Blockchain Tax Compliance via Identity Wallets and Smart Contracts

Resolve Bottlenecks,
Find Innovative SolutionsGenerate Solutions

Solution Overview

Problem

The current Value Added Tax (VAT) system is inefficient and cumbersome, particularly in handling digital transactions, cross-border trade, and emerging technologies like Distributed Ledger Technology (DLT) and cryptocurrencies, leading to significant fraud, overhead, and uncollected tax revenue, with a lack of adaptation to the digital economy and increased complexity in compliance.

Innovation Solution

A system utilizing verified identity wallets and distributed ledger technology to calculate and remit consumption taxes, automating the tax calculation and payment process through cryptocurrency transactions, with smart contracts ensuring accurate and efficient tax compliance, reducing the need for manual calculations and audits.

Engineering Contradictions & Design Principles

VSEngineering Contradiction Analysis

1Reliability

If the current VAT system is used for digital transactions and cross-border trade, then traditional tax collection methods are maintained, but fraud increases and tax compliance becomes cumbersome

Engineering Contradiction:

Improvetax complianceVSAvoidcompliance complexity

Core Design Contradiction:

ReliabilityVSDevice complexity

Solution Approach 1:

The patent replaces manual tax calculation and remittance processes with automated smart contracts on a blockchain network. The mechanical system of manual compliance is substituted with an automated digital system that calculates taxes, withholds amounts, and remits taxes automatically through cryptographic transactions, eliminating the need for manual intervention and reducing compliance complexity.

Inventive Principle:

Principle #28Mechanics substitution (Replace mechanical system)

Solution Approach 2:

The patent implements self-service through smart contracts that automatically perform tax determination, calculation, withholding, and remittance without requiring external tax authority intervention for each transaction. The system serves itself by automatically complying with tax obligations through programmed logic, reducing the need for manual compliance efforts.

Inventive Principle:

Principle #25Self-service

2Productivity

If manual tax calculation and remittance processes are used, then existing systems can be maintained, but significant overhead and uncollected tax revenue result

Engineering Contradiction:

Improvetax collection efficiencyVSAvoidcompliance time

Core Design Contradiction:

ProductivityVSLoss of time

Solution Approach 1:

The patent ensures continuous tax compliance by implementing automated smart contracts that operate continuously on the blockchain network. Tax calculation, withholding, and remittance occur automatically with each transaction without interruption or manual intervention, eliminating gaps in tax collection and improving overall efficiency.

Inventive Principle:

Principle #20Continuity of useful action

Solution Approach 2:

The patent performs preliminary tax calculation and withholding actions automatically at the point of transaction through smart contracts. The tax amount is determined and withheld before the actual payment is completed, ensuring tax obligations are met in advance and eliminating delays in tax collection.

Inventive Principle:

Principle #10Preliminary action

3Adaptability or versatility

If the current VAT system is used without adaptation to DLT and cryptocurrencies, then legacy systems remain stable, but the system becomes ill-equipped to handle decentralized transactions

Engineering Contradiction:

Improvesystem adaptabilityVSAvoidtax compliance reliability

Core Design Contradiction:

Adaptability or versatilityVSReliability

Solution Approach 1:

The patent creates a universal tax compliance system that works across multiple blockchain networks and transaction types. The smart contract framework is designed to handle various cryptocurrency transactions and can be adapted to different jurisdictions' tax requirements, making the system versatile and adaptable to evolving decentralized finance ecosystems while maintaining reliable tax compliance.

Inventive Principle:

Principle #6Universality (Multi-functionality)

4Extent of automation

If automated smart contracts are implemented for tax remittance, then compliance efficiency improves, but system complexity increases

Engineering Contradiction:

Improvetax automationVSAvoidsystem complexity

Core Design Contradiction:

Extent of automationVSDevice complexity

Solution Approach 1:

The patent segments the tax compliance system into distinct modular components: identity verification module, tax determination module, calculation module, withholding module, and remittance module. Each smart contract handles a specific function independently, making the overall complex system manageable through clear separation of concerns and enabling independent verification and auditing of each segment.

Inventive Principle:

Principle #1Segmentation

Data Source

PatentUS12190394B2Systems and methods for aiding tax compliance

Publication Date: 2025.01.07 THOMSON REUTERS ENTERPRISE CENTRE GMBH

AI summary

The present disclosure is directed towards systems and methods for aiding compliance with tax collection and reporting obligations. Distributed ledgers may assist with the verified calculation of taxes owed through the use of identity wallets and cryptocurrency transactions may be employed to effectuate payment to sellers as well as payment of taxes owed to the appropriate tax authorities. Verification of identity sources and of tax calculation and transmission engines may reduce compliance obligations on the part of sellers.