Should enterprises be prepared for bitcoin?
February 2014 | EXPERT BRIEFING | BANKING & FINANCE
Policy makers of the Group of Twenty Finance Ministers and Central Bank Governors (G-20) have expressed indignation at the poor fiscal performance of the member states and the “obnoxious” effective tax rates of multinational companies – that is, the cash that is actually collected by governments. Google, Starbucks and Amazon particularly gained media attention on this matter.
Speaking to INSEAD Knowledge in 2013, Pascal Saint-Amans, head of the Centre for Tax Policy and Administration of the Organization for Economic Co-operation and Development (OECD), said “When you have the major financial crisis, which turns into a fiscal crisis, which turns into a political crisis and maybe tomorrow a social crisis you cannot tolerate that anymore, and that’s why you have the politicians back on this.”
So OECD came up with a plan: it has identified Base Erosion and Profit Shifting (BEPS) as the fundamental bug in the international tax system. Simply put, BEPS are legal ways to book accounts to cut the global tax bite. And the BEPS action plan is the masterpiece of the brilliant minds at the OECD to achieve victory over this enemy.
“Double non taxation is like smoking in public places,” said Raffaele Russo at the International Bar Association meeting in October 2013. “It was accepted in the past, but now the time has changed.” This latest ‘paradigm change’ was fully endorsed by the heads of government of 19 countries plus the European Union, and bureaucrats are running against time to implement the BEPS project as soon as possible.
The world is now full of a new army of missionaries who spread the word to convert ‘ignorant’ multinationals to the OECD faith – “Is your business prepared for BEPS?” – as if they are announcing the imminent arrival of the messiah.
The world ‘after BEPS’ is one in which governments globally eliminate fiscal deficits as they collect their ‘fair share’ of taxes from multinational enterprises; that is, one in which the gap between effective and statutory tax rates is meaningless.
With all the money from BEPS controlled by the states, the financial crisis will only be a flashback of bad memories, and welfare will be extended to the world’s population…
Here ends this fairy tale.
The BEPS initiative to close tax ‘loopholes’, exchange information automatically between tax authorities, create centralised transfer pricing templates, mandate disclosure of ‘aggressive’ tax planning arrangements and monitor the impact of BEPS actions, among others, is somewhat reminiscent of the sentiment expressed in the classic movie Jurassic Park: “The kind of control you’re attempting simply is... not possible. If there is one thing the history of evolution has taught us it’s that life will not be contained. Life breaks free, it expands to new territories and crashes through barriers, painfully, maybe even dangerously… life... finds a way.”
Under the euphemism of ‘transparency’, BEPS is a plan based on control, aimed at converting the worldwide tax regime into a prison, with the OECD as the global panopticon of the G-20’s financial ambition. Failure to achieve the expected tax revenues will then lead to more advanced tracking systems that will need to be fed with more resources and will eventually end up in more and more surveillance. Professor Juan Zornoza, a member of the Ibero American Observatory of International Tax Law, hit the nail on the head during an informal chat in November 2013: “The BEPS initiative is a weapon of mass destruction.”
The BEPS project reflects the failure of heads of governments, Ministers of Finance and Central Bank Governors to understand human nature. It is really no surprise that the bureaucrats’ approach to reduce fiscal deficits is to blame taxpayers. The question is whether bureaucrats are part of the problem rather than part of the solution, as the plausible course of action to resolve fiscal deficits is to reduce or eliminate programs.
Either through more ‘aggressive’ tax planning or via tax evasion, people will find ways to survive the threat of the BEPS 15 actions points. Will retailers like Amazon operate as online ‘saladas’ – those widely known places of trade that operate underground in the suburbs of Buenos Aires and other cities in Argentina? Will coffee chains such as Starbucks reorganise themselves into ‘street vendors’ as in Thailand? Will search engine, email, hosting and internet based companies like Google convert themselves into peer-to-peer networks like Bittorrent?
This is exactly what is happening in the monetary field, with the rise of Bitcoin and other digital currencies. Bitcoin first appeared in January 2009, the creation of an individual or a group of developers using the pseudonym ‘Satoshi Nakamoto’. Bitcoin is a peer-to-peer system (transactions do not require a third-party intermediary such as PayPal or Visa or a financial institution) introduced as open source (its controlling computer code is open to public view). It is a cryptocurrency, so-called because it uses cryptography to validate transactions and govern the production of the currency itself (being electronic with no physical manifestation).
Users send payments by broadcasting digitally signed messages to the network. Participants known as miners verify and timestamp transactions into a decentralised public ledger (also called the block chain) that is visible to everybody but does not reveal any personal information about the involved parties.
The supply of bitcoins does not depend on the monetary policy of a central bank. Currently, about 12 million bitcoins are in circulation, worth about US$12bn, according to Coinmetrics. However, the total number of bitcoins that can be generated is capped at 21 million coins, which is predicted to be reached in 2140.
Also, because a bitcoin is divisible to eight decimal places, the maximum amount of spendable units is more than 2 quadrillion (i.e., 2000 trillion).
More and more people, merchants, non profits and businesses are accepting bitcoins, which can be exchanged for conventional money ‘over the counter’ or at online exchanges such as Mt. Gox, Kraken or Bitstamp.
Cryptocurrencies operate as the human counter-trend to capital controls, inflation, privacy insecurity, BEPS, Foreign Account Tax Compliance Act (FATCA) and other governments’ threats to freedom.
“Soon, for the first time in history, anybody will be able to register and operate his or her own company, completely free of charge, from the Bitcoin blockchain, and use it to build a reputation and serve customers worldwide,” asserts Bitcoin economist Tuur Demeester. As predicted by Dr Ian Malcolm in Jurassic Park, life found a way.
Tuur wonders “whether the multinationals of the old paradigm of Big Data are not too entrenched to survive in the new, the paradigm of Privacy and Personal Finance.” It is unlikely that governments will leave Bitcoin unregulated or even, as Juan Garófalo warns, not try to “use Bitcoins’ public database to monitor all the transactions in the economy”. Cryptocurrency developers are already working on that and other challenges.
Will your business survive perils like the BEPS action plan? Is your enterprise ready for Bitcoin and beyond?
Daniel Rybnik is the founder and managing partner of EnterPricing. He can be contacted on +5411 4776 8200 or by email: firstname.lastname@example.org.
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