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The following proposal for an EU VATCoin was presented at the Digital Tax Transformations Conference, December 18 & 19, 2017 in Vienna, Austria at WU Global Tax Policy Center (WU GTPC) at the Institute for Austrian and International Tax Law of Vienna University of Business and Economics.

The EU Commission has proposed “far-reaching reforms” to solve some of the fraud in the EU VAT. It hopes to capture €50 billion lost annually to MTIC fraud in goods. It hopes to do this without addressing tradable services, a MTIC mutation which by all accounts is running strong.

Fortunately, the Commission is open to technological solutions, and realizes that trust is the heart of the matter. Over the years, a large number of very good proposals dealing with MTIC have been rejected because one or more Member States do not trust the solution.

However, trust leads directly to blockchain. This advance in technology is not called the “Trust Machine” for nothing. Well-designed code is inherently trustworthy. In the age of cyberspace – code (computer code) is the new regulator. Code regulates better than laws written in the legal texts.

We present with this paper a workable solution to some problems in the Commission’s “far-reaching reforms.” It is a technology-intensive solution to long-troubling tax law problem. It is a solution that is similar to the VATCoin solution we have also presented to the GCC as they prepared to adopt a VAT. It follows some of the GCC insights in terms of harnessing the blockchain to share cross-border trade information. It relies in part on technology observations in the GCC Framework Agreement, but it goes further than any of the GCC sources by specifying the mechanisms through which VATCoins will work within the blockchain.

This paper is not critical of the “missing pieces” in the EU Commission’s “far-reaching reforms” (largely the failure to deal with tradable services). It is fairly easy to see how services can be added-on to the VATCoin approach we have taken, but the Commission is not anxious to do this (yet). Fraudsters, particularly when they have adopted VAT fraud as their means to raise funds for terrorist organizations, are not deterred by half-measures. The Commission is very aware of the people who are on the other side of this tax fraud fight. It should be anxious to close the circle.

We believe that blockchain will align the government’s interest in improving revenue yields, simplifying compliance for businesses, and opening the VAT to verified observation. We know more than enough about how blockchain works from all the efforts expended in this field since Satoshi Nakamoto’s Bitcoins first appeared in 2008. We also understand how smart contracts (enforceable digital agreements) can be associated with the blockchain after Vitalik Buterin showed us how to do it with Ethereum in 2013. We can also craft a fully public distributed ledger if we adopt Silvio Micali’s Algorand as a consensus mechanism. And if the Red Belly Blockchain lives up to its early reports, we can bind 660,000 transactions per second into a blockchain, and out-perform VISA by a factor of 10.

It is clear to us that VATCoin’s time has come. As Larry Lessig observed, in the Age of Cyberspace “code is law.” We believe the time has come for the EU Commission to look at encoding the VAT in a blockchain and solve MTIC once and for all with VATCoin.

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