Grant supports ‘transformational’ power of blockchain technology in the tax world

Professor Jennifer Farrell has been awarded a Western Social Sciences and Humanities Review Board (SSHRB) seed grant of $21,292 for her project, “Blockchain and taxation: A case study on eliminating the sales tax gap.”

Distributed ledger technology, better known as blockchain, is the disruptive technology behind cryptocurrencies such as Bitcoin and Ethereum. It’s a tamper-proof technology that tracks items or transactions.

Jennifer Farrell“Blockchain could be transformational for the tax world,” says Farrell. “It can help the tax industry in reducing tax compliance costs, and improve tax administration for governments.”

In particular, says Farrell, blockchain has the potential to tackle the ubiquitous problems of aggressive tax avoidance and tax evasion; and some governments are actively researching and employing the potential of the technology for taxation problems.

In her research, Farrell posits that a blockchain system in a cashless society will significantly reduce, or even eliminate, the Canadian tax gap for GST/HST, and result in a significant increase in revenue for public finances.

“The non-payment or under-payment of sales taxes creates a significant loss of revenue in Canada,” explains Farrell. The Canadian Revenue Agency (CRA) estimates the tax gap for GST/HST non-compliance at $4.9 billion in 2014.

Her research will investigate and explain the causes of sales tax non-compliance (e.g., tax fraud) and explore how blockchain technology can eliminate sales tax non-compliance.

“Blockchain technology can record real-time transactions along the supply chain, create smart contracts, and calculate, withhold and remit taxes automatically to the CRA,” says Farrell.

Her research will examine the advantages and disadvantages of blockchain for key stakeholders such as taxpayers, the CRA, and the government, and will explore the legal, technical, and ethical implications of this new technology, most notably privacy concerns.

“It’s an exciting area of research,” says Farrell. “Currently there are no Canadian studies on blockchain and its application to taxation so it’s a relatively unexplored field for Canadian scholarship. It fits neatly with my own research interests in domestic tax law, international tax law and policy, and exploring how tax intersects with other areas.”