SUMMARY

Real-time reporting systems, in which companies are required to register their invoices with the tax authority, experience a big political push across the globe. By now it is not a question of if, but of when and how real-time reporting systems will be implemented by other states. Thus, focus needs to shift towards design requirements. Very recently, a clear recommendation has been made by the German Bundesrechnungshof: real-time reporting should be connected to blockchain technology to ensure timely and authentic data. We welcome this boost and explain in the following why.

Real-time reporting is the way to go

All around the world, governments develop instruments that help register VAT and combat VAT fraud more effectively. By now, it is clear that real-time reporting is becoming the new standard in this (read more here and here). We welcome the fact that also the German Bundesrechnungshof makes a clear case in favour of real-time reporting and even goes further in stipulating clear design requirements.

Real-time reporting in its essence implies that all companies within a jurisdiction must report their invoices to the tax authority. In contrast to traditional VAT reporting, in which VAT returns and supporting documents are sent to the tax authority some time after business transactions took place, VAT returns can now be pre-filled and tax authorities receive real-time data on business operations. This enables tax authorities to trace the path of invoices and perform (automated) checks, which helps them detect irregularities earlier and fight fraud more effectively (read more here). Real-time reporting has led to remarkable results for tax authorities, despite being implemented very differently across countries[1].

Blockchain and real-time reporting should be combined

The German Bundesrechnungshof has been very clear as to when and how real-time reporting should be implemented. With this, real-time reporting has gotten a boost from a trusted institution: The Bundesrechnungshof is the supreme federal authority for federal audit matters and tasked to examine the performance of the German government’s financial management. In its report on measures to improve the fight against VAT fraud, it urges the German Ministry of Finance to start working on a real-time reporting system as soon as possible.

It demonstrates that existing (analogue) measures are not sufficient to effectively detect and fight VAT fraud[2], which would result in €22 billion lost annually for the German household[3] and disadvantages for honest businesses. According to the Bundesrechnungshof, the urgency to start working on a real-time reporting system also stems from the fact that other countries do have such a system already and that Germany should not lose track. If other countries implement real-time reporting systems, fraudsters move to countries with less effective auditing systems and create fraud there.

On the question of how, the Bundesrechnungshof has found even clearer words. It stipulates: “The [German] fiscal administration has to ramp-up its digital fraud detection capacities. It needs new mechanisms such as real-time reporting, which should be best connected with blockchain technology.” It explains that “blockchain technology is crucial in digitalising the fight against VAT fraud. A blockchain is a continuously expandable list of data records that are linked to one another and build on each other. Crucial in this is that inserted information is unchangeable."

By using this technology, a real-time reporting system would thus not only reduce the time to detect fraud because it makes data available in a timely manner, but also guarantee the authenticity of recorded data. Today, none of the existing real-time reporting systems makes use of blockchain technology. Thus, the important advantage of unchangeable data is not yet capitalised on.

Here, summitto can help. We have built the world’s first blockchain-based real-time reporting software through which companies can register their invoices and report VAT. The recorded data on the blockchain is time-stamped, so it cannot be changed after the facts without detection. In this way, a ‘single source of truth’ for invoices is created and businesses are incentivised to report consistently.

Also, our technology ensures that there is no single point of failure. This is another requirement stipulated by the Bundesrechnungshof. As explained in more detail here), our system is architecturally decentralised, which means that data is not stored centrally but on a higher number of computers. This ensures that invoices can still be reported, if one computer fails. It also makes our system less vulnerable to cyberattacks. This leads us to another imperative point - confidentiality.

Confidentiality and real-time reporting can be combined

The report of the Bundesrechnungshof also quotes the German Ministry of Finance emphasizing that data protection and confidentiality need to be considered in any real-time reporting system. Unfortunately, existing real-time reporting systems do not ensure the confidentiality of the taxpayer. Instead, they often store invoice data in plain text to make it available for relevant public officials. This makes existing systems prone to cyber attacks and internal fraud, which is dangerous in the case of invoice data, containing sensitive pricing information. Leaking such information could seriously damage the customer-relationship or harm an entire economy (see more here).

But there is good news: data confidentiality and real-time reporting can go together, which summitto’s software shows. We use modern cryptography, which allows us to make invoice reporting as secure as possible. In our system, invoice data is hashed and only the resulting fingerprint of the invoice is transferred to the tax authority. This means that tax authorities are able to detect fraudulent behaviour and close the VAT gap, while preserving confidentiality (read more here).

To sum it up, we welcome the recommendation of the Bundesrechnungshof to connect real-time reporting with blockchain technology. Such a system would replace costly and inefficient post-audits with real-time risk checks, and guarantee the authenticity of data. This would not only benefit society (through VAT revenue which was previously missed), but also businesses that would automatically be compliant, know about the authenticity of value chain partners and could use financial information for other purposes.

In case you want to learn more about how summitto’s real-time reporting system exactly works and how it benefits both the public and private sector click here. For questions, shoot us a message at info@summitto.com

[1] Koch, B. (September 2019). The e-invoicing journey 2019-2025. https://www.billentis.com/The_einvoicing_journey_2019-2025.pdf

[2] Bundesrechnungshof (October 29, 2020). Bericht nach § 9 BHO über Maßnahmen zur Verbesserung der Umsatzsteuerbetrugsbekämpfung - Chancen der Digitalisierung nutzen. https://www.bundesrechnungshof.de/de/veroeffentlichungen/produkte/sonderberichte/langfassungen-ab-2013/2020/massnahmen-zur-verbesserung-der-umsatzsteuerbetrugsbekampfung-chancen-der-digitalisierung-nutzen

[3] European Commission (September 2020). Study and Report on the VAT Gap in the EU-28 Member States. https://ec.europa.eu/taxation_customs/sites/taxation/files/vat-gap-full-report-2020_en.pdf