taXchain provides a faster, better, cheaper way to complete EU tax forms using Hyperledger Fabric

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Building a working Proof of Concept with blockchain

Teams from Henkel and Siemens drew up a list of 15 possible use cases for blockchain in tax and customs. Then they selected the Long Term Supplier Declaration (LTSD) for a Proof of Concept.

“It’s not the sexiest use case, not something everyone was crying for,” notes Rubbert. “We picked this form because the process is very simple. The only purpose was to prove the technology.”

The next decision was which blockchain platform would fit the project best.

“Deciding on which blockchain framework to use was quite easy,” says Proshanta Sarkar, blockchain engineer and technical lead for the project at Henkel. “We thought about Quorum and Ethereum, but for a permissioned blockchain, we found Hyperledger Fabric is the best.”

Everyone agreed on that choice.

“Hyperledger Fabric provides a modular architecture with many use cases,” agrees Dr. Olga Chatelain, Blockchain Program Lead @ IT Financial Platforms and Services, Siemens AG. “It’s built for permissioned networks, with good security and privacy, and strong community support.”

Microsoft developers in Europe quickly built a working prototype using Hyperledger Fabric. Within three days of coding, the new system could handle an LTSD form on-screen instead of on paper.

The benefits were obvious. Before, the complicated paper-bound process took days, if not weeks.

Now, thanks to pull-down lists and tax codes, the LTSD forms never need to be printed. If both buyer and seller use the new system, a whole form can be done in minutes, with far less risk of errors or fraud.

And in case a print is needed, a PDF for each LTSD is generated and stored on the platform. In some cases, the authorities still require it during their audits.

Completing a production-ready network

To build out the full blockchain network, Microsoft recommended KrypC, an experienced solution provider that was already operating several other networks built with Hyperledger Fabric.

The two sponsors asked for maximum flexibility to accommodate any company in Europe, whatever its size, industry, IT environment, or technical skills.

So KrpyC built a very flexible network, where any member can run their own node or use a managed node; write their own APIs or have those written for them; and process a small, medium, or large number of tax forms.

The LTSD form is now running on the network, linked to a database of 7,000 possible materials. APIs link the network to an SAP pilot system at Siemens.

The blockchain stands ready to record and certify precise data based on each LTSD, in a tamper-proof format that government authorities and trading partners can trust.

“KrypC has been really successful,” says Rubbert, noting that the development team worked at a brisk speed, met their requirements, and delivered a crisp, clear UI.

“We talked to our top suppliers and several other companies and showed them the UI. And the feedback was great. Everybody found it well designed and simple to use.”

Creating an association to promote the network

The next challenge is to persuade more companies to join the network. But when you’ve done something the same way for many years, change is never easy.

“To be honest, the tax and customs authorities didn’t invest much in digitalization over the last few decades. They still work mostly with paper forms or PDFs in the best case,” says Rubbert. “So to close the gap, huge investments in networks and qualified people will be necessary.”

To help tax administrators and executives with the transition to digital forms, Siemens co-founded the Institute for Digitalization of Tax Matters (IDSt) under the umbrella of a large trade association in Germany, the BDI (Bund der Deutschen Industrie).

The IDSt now includes 150 well-known companies and eight technical committees. One committee is devoted to distributed ledgers, animated by experts like Dr. Matthias Gries, Syndikus Tax Advisor (VAT/Tax Technology) from Siemens.

“It’s never easy to start a new solution such as blockchain,” says Gries. “Even if you can save so much money, it takes time to persuade other companies. In the end, if you have a better process, it will always win… but it takes time.”

Extending the network with new partners and further forms

In a huge vote of confidence for its innovative design, taXchain recently won the prestigious Taxcellence award from Handelsblatt, a renowned financial newspaper in Germany. This gave the network a big boost in visibility. 

And the taXchain sponsors continue to share their vision with colleagues, suppliers, and other companies. 

“The whole idea was to build one platform where different companies can have different use cases related to tax and customs, available to members through some sort of app store,” says Chatelain. “That’s why we chose the name taXchain, a combination of ‘tax data exchange’ and ‘blockchain.’”

Since all businesses in the EU use the same forms, every member will benefit from a better, faster, and cheaper way to handle each new form added to the network. 

The next few goals for the taXchain network include: 

• Implementing more tax and customs forms  
• Engaging suppliers to use the network
• Signing up 10 or so large companies

Once lots of transactions are running through the system, everyone will see that it’s secure and cost-effective. Since the platform license fees are based on cost-sharing, more users on the platform will shrink the costs for each participant. 

At that point, a network effect should bring in more and more members.

“I think in a few years we can have a huge taXchain community with lots of different use cases from tax and customs, and members not only from Europe but worldwide,” says Chatelain. 

What’s even more, the traditional chore of processing B2B taxes may be transformed from a cost center to a profit center. 

With companies free from the burden of paper-based forms, smart contracts can help them automatically benefit from every possible deduction under trade agreements with any other country.

And that mountain of paperwork may finally be leveled, thanks in part to Hyperledger Fabric.