorough tax legislature. This just goes to show that there is more to every situation than what meets the eye. Nevertheless, the Double Irish and Dutch Sandwich schemes were detrimental to most economies. The governments of the world aimed to remedy this by giving the OECD (Organization for Economic Co-operation and Development) the task of designing a globally accepted Base Erosion and Profit sharing (BEPS) plan. This plan currently exists but in an extremely watered down form as a result of extensive lobbying from American technology and life sciences companies, the main beneficiaries of BEPS strategies. There must be an easier way to get companies to be compliant with tax norms. A multilateral agency like OECD has minimal powers to push agendas, but this particular plan despite having 68 signatories (countries) has proven to be inefficient. So what else can be done in this situation? Enter, DLTs.

What is Blockchain and What it is Not?

Ask anyone about what was the most rotating buzzword of 2018, and everybody would shout out “Blockchain”. Not a lot really understand what it is, even less are able to explain the reason for the buzz, and a small percentage of that can actually differentiate the buzz from actual use-case. For that reason, we are going to clearly specify in bold letters, WE ARE NOT DISCUSSING BLOCKCHAIN, but a form of Distributed Ledger Technology (DLT).

A blockchain is a terribly unattractive database distribution model when National and International resource sharing come into play. Blockchain, being an open-source, public and censorship-resistant ledger cannot be implemented as a common database for Governmental authorities to update and extract information as it allows for participants other than the entities in-charge, and outside players to also extract information.
But that doesn’t mean that certain aspects that have been developed within the Blockchain ecosystem cannot be used with other database models. One of our previous article specifically talks about Distributed Technologies, its Sub-sets, and the use-cases for each of them.

Inter-Governmental DLT

Consider a scenario wherein a set of countries (say G20) get into an agreement to form a Distributed Database of International Accounting Information, somewhere on the lines of a Blockchain or a Private DLT such as Quorum (JP Morgan) or R3 (Corda consortium). In this database, they agree to voluntarily upload the Accounting Information of corporations or entities that fall within the sphere of the G20. Each country can look into the information it needs from the accounting information provided by others, readily cumulate the information available and extract the Tax liabilities of the concerning entity. For instance, the USA, wishing to determine the true tax liability of say Apple Inc., can make use of the distributed ledger wherein other member countries have promptly updated Apple Inc.’s accounts with respect to their particular jurisdiction. Due to its access to the distributed database, the USA now can immediately ascertain the cumulative accounting information of Apple Inc., which it can then use to ascertain the true tax liability of the corporation, and also, can later remunerate fellow member countries with the tax liability they are owed from Apple Inc.’s profits accumulated in their respective boundaries. This process can be carried among all the mutual entities that the member nations evaluate to be taxed under their jurisdiction.

Features such as Smart Contracts and Multi-Sigs can be embedded within the database, that allows members to customize their information giveaway and collection process. Pre-specified inter-governmental agreements between two or more nations can also be embedded to account for National preferences. For example, if Japan has a clearly superior relationship with say Argentina, wherein they have a pre-arranged agreement that specifies each other to facilitate a wide range of information exchange, they can customize the protocol in ways that allows for this exchange, and also be sure that other member nations cannot snoop in to disrupt their closed inter-governmental agreement. A similar highly complex agreement can also be embedded in the pre-arranged agreement that encompasses all the members of the G20 (in this case) to follow a bureaucratic arrangement which allows the fast flow of international information transfer.

The adoption of this model could also bring in an increased sense of transparency for corporation and governments alike, because, to ensure honest and unaltered extraction of information from other countries, each country has to be able to provide honest and unaltered information personally. This is the only favorable strategy for each and every member country to follow to ensure maximum cooperation and extraction.

Road towards Adoption

Due to the current downside financial association with Blockchain, Bitcoin leading the way, and the generally negative or unclear consensus among Governments, it is difficult to convey to the authorities the uses of a distributed blockchain-inspired database that performs complex accounting applications and pre-specified arrangements, and at the same time facilitates smoother and faster information exchange. It can be argued that this process of information transfer is definitely several orders of magnitude better and more efficient than the current bureaucratic mode of international information transfer.

Governments have to start differentiating public Blockchains with private DLT mechanisms and realize the potential the latter model carries. Inefficiencies, malpractices, third-party manipulation, corruption are just several of the drawbacks that a shared database will help curb and eliminate. The potential for distributed databases is clearly immense for centralized governing entities.

It is understandable if several “hardcore public blockchain fanatics” disagree with the view of Governments taking part in a private database management system, as it opposes their imagined utopia of a “Global Decentralized Public State” which is individually controlled and arbitrated by the members. But, it is important for them to realize that no matter what their imagined utopia looks like, it is crucial that there exists a Governing authority that externally keeps a check on the activities and makes timely adjustments to local or global laws governing the subjects.

Conclusion

Rather than forming a barrier against the innovation wave that's about to hit the Global economy, the Governments should rather start evaluating their losses, analyze their moving-ahead strategies and embrace the eventual outcome. Yes, most Governments are afraid that they might lose out on a lot of economic, social and monetary power that they have built up for decades or even centuries. But that doesn't mean that they can stop the changing opinions of the crowd. Instead, they have to make sure how best they can use it to their advantage to do the job they are elected for, Serving the Public.