After controversial laws to restrict privacy in crypto transactions, and even flirting with banning bitcoin altogether, the European Parliament is now considering what blockchain technologies could mean for taxes.
On April 25, lawmakers will discuss how to tighten up tax laws and procedures for the Web 3 era – and a draft report prepared by Portuguese member of the European Parliament Lídia Pereira suggests national tax authorities could start swapping data on individuals’ crypto-asset holdings.
That call is, perhaps, no surprise. Existing EU rules on administrative cooperation allow similar exchanges of information about bank accounts to stop overseas holdings being kept secret from the taxman, and the OECD, guardians of international tax norms, is currently consulting on whether that should extend to crypto.
Pereira’s proposal isn’t a problem when you’re talking about big corporations, but could be a troubling privacy invasion if it implicates your regular crypto saver, one lawmaker involved in the report has told CoinDesk in an interview.
“When you have a well-established business which is on the border between the traditional financial system and crypto, then I think it's fine to have a certain overview or supervision from the authorities, and to share this information”, said Mikuláš Peksa, a member of the Czech Pirate Party, which promotes digitalization and online rights.
That shouldn’t mean extra snooping or enforcement activity against regular people, though, he adds.
“Our tax system, as it stands, is very much focused on chasing the smaller players in order to force them to pay each and every euro,” he said, while “the bigger players are generally using more or less legal ways to optimize their taxes.”
Alongside the risks of tax evasion, lawmakers also seem interested in the blockchain opportunity for taxes. Public ledgers could offer a new way to automate tax collection, ensuring people pay what they owe without lots of form-filling.
Instead of submitting returns to the tax authorities, “you can tell them the address of your wallet, and they can just do everything else,” Peksa said, adding that, in terms of proving which transactions you’d made, blockchain networks verified by multiple users are “much more accountable than whatever any bank could give you.”
Modernizing conservative tax administrations presents its own challenges, he admits. But lawmakers may have been inspired by a presentation they were given in November, at which tax lawyers said Web 3 technology could improve efficiency and cut fraud.
Blockchain tech can ensure taxes are taken out at the source, such as on the payroll or when share dividends are distributed – but also used in trickier applications like transfer pricing, the complex process for valuing multinational companies’ liabilities across different jurisdictions.
Value-added tax, the levy on day-to-day sales imposed throughout the bloc, could even be replaced by a less fraud-prone virtual token in time, Robert Müller of law firm Flick Gocke Schaumburg told lawmakers.
Pereira’s draft urges the European Commission to “assess how to leverage blockchain technologies and to prevent tax fraud and avoidance,” and even develop an EU-wide infrastructure to support it.
In practice, what lawmakers say may make little difference. Unlike areas like anti-money laundering law or crypto license requirements, the European Parliament can’t amend tax legislation, but only provide advice.
As such, lawmakers’ views seem unlikely to ideal with more substantive issues within the EU crypto tax system. Even in relatively accepting jurisdictions like Germany, the tax treatment can create a headache.
A 2020 OECD report shows that different countries, even within the EU, take different views as to how to tax income from mining, or when one crypto asset is exchanged for another.
That divergence can make life complicated for those working in multiple jurisdictions – but it also offers a potential bonus for the sector, as EU nations can vie with each other to offer the most crypto-friendly environment.
Advice from the parliament seems unlikely to change that arrangement. While many EU member countries want to fight tax-dodging, they also jealously guard their room for manoeuvre in setting their own tax policy. And, under EU procedures, any country can veto a tax proposal it doesn’t like, preventing it from passing into law.