Making Tax Smart: Feasibility of Distributed Ledger Technology for building tax compliance functionality to Central Bank Digital Currency

TL;DR

This paper demonstrates the feasibility of a distributed ledger-based infrastructure, called Making Tax Smart, for real-time tax payments and oversight within a Central Bank Digital Currency system, enhancing transparency and policy implementation.

Contribution

It introduces a prototype using open source DLT (R3 Corda) for real-time VAT split payments and oversight within a CBDC, showing scalability and integration with existing systems.

Findings

Prototype confirms feasibility of scalable MTS system

Smart Money CBDC can transform payments data into policy tools

DLT and smart contracts enhance government and societal benefits

Abstract

The latest advancements in Distributed Ledger Technology (DLT), and payment architectures such as the UK's New Payments Architecture, present opportunities for leveraging the hidden informational value and intelligence within payments. In this paper, we present Smart Money, an infrastructure capability for a Central Bank Digital Currency (CBDC) which enables real-time Value Added Tax split payments, oversight, controlled access and smart policy implementation. This capability is implemented as a prototype, called Making Tax Smart (MTS), which is based on the open source R3 Corda framework. The results presented herein confirm that it is feasible to build a MTS capability which is scalable and co-exists with the current payment systems. Smart Money CBDC has the potential to mobilise payments data in order to transform the role of money from a blunt instrument to a government policy sensor and actuator without disrupting the existing money system. DLT, smart contracts and programmable money have a crucial role to play with benefits for government departments, the economy and society as a whole.