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Tax and accounting

Distributed ledger technology may end VAT fraud

Verified financial information is an integral part of the global economy.

Organizations of all sizes, private and public, undergo audits to prove they are accurately paying dividends and taxes as well as meeting their commitments based on their financial performance. Unfortunately, many existing auditing methods still rely on manual and subjective actions — like reviewing invoices — which makes those processes time-intensive and expensive. As a result, fraud is rampant, with governments spending billions of dollars to try to curb it and using money that could be better spent elsewhere for social good. Fortunately, new technologies and business models offer practical solutions to the current situation.

Distributed Ledger Technology (DLT) is a new tool that promises to lower the costs of verifying financial information. DLT — often called “blockchain” — is an umbrella term for a range of technologies that allow you to generate mathematical proofs about your data and store those proofs in a distributed manner. This makes data simultaneously more transparent and more secure.

The first DLT solution, the public transaction ledger of the cryptocurrency Bitcoin, was built to verify the soundness of money. It is practically impossible for ordinary citizens to verify whether their government is printing too much money. It is also quite expensive to verify with 100% certainty that your banknotes are real. Bitcoin solves these issues. Instead of just trusting what a central bank tells us, anyone can verify how many bitcoins are in circulation. As the famous proverb goes: “Trust, but verify.” DLT allows for processes to be transparent, as everyone can verify the code and math involved because there are no more black boxes.

The cost of verification

To assess whether it makes sense to use DLT in a certain setting, you have to ask yourself: “How much does it cost to verify this information?” Where costs are high, you will find fraud. DLT solutions have been proposed to solve a wide variety of fraud cases, including corruption, property title fraud, and Value Added Tax (VAT) fraud.

Solving VAT fraud is a 152 billion EUR opportunity for DLT to show its strengths. Several EU governments are positioning themselves to implement sweeping changes to their VAT systems. Reforms and adjustments that would normally take years to implement are being rushed through in a matter of months. VAT fraud is the perfect use-case for DLT because it is essentially solving a double-spend problem. Companies fraudulently report amounts to the tax authority which are different from the amounts on their invoices. DLT offers us a way to verify those amounts inexpensively and at scale.

The solution is to create a globally distributed, resilient and confidential registry of invoices. Over the next decade, we expect to see every single invoice in the EU digitally registered in a single-shared distributed database. By standardizing and digitizing the method of reporting, transactions can be recorded in a global ledger, which is available for anyone to verify.

Begin to digitize early

Corporations don’t have to wait for legislation to be finalized to start digitizing their invoices. By starting to digitize early, companies will be able to fully understand and reap the benefits of digital invoice registrations. For example, they will be able to use their digital invoices to get easier access to audits and loans. Corporations should keep their digitization strategy as simple and secure as possible to stay flexible enough for future legal changes.

Ubiquitous invoice registrations are soon to be the norm. Summitto is a startup based in the Netherlands that is working on a DLT solution to make invoice registrations as safe and secure as possible. Numerous VAT experts in the Dutch government and the private sector have validated its system, and as a result we are working with various EU tax authorities to bring secure invoice registration to the market.

History has shown that regardless of the intent, collecting sensitive data exposes all parties to unnecessary risk. Due to recent cryptographic innovations, it is possible to verify the validity of invoices and identify VAT fraud without collecting any invoice or transaction data. In contrast to other VAT fraud solutions, Summitto designed a system that cannot leak data, because data is never collected in the first place. In other words, Summitto is taking a privacy-by-design approach, ensuring companies do not carry the burden of any governmental obligations, because invoice registrations in this system cannot be falsified. Summitto does not only help governments recover billions of lost tax revenue, but it also helps ensure that companies are automatically compliant. This reduces costs for companies and increases the validity of their financial data.

Thomson Reuters has a history of supporting innovation in tax technology and that is why they are an ideal investor and partner for Summitto. Thanks to Summitto’s technology, we can upend a system that has long been plagued by inefficiency and fraud and usher in a new era of trust and transparency.

Learn more

This article was written by Sascha Jafari, co-founder of Summitto. Summitto’s mission is simple: to end VAT fraud. Are you interested in participating in Summitto’s ground-breaking pilot? Contact them at pilot@summitto.com.

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