Global professional services firm Ernst & Young (EY) continues exploring the potential of blockchain technology to improve taxation processes with a new initiative.
The company announced Wednesday that EY completed a blockchain-based project to address complexities and inefficiencies in the cross-border withholding tax (WHT) process, generally a paper-based process where data could be lost or not shared properly due to privacy concerns.
“It also may not be trusted by counterparties and tax authorities, who require more and more information to validate that the correct amount of withholding tax has been paid either by relief at source or after a withholding reclaim,” EY noted.
The new WHT solution implements EY’s blockchain-based technology to enable secure, automated and decentralized sharing of financial information between tax authorities and related intermediaries and improve tax compliance and reduce fraud.
The Withholding Tax solution uses EY #blockchain-based technology to automate, decentralize and share tax and financial information more securely between financial intermediaries and tax authorities. Discover how it works: https://t.co/h21dwnWGOe pic.twitter.com/3ALZpV0Q2w
— EY Tax (@EY_Tax) July 28, 2021
The project involved several global tax authorities, including the United Kingdom’s tax collection agency HM Revenue & Customs, the Netherlands Tax Administration and relevant authorities in Norway. Participating companies included French banking group BNP Paribas, American investment bank JPMorgan, financial services company Northern Trust, and Citibank.
As part of the project, EY experts alongside state and industry representatives have specifically tested the TaxGrid blockchain solution, a multi-party blockchain network connecting financial intermediaries to share tax and finance data. The solution deploys smart contracts to tokenize investment entitlements and distributes them on blockchain wallets owned by various financial entities. The tool uses tokens to receive investment data and calculate the appropriate WHT once final investors are identified.
To ensure privacy on the TaxGrid network, the solution implements zero-knowledge proof technology, a digital protocol that allows sharing data between parties without using passwords or other private information.
“Distributed ledger technology as a solution to the WHT challenge is no longer merely a concept,” EY’s WHT distributed ledger report notes, adding that the project has provided a basis for enabling a global solution to address various demands of taxpayers and tax authorities. “This could support the European Commission’s proposal to begin building a common, standardized, EU-wide system for withholding tax relief at source,” starting in 2022, EY stated.
EY has been actively working on blockchain and cryptocurrency-related tax solutions in recent years. The company last year released a crypto tax app called EY CryptoPrep to provide a fully automated product to assist clients with tax filings in the United States.