The immutable nature of blockchain, its ability to automate control systems as well as increase transparency and precision of transaction data, and having a decentralised base, places its importance as potentially revolutionising and having the prospect of radically transforming taxation as is obtained currently.

Although blockchain is predominantly utilised in the financial sector today, its value is noticeably more, being that it is widely associated with cryptocurrencies. While cryptocurrencies may not exist without blockchain, blockchain has a broader range of applications beyond crypto; real estate processing systems, music royalties tracking, anti-money laundering tracking systems, medical data security, real-time IoT operating systems, and content creation, are a few usages of blockchain currently at play today.

The taxation economy is one of the sectors that need to keep pace with the rapid growth of technology to improve nations’ economies and increase the standard of living of its adherents. The Organisation for Economic Co-operation and Development (OECD) has identified technological advancements and digitisation as leading transformation and adjustment in tax systems.[1] Taxation is one of the significant sources of government revenues. As an integral part of the effective functioning of the state, the quest for bettering and improving taxation is infinite. Reforms in the taxation sector have the potential to spread across other public sectors. This paper sets out to examine blockchain and its design while exploring its potential for the tax economy.


While many are familiar with bitcoin and other digital assets, the same is not the case for the underlying technology they are built; blockchain technology. A Blockchain is an open-source ledger containing information replicated and distributed across computers joined in a peer-to-peer network.[2] It is an immutable and distributed digital record of transactions or data stored in multiple places on a computer network. Its immutable nature means that it is trusted to be accurate and precise, while its distributed nature protects it from being breached[3].

Simply, it creates a record of the transaction, traceable, verifiable, and accessible only by the approved parties to the transaction. A single store of transactions is called a “block,” a permanent, unalterable record preserved and distributed in a digital ledger. Any new transactions related to the original one can be added to the block as a distinct block, creating an interrelated blockchain of transactions and counterparties, tidily represented in the single ledger and shared by all approved parties[4].

This database, being decentralised, is managed by multiple parties and is known as Distributed Ledger Technology (DLT). Thus, a blockchain is a type of DLT with an immutable cryptographic signature known as a hash  [5]. The properties of a DLT include (but are not limited to) the following:

  • It is programmable—for example, smart contracts;
  • It is secured—information which is individually encrypted;
  • It is distributed—all participants have access to the ledger in real-time;
  • It is immutable—records are unchangeable.
  • It is time-stamped—all transactions have a timestamp;
  • It is anonymous–participants are either anonymous or pseudonymous;
  • It is unanimous – participants agree to the accuracy of the record.[6]

The essence of blockchain is that it eliminates the need for a centralised system regulated by an intermediary and allows parties to a transaction to share information directly amongst each other in a secure manner. Potentially, all types of data can be stored on a blockchain, allowing it to be modified to fit different systems and industries, taxation systems inclusive.

Advantages of Blockchain Technology

As is true of all technological advancements, the blockchain has generated a lot of praise and incertitude. Though hailed as possibly transforming almost all facets of record-keeping, exchange, and settlement, blockchain is still largely unapplied. There remain stumbling blocks to its practical application, especially in technical areas like taxation. Still, it contains properties that justify its status as a “trustless” network. It is “trustless” because it doesn’t require trust from the participants. Its trust is predicated upon its enhanced security, transparency, and traceability. It also aids cost-cutting by its increased speed, efficiency, automation, and its ability to eliminate or restrict the need for intermediaries. Some of its benefits are adumbrated below:

  • Enhanced security: by having an end-to-end encrypted system, blockchain technology drastically controls fraud and unauthorised access/activities. Also, its anonymous nature and its permission-conditioned access address privacy issues prevalent in transactions. Its distributed rather than central feature also prevents or reduces cyber-attacks.
  • Greater transparency: As a distributed ledger, data is identically recorded in multiple locations. And all participants who have access to a ledger view the same information simultaneously, aiding transparency. The entire history of a transaction is equally available with a time-stamp, thus eliminating windows of fraud.
  • Prompt traceability: blockchain maintains an audit trail that records the attribution of an asset, data, or transaction at every step of its usage. For example, this helps in industries where consumers are concerned with the product’s life cycle as a condition for their patronage, as it helps provide real-time proof of the process.
  • Heightened efficiency and speed: providing a paradigm shift from the paperwork, which is process-laden, time-consuming, and susceptible to errors, blockchain provides a more streamlined process where transactions are completed quicker and more efficiently. Clearing and settlement are potentially faster, as there wouldn’t be a need to maintain multiple ledgers.
  • Automation: Transactions can be more efficiently carried out with ‘smart contracts[7]. As they reduce human intervention and the need to have a third party to verify the adherence or otherwise of contractual terms. Contracts can be converted to computer codes, which are then stored and replicated on the system and supervised by the network of computers that operate the blockchain[8].

Blockchain Potentials in Taxation

Tax compliance is a labour-intensive and time-consuming process, often involving a lot of paperwork and professionals, thereby driving up costs. The taxpayer would ordinarily collate, prepare, and submit their returns, calculating and deducting their allowable. At the same time, the tax authorities verify, cleanse, and validate the returns before the process is completed. This process drives up costs and needlessly consumes the time of the taxpayers and the authorities. There’s also the eternal battle between taxpayers and authorities in interpreting and applying tax laws, leading to indecision and risks of audits and even litigation.

The digital age is reshaping taxation as we know it. This is mirrored by the OECD’s attempts to redefine the permanent establishment model into one of significant economic presence, especially in light of the proliferation and growth of big tech. Technology alters the way tax returns are made, and tax information is collated and stored. Blockchain has the potential to redefine the methods of accounting and automating tax information, tax payments, and tax records.

The Global Tax Policy Centre, Vienna[9]A report published in 2017 identified that blockchain has the potential to disrupt or at least modernise tax payments. And that it can improve tax compliance by ensuring real-time, automated tax payments from the taxpayers to the authority at the consummation of a transaction. This can be done using smart contracts and codes programmed to self-execute upon the satisfaction of some pre-existing conditions. Another example is embedding tax compliance in the process businesses use to conduct transactions. This has several advantages, including real-time compliance, significant reductions in transaction costs, and the elimination of fraud and tax evasion risks[10].

Use of DLTs and Smart Contracts in Tax

With the successful adoption and application of DLT in systems like electronic proof of identities, customs and excise processing in some parts of the world, and the use of smart contracts in the involvement of third parties in transactions, they could be designed to calculate, withhold, and remit tax from source to the authorities, eliminating the need for tax agents. Other uses include:

  • DLT potentially reduces tax fraud. The immutability and transparency of records could strengthen tax compliance and discourage both tax evasion and tax avoidance.
  • DLT, infused with smart contracts, would propel real-time tax administration and compliance, aiding computation of tax due and prompt tax remittance.
  • DLT allows the creation of tax registries. Tax ruling advances pricing arrangements, allowing authorities to share information in different jurisdictions. For example, the Income Tax (Country by Country Reporting) Regulations of 2018 were released by the FIRS to determine and regulate taxable digital entities (DLT allows for ease of sharing real-time tax data between countries).
  • Transfer pricing operations in real organisations can easily be tracked to specific transactions, providing auditors with an immutable, trustworthy record.
  • DLT improves payroll tax computation and payments by eradicating the duplicity of processes and also eliminating human errors.
  • The burden placed on employers to remit to payees from a single source would be lifted, and the possibility of employers defaulting would be eliminated. Smart contracts would automate the process and remove this threat.
  • Withholding tax on dividends, interest, and royalty payments: On a basic level, the tax would be sent directly to the tax authority when appropriate. Smart contracts could aid in the computation and recovery of foreign tax credits.
  • Transfer pricing matters: Transfer pricing processes and compliance could be streamlined to the specific transaction. Levels of trust between taxpayers and tax administrators could be vastly improved in a context focused on cooperative compliance[11].

BlockChain as A Transfer Pricing Tool?

Transfer pricing is the system of actuating prices for goods and services exchanged between subsidiaries, affiliates, or commonly controlled companies that form part of a larger enterprise. It also represents the price of goods and services provided by a company’s division to another within the same company. It obtains in domestic as well as cross-border transactions[12]. Multinational businesses deploy it to allocate earnings among their subsidiaries and affiliates that are part of the parent entity. It also allows some multinationals to alter their taxable incomes to affect their overall tax liabilities and shift liabilities to low-cost tax jurisdictions.

An accurate transaction trail is necessary for tax authorities to track and verify transfers within and between correlated companies effectively. Blockchain could provide a more reliable audit trail. It can be used to show, for instance, where an associated party transaction occurred and the basis upon which it occurred. It has the potential to also show the development, enhancement, maintenance, and protection of intangibles by establishing a trail back to the origin of the value creation. It can be programmed to track the source of software codes and where they are used. It can also aid in making available the aggregate group profit associated with a series of related transactions, simplifying the profit split across the various parties.

The potential for transfer pricing on the blockchain is innumerable. Although there is scepticism about its ability to eliminate the information deficit authorities contend with when auditing transactions involving foreign affiliates, it can lessen the gap by providing details of the supply chain of a multinational, thereby reducing the knowledge gap. It may also improve the dependability of transfer pricing documentation and accounting records, resulting in lower compliance and processing costs[13].

Payroll Tax (PAYE)

An employer pays payroll tax on behalf of their employee(s). The employer, as the tax agent, withholds it at the source and remits it to the tax authorities. This is often a daunting tax for employers, as they are responsible for calculating and transferring the tax payments from their employees’ salaries to the relevant authorities. This responsibility comes with attendant consequences in the event of a default.

Adopting blockchain in the process immediately relieves employers of this responsibility. An employer only needs to embed in smart contracts the gross amount of their employees’ salaries and other relevant tax data into the system. The blockchain would then match the tax data and calculate the correct tax amounts. The net salary would be automatically transferred to the employee’s account and the calculated tax to the authorities. This makes the tax process faster and more cost-efficient. It also relieves employers of the labour involved in manually calculating, withholding, and remitting the tax, especially as employers move up the salary ladder.

Blockchain and Value Added Tax (VAT)

VAT is a form of indirect consumption tax levied on goods and services at each stage where value is added to the supply chain, from production to the point of the final sale. Businesses have to trail, track and document the VAT they pay on their purchases where the goods are to be resold to be eligible for a tax credit for the VAT they pay on their return[14].

VAT is one of the largest government revenue sources and the most complicated to implement¹⁵. As a result, tax authorities are constantly developing systems for the practical assessment and collection of VAT to realise more revenue and bridge the loopholes in the system.

The current VAT systems worldwide are fraught with a range of issues. It is dependent on the trust and compliance of businesses to calculate and remit the correct amount of VAT due to the authorities. The calculations are not real-time, as returns and settlements are aggregated over some time; monthly, quarterly, or annually. They are therefore reliant on arbitrary dates like that of the one on invoices.

It is also difficult for authorities to tax VAT payments, resulting in fraud and misappropriation. It is even more complicated in the case of cross-jurisdictional transactions, as each country maintains its ledgers, making it almost impossible to procure complete data on VAT movement[15]. In light of these difficulties, blockchain poses a pause to the VAT ecosystem, particularly for recording and reporting. Some of the potential benefits include:

  • Real-time trail: where both the seller and buyer have identical copies of the VAT-related data, there would be no room for differences. Transactions on the blockchain are trackable in real-time, making the transaction quicker and the information more reliable.
  • Single-Use: this eradicates the problems around duplication of entries, as all parties involved have a real-time date of the transaction.
  • Transparency: transactions executed on smart contracts reduce the possibility of fraud and tampering. This allows the authorities to obtain reliable data on each transaction and aids in assessing tax credits for businesses.
  • E-signature: as all transactions have to be digitally signed, they are more trustworthy and safer than a paper signature or e-mail approval.
  • Administrative effectiveness: the administrative burden of businesses is significantly reduced, saving time and the cost of accounting services. As the blockchain calculates and registers what the item is, the value of the transaction and its provenance, taxpayers get the burden of VAT amount calculations on invoice level and VAT amount due on tax return level taken away[16].


Blockchain is a revolutionary technology with an unending potential to increase transparency, reduce administrative bottlenecks, and lower transaction and filing costs in the tax economy. These, however, must be augmented with adequate confidentiality measures, data and privacy protection, and a top-tier underlying infrastructure. Although the proposed submissions and solutions are worth the hype, they must undergo critical examination and assessment from the technical, regulatory, and legal perspectives to provide a well-rounded, fit-for-purpose improvement to the tax economy.

An incubation period and platform for testing the efficacy of a blockchain platform built to solve a particular problem is advised (regulatory sandboxes, to be precise). As further research and development on the actual potential of blockchain are underway, blockchain is best suited to areas in which data must be distributed across a vast network composed of unrelated and untrusted parties, with data integrity as an overriding objective. As shown above, some fields of taxation appear particularly promising and compatible with blockchain. They include payroll taxation, VAT, and transfer pricing matters, all of which could benefit from increased transparency, compliance, and reduced transaction costs through smart contracts.

The transition of blockchain from its dominant use in the world of cryptocurrencies to a much more complex and crucial system like taxation would be a daunting task. Privacy concerns, lack of uniform standards, lack of infrastructure, limited scalability for transactional purposes, and the decentralised nature of blockchain are just a few of the issues raised by experts.

Nevertheless, the development and improvement of blockchain are ongoing, and it has yielded results at an unprecedented level.

“Blockchain allows us to capture real-time information from different perspectives. The result is more detail, more visibility, more useful information and more precision.”

About the Author

Mr. Oyetola Muyiwa Atoyebi, SAN is an exceptional Technology lawyer and thought leader with over a decade’s worth of experience in legal practice and technology. He has facilitated numerous transactions and given countless legal opinions as regards tech in Nigeria, his outstanding performance has attracted international recognition and awards. He is the youngest lawyer in Nigeria’s history to be conferred with the highly coveted rank of a Senior Advocate of Nigeria (SAN).

He is the Managing Partner of OMAPLEX Law Firm, an established law firm driven by Technology innovation. As an expert in emerging areas of law practice, he has core competence in information technology, cybersecurity, Fintech, Robotics and Artificial intelligence. He is described to be the go-to person when it comes to issues around tech.

The learned silk is best characterized as a diligent, resourceful and yet humble individual who is revered for his highly analytical and pragmatic approach to solving legal problems as well as an unwavering commitment to achieving client goals. Indeed, his hard work and dedication to his clientele set him apart. 
Beyond his interests in law, the learned silk is an avid golfer and a tech enthusiast.

ContributorIbrahim Wali, Banking and Corporate Finance Group

[1] Organisation for Economic Cooperation and Development, Tax Administration 2017: Comparative Information on OECD and Other Advanced and Emerging Economies (OECD Publishing,2017).

[2] Peer-to-peer (P2P) is a decentralised communications model in which each party has the same capabilities and either party can initiate a communication session.

[3] Nick Darlington, ‘Blockchain For Beginners: What Is Blockchain Technology? A Step-by-Step Guide’ <https://blockgeeks.com/guides/what-is-blockchain-technology/ > Accessed 3 November 2021.

[4] Jurgen G, Introducing Blockchain Technology To The World Of Tax<https://medium.com/@jurgeng/an-introduction-to-blockchain-technology-tax-567e536767ec > Accessed 3 November 2021.

[5] A hash is a function that meets the encrypted demands needed to solve a blockchain computation.

[6] Euromoney Learning, ‘What is Blockchain?’ <https:/www.euromoney.com/learning/blockchain-explained/what-is-blockchain#:~:text=Blockchain%20is%20a%20system%20of,computer%20systems%20on%20the%20blockchain> Accessed 3 November 2021.

[7]  Smart contracts are agreements in the form of computer programs where the terms & conditions of an agreement can be programmed, designed to self-execute themselves. 

[8] IBM, ‘Benefits of Blockchain’ <https://www.ibm.com/topics/benefits-of-blockchain> Accessed 5  November 2021

[9] WU Global Tax Policy Center, ‘Blockchain for Governments’ < https://www.un.org/esa/ffd/wp-content/uploads/2017/10/15STM_Blockchain-101.pdf > Accessed 7 November, 2021.

[10] Ibid

[11] Jeffrey Owens and Juila de Jong, ‘Taxation On the Blockchain: Opportunities and Challenges’.(2017) 87 (6) Taxnotes International; 61.

[12] Shobith Seth, ‘Transfer Pricing’< https://www.investopedia.com/terms/t/transfer-pricing.asp  > Accessed 5 November, 2021.

[13] David Slemmer, ‘Blockchain Technology And Transfer Pricing’< https://www.pkfod.com/wp-content/uploads/2018/11/Blockchain-Technology-and-Transfer-Pricing-FINAL.pdf > Accessed 12 November, 2021.

[14] Investopedia, ‘Value-Added Tax (VAT)’ < https://www.investopedia.com/terms/v/valueaddedtax.asp > Accessed 11 November, 2021.

[15] Richard Thompson Ainsworth and Mussan Alwhohaibi, ‘Blockchain, Bitcoin, and VAT in the GCC: The Missing Trader Example’< https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2919056 > Accessed 14 November, 2021.

[16] Jurgen G, Introducing Blockchain Technology To The World Of Tax<https://medium.com/@jurgeng/an-introduction-to-blockchain-technology-tax-567e536767ec > Accessed 3 November, 2021.