Blockchain tech can raise tax revenues
But the South African Revenue Service doesn’t yet have the skills and multiple users to adopt it
Blockchain technology, the lifeblood of the world’s booming cryptocurrency market, has the potential to be the next frontier of tax collection. 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.
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-topeer 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.
O 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.
O The database also allows for realtime 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 valueadded 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.”
Asignificant 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.”