Businesses often find themselves entangled in a web of tax policies, financial regulations and legal considerations, which may seem to continually change.
These fluctuations may have a dramatic -- and often immediate -- impact on business revenues, cash flows, and tax positions, especially for multinational corporations that regularly conduct business and move goods, services, and intellectual property across borders.
To adapt to and implement these sometimes frequent and unexpected changes in tax regulations, tariffs, subsidies, quotas and more, some CIOs, CFOs, and even chief tax officers are exploring an innovative technology: blockchain.
Blockchain is being used to streamline tax and finance activities in ways that may have an immediate impact on cash flows, revenues, and income.
Initially made popular by cryptocurrencies like Bitcoin, blockchain establishes a single ledger that can help track and trace numerous, interconnected transactions and their business implications. Real world examples are demonstrating how blockchain can solve pressing business issues, such as creating a more transparent supply chain for food companies or reducing fraud for financial services.
Detangling tax and finance issues
It’s not surprising that blockchain can be an especially useful tool in the world of corporate tax and finance.
By helping senior finance leaders diagnose tax, tariff, and finance implications in real time and assist in the automation of certain processes, blockchain has the potential to optimize the time that working capital is tied up for a transaction. And blockchain can help to lower or even eliminate transaction fees and errors by reducing reliance on third-party support.
For example, one way that KPMG is using blockchain to help companies is by capitalizing on duty drawbacks -- refunds of certain duties, taxes, and fees collected on imported materials that are either exported in an unused state, destroyed under U.S. Customs and Border Protection supervision, or further processed in the U.S. and later exported to foreign markets. Duty drawback rewards can be significant cash-drivers. So much so that they can incentivize companies to export goods internationally. Drawbacks can also offset the additional 25% in duties levied on Chinese imports.
Many companies fail to maximize drawback recovery due to the lack of data in a confusing web of systems, weak record-keeping processes, little resources, and reliance on third parties. Moving the drawback data to the blockchain eliminates the need for manual data entry between systems, thereby reducing errors and creating a single source of truth. Ultimately, by implementing blockchain, the entire process is enhanced, creating the potential for companies to recover significant cash.
Businesses can also use blockchain technology to calculate tax and finance implications in any jurisdiction in real or near real time by tracking transactions from each of its individual subsidiaries and compiling the data into a single, easy-to-access digital ledger.
For example, one industrial manufacturer implemented blockchain to enable near real-time visibility into the location of parts as they are created, shipped, imported and exported across multiple international sites. While this blockchain helps increase visibility into its inventory, the manufacturer went a step further by using the blockchain to track the tax and financial implications associated with the movement of these parts. Every time a part is moved or transferred, there is a tax and finance implication, such as ports-of-passage requirements, transfer fees, bills of lading requirements, transnational maritime laws, and insurance requirements – and that’s not including internal transaction requirements. With increased visibility into these implications, the company can optimize its various tax and finance obligations.
Pilot … then scale
If a CIO or CFO is considering blockchain for tax, finance, or any other business purposes, it would be wise to begin a pilot program that allows teams to learn and experiment with the technology, manage risk and measure its effectiveness. Given the cultural impacts that result from such vast technical change and the need to rework existing processes, a small and easily-controlled pilot program can be critical before considering a wide-scale implementation.
To get started, assemble a cross-sector team of blockchain, tax, IT, finance and business leaders who can collaborate to create a blockchain strategy that properly addresses auditability, risk and compliance and tax and finance areas to drive overall success. The blockchain journey is not a rip and replace solution: It requires a significant transformation of procurement, supply chain, financial and other core operations that reach far beyond the tax and finance organization.
Businesses willing to experiment with blockchain applications could ultimately claim a first-mover competitive advantage in their industry and begin solving decades-old problems -- and few functional areas have greater potential for immediate, bottom-line impact than tax and finance. When approached as a thoughtfully planned, enterprise-ready solution, blockchain has the potential, for the right company, to cut through this multilayered, complex web of transactions to streamline processes, improve margins, and even grow top line revenue.
David R. Jarczyk is a Principal in KPMG LLP’s Tax Innovation group and the firm’s Tax Blockchain Leader. Previously, he was a founder and CEO of a successful intellectual property technology company and was founder and head of client services for an economics and valuation firm. Jarczyk’s specialty is bridging the gap between technology/big data and business cases and user needs. Throughout his career, hehas been an advocate for small businesses, providing coaching, lectures, and advisory services to entrepreneurs.