EY tests blockchain for ‘near-real-time’ cross-border tax compliance

4 Aug 2021

Image: © MOZCO Mat Szymański/Stock.adobe.com

The TaxGrid system was tested in partnership with a multinational team of financial institutions, tax authorities and academics.

EY has announced the completion of a project that aimed to use blockchain technology to address “certain inefficiencies and complexities” in cross-border withholding tax (WHT) systems.

The project involved working with the tax authorities of the UK and the Netherlands, as well as BNP Paribas, Citibank, JP Morgan, Northern Trust, APG Asset Management, PGGM Investments, and academics from Vienna University of Economics and Business and the University of Exeter.

The system tested in the project, which is called TaxGrid, builds a ‘shared record book’ between financial intermediaries and tax agencies of dividend transactions. According to EY, this system can “automate, decentralise and share tax and financial information” in a secure fashion, “enabling appropriate and accurate taxation of dividend income at source”.

TaxGrid is said to include a number of security and privacy technologies including zero-knowledge proof systems, in which a party proves it possesses some secret piece of information without having to take the risk of transmitting that information over any network.

According to EY, the TaxGrid system has the potential to “improve tax compliance to near-real-time”, which could benefit investors, financial institutions and tax authorities.

“This groundbreaking cross-border project illustrates that innovation and technological development – powered by collaboration – can facilitate tax policy that works for a wide range of stakeholders,” said Kate Barton, EY’s global vice-chair for tax.

“The broad tax ecosystem can benefit from withholding tax processes that are more efficient and more secure. This will reduce costs, increase transparency and move tax compliance into near-real time.

“The intention is to continue these multi-stakeholder discussions on ways to engage with other government and industry representatives. We want to address the legal and regulatory changes required to achieve a wider application of the WHT solution to help the global withholding tax challenge.”

Jeffrey Owens, director of the Global Tax Policy Center at the Vienna University of Economics and Business, added: “Our analysis of a blockchain solution to withholding taxes showed that, by drawing on countries’ best practices, solutions to some interesting legal issues can be found that enable governments and industry to benefit from near-real-time access to information and improve the functioning of international capital markets.”

Jack Kennedy is a freelance journalist based in Dublin