​House of Reps committee ponders taxation on the blockchain

A House of Representatives committee on Tax and Revenue heard on Wednesday from RMIT fellows that blockchain, the underlying technology that facilitates the trading of cryptocurrencies, presents a "huge" opportunity for Australia and the economy, but one fraught with regulatory concerns and moral dilemmas.

Addressing the committee, Chris Berg, postdoctoral fellow at RMIT University and a senior fellow with the Institute of Public Affairs -- as well as a fellow with the newly established RMIT Blockchain Innovation Hub -- said that while the 21st century was dominated by large firms, he predicts the future will look more like "shifting networks managed by blockchains", rather than the centralised hierarchies that he said are currently in place.

Australia is heavily reliant on corporate tax revenue; therefore these new firm-like structures that Berg is predicting are going to be harder to tax than the "monolithic firms" currently are. Taking trading of funds onto a decentralised system may potentially supercharge the profit shifting trend, as corporate tax avoidance measures cannot apply to transactions that are invisible to the Australian Taxation Office (ATO).

"For better or worse, more things are going to be unobservable by governments. Government is going to have to shift its taxation and revenue models and process to those it can observe," Berg said. "It's going to have to accept ... that there are many things it won't be able to tax, see, or regulate."

Placing income and asset information on the blockchain will require individuals, private and public Australian companies, and multinationals previously pinged as funnelling profits offshore to tell the ATO exactly how much money they have and explicitly where it is.

Berg's colleague at the university's blockchain hub, professor of Institutional Economics Sinclair Davidson, said excessive citizen surveillance or poll taxes might be the new norm for taxation.

Pointing to the debate over breaking encryption and requesting applications be built with a government-friendly backdoor, the RMIT representatives were asked if the option of a universal key was possible on the blockchain.

"I don't know that even if the government wanted to crack encryption that there would even be an available blockchain that would say 'yeah, sure'," Berg replied. "This is a global thing, there's no way to stop Australians from participating in these cryptopcurrency networks. I think we just have to accept that down the track, some of these consequences might happen."

It should not be surprising given the underlying philosophy of the blockchain was based on not trusting government.

From a government perspective, Davidson said there are positives -- providing the ATO becomes blockchain-enabled.

"If we had a situation whereby public companies placed their financial statements on a blockchain, you could have tax paid in real time via micropayments -- this would take away auditing needs -- similar thing for small business BAS statements prepared in real time," he explained.

"We've been talking about the worse case scenarios -- but government and private sector could work together. Doomsday is there and it's a non-trivial possibility that the government's ability to raise revenue will severely be impacted."

Building out such a capability would be very costly to all parties involved.

LNP MP for Forde Bert van Manen has a solution, and given the ATO just this month suffered yet another outage, he's hesitant to give the government agency the mandate.

"Given that the ATO's track record of IT projects is chequered, shall we say, to be polite, if you take ... Xero, to pick one example, I can't see anything at the moment to stop them designing their system so that it's got a blockchain capacity so that when somebody inputs their financial data their accountant already has access to it," van Menan explained.

"There's nothing stopping that interface then being fed into a blockchain setup that the ATO has access to in order to verify it.

"The ATO doesn't need to set up a whole new IT system because they've got access to the system that's already set up as part of the supplier or tax agent's licence to provide that product."

While Berg said conceptually it is possible for the likes of Xero to cop the responsibility of building such a setup, he reiterated to the committee the tech is still "a while away".

"The ATO could just trust that you were compliant, that algorithmically you were remitting the correct amount of taxation without ever exposing your books," he said, calling it a "really exciting opportunity".

"The power is being returned to the firms."

Sinclair, however, said the ATO would still need to pump funds and resources into the technology to be able to receive the flow of micropayments.

"There's no point in having all of this technology and companies still paying their tax every quarter," he said. "But there'd be nothing stopping the ATO from commissioning Xero to develop a product."

In response, Xero said the proposal to work with the ATO on blockchain wasn't an "immediate necessity" in the world of accounting.

"Xero works closely with ATO on a number of technology initiatives to make compliance for businesses easier," Xero Australia managing director Trent Innes told ZDNet.

"As everyone is, we're seeing some fascinating experimentation happening with blockchain."

The RMIT Blockchain Innovation Hub, which officially launched last month, is focused on measuring and understanding -- or seeking to understand -- the economic, political, and social implications of blockchain, and plans to advise government, educational institutions, and the private sector on how to best take advantage of the technology.

With the political heads of Australia's states and territories unanimously agreeing to establish a facial biometric database earlier this month, and the federal government detailing its Govpass citizen identification play, Berg touched on the university's lab partnering with Australia Post to further develop a digital identification system for citizens using blockchain.

PREVIOUS AND RELATED COVERAGE

Blockchain development in Australia overseen by eight regulatory bodies

In order to take a blockchain concept to market, Australian players need to jump regulatory hurdles enforced by eight separate government bodies.

ASIC weighs in on initial coin offerings

Australia's corporate watchdog has urged those involved in initial coin offerings to err on the side of caution to ensure they are abiding by the country's laws.

Don't hold your breath for blockchain-based Commonwealth services

Austrac has said Australia is still 'ways away' from a time when big-business and government really grapples with the application of blockchain-based technology.