As its popularity grows, the blockchain system with its various derivative technologies also faces resistance, such as the use of smart contracts which is considered to erode tax potential.
Smart contracts are agreements or contracts made between parties based on the blockchain system. The form is in the form of a computer program code that is automatically generated.
This means that if a blockchain-based transaction has fulfilled its terms and conditions, an invoice will be generated automatically, along with a payment using cryptocurrency.
This smart contract does offer several advantages over conventional contracts such as speed, security, flexibility of transaction terms and conditions, simplification, and cost efficiency.
In addition, smart contracts are also transparent. Because every transaction that occurs can be verified by all parties involved. This happens because of the decentralized nature of the blockchain system.
With all these advantages, making contracts with smart contracts no longer needs to go through third parties, such as lawyers or notaries. Therefore, many parties are interested in utilizing this technology, especially the private sector.
Referring to data from the Global Smart Contracts Market Research Report released in 2022, the value of the smart contract market in the world reached US$ 397.8 billion in 2022. This figure is predicted to continue to increase and reach US$ 1,460.3 billion by 2029.
Tax Avoidance Loopholes
Due to its direct involvement of transacting parties without going through any authority, including financial or legal institutions, smart contracts have encountered resistance from governments. There is a concern that they may be used as a means of tax avoidance.
Smart contracts are peer-to-peer which is only known by the two parties without any government intervention. This means that there is no loophole to tax the transaction, either income tax or value-added tax (VAT) when the smart contract system is running.
Thus, tax collection through third parties cannot be done, because it is difficult to determine which party is responsible for a transaction. Given that the parties involved are anonymous.
Royel, Principal, and White (2018) identified at least three issues on the tax side. First, fluctuations in the value of cryptocurrencies. Second, taxing on administrative costs. Third, the taxing on transactions that occur.
A good tax system should be able to keep up with technological developments. Including, transactions with new models that have a direct effect on investors and consumers.
The role of tax administration in the tax system should provide certainty in the grey area sector of taxation and enforce the law on tax evaders (Savic et al, 2015).
Data Access Issue
According to Royer and White in their 2018 research, there are at least three steps that tax authorities can take in responding to the existence of smart contracts.
- Conduct tax law enforcement with existing regulations one by one;
- Forcibly infiltrate the market mechanism so that the government's role can run and intervene in every smart contract creation through government contracts with the private sector; or
- Compete with the private sector such as forming a counter-platform, such as the government Blockchain, to facilitate digital transactions with codes according to tax provisions.
The first alternative solution can actually be applied when the Indonesian government has data on the identity of the owners who utilize smart contract transactions. Thus, forced law enforcement can be carried out.
The problem lies in the difficulty of identifying smart contract users since they are protected by the blockchain system. Therefore, the disclosure effort will require a large amount of money and potentially increase the compliance cost of the tax authority.
Another effort the government can make is to identify taxpayers who are suspected of using smart contracts. The trick is to ask the private party using the agreement to enter the tax withholding and/or collection code.
This means that the government only needs to find a third party as a withholder like the system that has been in place in Indonesia. However, this step can only be done when the government already has a market identity. On the other hand, the private sector will bear the cost of creating the tax code.
Another solution is for the government to establish a smart chain application in a blockchain system that can be utilized by the private sector. With this system, the government can form several parameters or conditions according to applicable tax regulations.
In this case, smart contracts can be utilized as a form of transparency, auditable, and the information can be accessed by all parties (Wijaya et al., 2019). This solution provides an answer to the identity problem in the blockchain system.
However, this will have a negative impact, as it could affect the independence, as an advantage of decentralized blockchain, from the government.
With intervention, the development of the smart contract market will be hindered. Moreover, when the blockchain is established by the government will require identity as the transacting party for the administration system.
Therefore, in the context of tax interests, the creation of smart chain applications can be a preventive effort that the DGT can make. Thus, when smart contract users become common, the tax authority will not be caught off guard. (ASP/KEN)