WO2020115529A1

WO2020115529A1 - Method for implementing transfer pricing using blockchain

Info

Publication number: WO2020115529A1
Application number: PCT/IB2018/059652
Authority: WO
Inventors: Kęstutis RUDZIKA
Original assignee: Rudzika Kestutis
Priority date: 2018-12-05
Filing date: 2018-12-05
Publication date: 2020-06-11

Abstract

This description discloses invention which uses blockchain technology to implement processes related to transfer pricing and estimating related tax. The method and system are applied to the intercompany transactions, occurring between several entities located in different jurisdictions. The method and system are based on blockchain technology and comprise of three layers: protocol layer, network layer and the application layer. The blockchain based method and system track the transactions, apply transfer pricing rules and calculate the transfer price and related tax between the parties to the transaction. The method and system pull the transactional financial signals with data from the ERP or accounting systems of the intercompany entities. After that, the transfer pricing rules are applied and the sales price, profit from the transaction and estimated tax liability are calculated. The transfer price and estimated tax amount data are pushed to the ERP or other accounting systems of the participants to the transaction and other stakeholders. The parties to the transactions, auditors and tax authorities validate, monitor and timestamp the transactions. The transactions become immutable, transparent and visible to all authorized participants. The authorized participants have a possibility of an end-to-end view of all the intercompany transactions in real time. The transactions are automatically validated, audited and approved in real-time by using the system by all participants to the transaction and stakeholders, including tax authorities, auditors and group management, thus reducing or eliminating compliance and audit requirements, cost and associated risk. The method and system for implementing transfer pricing can be applied for the existing taxation but also for the introduction of new taxes and compliance thereof. The method and system can also be applied to introduce and effectively manage the envisaged taxation of the digital economy.

Description

METHOD FOR IMPLEMENTING TRANSFER PRICING USING BLOCKCHAIN

FIELD OF THE INVENTION

The present invention relates to a method and a system for automated processing using blockchain, and more specifically transaction transfer pricing and estimating related tax using blockchain.

DESCRIPTION OF RELATED ART

Herewith in this description it is disclosed application of blockchain in transfer pricing. According to the presented method, transfer price is calculated, validated, and authorized by the participants to the transaction, auditors, tax authorities and/or other parties in real time and creates timestamped, verifiable, incontestable and immutable transaction record history. This leads to consistent application of transfer pricing rules automatically verified by all stakeholders and creates many benefits of using such systems as following: all transactions can be seen in real time by all involved parties; transactions can be accessed any time, thus, providing clear communication about transfer pricing policies within the supply chain and an ability to view the application of these policies on a transaction-by-transaction basis, and reducing or eliminating the need of transfer pricing compliance, documentation and tax audits; transactions are automatically verified, audited or monitored by the auditors and tax authorities in real time, thus reducing or eliminating tax compliance burden, tax audit risk and associated costs both for entities involved in a transaction and for entities not directly involved in a transaction (e.g. tax authorities); transparent application of the transfer pricing rules, end-to-end real-time view of the entire supply chain, automatic verification by the tax authorities and auditors, promotes fair, transparent, predictable taxation, automates compliance, and provides end-to-end supply chain visibility and predictability of taxation; double-taxation and double-non-taxation due to transfer pricing adjustments, inconsistencies and deviations is eliminated. Blockchain-based supply chain calculations and verification is a technical platform allowing interoperability and differing format data feeding and using from different Enterprise resource planning (ERP) and accounting systems.

US2014095373 (A1 ) (published 2014-04-03) discloses a system that determines transfer price based on transfer pricing rule, system selects a transfer pricing rule from plurality of transfer pricing rules, calculates and provides transfer price. There is nothing mentioned about presenting data, reports in real time, involving third parties (e.g. auditors, tax authorities) into transfer price determination and validation. Nothing mentioned about technical means to create trustable data exchange platform to run the said method, which also could provide full traceability of each transaction for all involved parties in real time.

US2014067632 (A1 ) (published 2014-03-06) presents system which automates calculation of transfer pricing between entities and generates reports. However, there is nothing mentioned concerning real time data processing, real time reporting and confirmation for auditing and tax collecting authorities. Reports are static, i.e. if report is presented for e.g. tax collecting authorities, there is no possibility to expand or to extract additional data. Also, there is no possibility to monitor each transaction in real time.

Summarizing the related Prior Art according to the cited documents, the following deficiencies are identified:

- there is no possibility to present signals with data for third parties, such as auditors, tax authorities in real time when every transaction occurs;

- no possibility to monitor transactions in real time, thus no possibility to predict financial, taxation results;

- there is nothing mentioned about creation of trustable and confirmed by all parties data platform to run the system;

- there is nothing mentioned about traceability of each transaction between all parties involved;

- there is nothing mentioned about creation of timestamped, verifiable, incontestable and immutable transactions, trusted by the parties to the transaction and also third parties.

The present invention, described in this application, provides a technical solution that does not have the above-mentioned deficiencies.

SUMMARY OF THE INVENTION

This description discloses invention which uses blockchain technology to implement processes related to transfer pricing. The presented invention applies transfer pricing rules to determine transfer price and estimate related tax from first entity to second entity, each transaction details are being accessible in real time for the parties to the transaction, auditors, tax authorities which monitor, validate or approve each transaction. The solution is applied to the intercompany supply chains, comprising of a number of entities located in the same or different jurisdictions.

The solution is based on blockchain technology and comprises three layers: protocol layer, network layer and the application.

The blockchain based solution tracks the transactions throughout the supply chain and calculates the transfer price and estimates related tax between the parties to the transaction. The solution pulls the financial supply chain signals with data (costs, revenues) from the ERP or accounting systems of the intercompany entities. After that, the transfer pricing rules are applied and the sales price, profit from the transaction and estimated tax liability is calculated. The transfer price is pushed to the ERP or other accounting system of the participants to the transaction.

The transaction terms and calculations are validated and confirmed by applying the blockchain functionality. The parties to the transactions, auditors, tax authorities and other parties monitor, validate or timestamp the transactions. The transactions become immutable, transparent and visible to all authorized participants. The authorized participants have a possibility of an end-to-end view of the supply chain in real time. This allows monitoring of the transactions in live mode, estimating the financial results, profits and tax liabilities by any of the authorized entities in the supply chain. Authorized participants to the supply chain and stakeholders know a real time status of every transaction and the estimated tax revenue or tax costs associated with that transaction. An impact of every single transaction to the overall result of the supply chain entities, including cost, revenue and tax liability, can be monitored and assessed. Any unusual transactions and therefore tax liability increase or decrease can be detected immediately and risk mitigation actions can be undertaken. Assessment and monitoring includes both direct and indirect taxes, including corporate income tax, VAT and customs duties.

Global overall and local tax liabilities can be monitored in live mode as transactions run through the supply chain, allowing immediate detection of any unusual profitability changes, which impact tax liability increase or decrease. Real-time supply chain simulation is also possible, including simulation of tax impact of changing transfer pricing rules, cost or revenue increase or reduction. Transactional data can be fed into the projections in real-time and update the actual and projected financials for all supply chain participants and the entire end-to-end supply chain. Deviations in any supply chain segment transfer through the supply chain and affect the profits and tax to the very end of the supply chain. These deviations are captured by blockchain on a transaction-by-transaction basis in real-time and the profit, tax and other financial result data is automatically updated for the whole supply chain. Unexpected deviations from arm’s-length profits, usually leading to higher effective tax rates, are eliminated through consistent application of transfer pricing rules. Cash tax payments and accrued taxes will not increase due to deviations from arm’s-length profits. By eliminating deviations from arm’s-length profits, the need for transfer pricing audits of such deviations is eliminated as well.

The consistent, transparent application of the transfer pricing rules, end-to-end live view of the supply chain, confirmation by the tax authorities and auditors, promotes fair, transparent, predictable taxation, automate compliance and reduce compliance effort, burden and cost.

The entities to the transaction, tax authorities, auditors and other participants have better visibility into the application of transfer pricing rules within the supply chain and the impact on direct and indirect tax due in each country.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 is a block diagram illustrating the transactional signals with data flow between company ERP systems and blockchain.

FIG. 2 is a block diagram illustrating the validation and approval of the transaction.

FIG. 3 is a block diagram illustrating data retrieval, processing and delivery.

FIG. 4 is a block diagram illustrating principal scheme of system.

DESCRIPTION OF THE PREFERRED EMBODIMENTS

Usually a price for goods or services is determined based on market values of same or similar goods or services, or negotiated between the seller and the buyer, when the seller and the buyer deal on at arm’s length terms. Prices can also be determined based on other rules or principles especially when the seller and the buyer are related to each other (e.g. the same shareholders, a company is a part of an international supply chain within a group of related companies, etc.). Term“transfer pricing” is used for such international intercompany price calculation cases. Transfer pricing defines the price of products (i.e., goods or services) transferred from the first entity within a group of companies to the second entity within the same group of companies. As part of transferring a product from the first entity to the second entity, the transfer price assigned to the product will result in revenue for the first entity (the entity transferring the product) and a cost for the second entity (the entity receiving or purchasing the product). In such cases there is a risk that international entities will agree on the price which will be driven by the tax differences in different jurisdictions, i.e. profits will be allocated where tax regime is more favorable. Most governments rely on transfer pricing rules when determining corporate income taxes for both domestic and multi-national enterprises, that are defined in “Transfer Pricing Guidelines for Multinational Enterprises” published by the Organization for Economic Cooperation and Development (OECD). It is therefore convenient and efficient to link such automatic application of transfer price defining rules to the company internal ERP, accounting systems.

Transfer pricing is highly complex, laborious and often ex-post transaction compliance effort, usually further complicated by multi-jurisdictional differing format data aggregation, low supply chain visibility, transaction recognition and taxation timing differences.

The term Enterprise Resource Planning (ERP) is used in this description and refers to the same as it is known in the Prior Art - as software dedicated to mediate core business processes, including accounting systems, systems dedicated for product management, etc.

This description discloses invention in which blockchain technology is used for transfer pricing purposes. The blockchain technology used for this invention is standard as it is known in the Prior Art and can use any prefabricated blockchain platforms such as Hyperledger (by the Linux Foundation) and/or others. Prefabricated blockchain solution must be customized, tailored and adapted to run the disclosed method of transfer pricing. As an example, blockchain refers to a distributed electronic ledger of signals with data records which are authenticated by the consensus protocol. Multiple computers within the blockchain, referred here to as“nodes”, each may comprise a copy of an entire ledger of records. Nodes can write a“block” to the blockchain where the block may comprise data, timestamp, reference to the previous block in the blockchain. Data may relate to transfer pricing information.

If not mentioned otherwise, herewith in this description the private blockchain is used. Authorized nodes may only access this private blockchain. In some embodiments nodes must be authorized to write to the blockchain. In some embodiments nodes must also be authorized to read from the blockchain. Herewith in this description for the sake of clarity only two sides of the transaction - two group entities, and the related stakeholders - auditors, tax authorities or other parties of the transaction are described. However, this is only to illustrate how the method works, and in real life applications a large number of companies, authorities, auditors, controlling institutions can be involved in multiple supply chains and complex transactions.

This description discloses invention which addresses all above mentioned issues. Blockchain technology is being used to facilitate transfer pricing policy application, transfer price determination, tax estimation, auditing, etc. The new invention features the application of blockchain technology for transfer pricing purposes. The solution is applied to the intercompany supply chains, consisting of a number of entities located in the same or different jurisdictions.

This invention is implemented in networked computer systems. The benefits from this invention are incorporated in the software means operating in the said networked computer systems.

Said software means in this invention consists of three layers:

protocol layer,

networking layer,

application layer.

Protocol layer represents the core blockchain engine, i.e. software means implementing operation of blockchain functions and application to particular needs. This is where all basic principles of blockchain technology come from and are being applied to further operation of all inventive method and operational particulars related to this invention. There can be used any blockchain functionality implementing software means, e.g. Hyperledger or other. These blockchain technology implementing software means are customized and tailored for specific needs, i.e. in this case for blockchain based transfer pricing implementation.

All known blockchain technologies comprise a plurality of computers connected to the network, where blockchain operates. Networking layer is one of three layers operating in this invention. One of the basic operation principles of this invention requires that computers, terminals or other networks are connected to the single blockchain network. In blockchain terms these connected devices can be named as “nodes”: seller node, buyer node, auditor node, tax officer node, etc. As it is mentioned, this set of nodes is very minimal, for illustration purposes only, and usually more nodes will be connected to the same network, monitoring, verifying and approving transactions from a transfer pricing perspective. If this method is used in long supply chains comprising plurality of sellers, buyers, auditors and tax authorities, thus plurality of the said nodes are involved and operating in network of this invention.

There is an application layer in the software means of this invention, as it is mentioned above. Application layer comprises at least one application to make this method operable. Application will drive the operability of this invention as it is disclosed in this description, i.e. the rules how this method works are implemented in the application layer. Additionally, application layer will serve as a user interface, as a dashboard to control the method, as a graphical interface to present information to the user, also as an interface to exchange signals with data between this method implementing software means and ERPs, accounting systems, or other software means used in each node. Application can be installed in each node operating in this network or it can be web based.

The method presented in this invention is incorporated in the software means of this invention and comprises following steps:

- receiving request to determine transfer price for product, including goods, services, intangible assets or any other objects of the transaction;

- receiving signals with data from related ERPs or accounting systems to form initial signals with data for transfer price determination;

- selecting or retrieving from ERPs or accounting systems an appropriate transfer pricing method for transfer price determination;

- determination of transfer price for product based on financial data relating to product from ERP and based on selected transfer pricing method;

- having transfer price and including other data related to transaction, a data block is formed and verified, validated and approved by other parties involved in the transaction, including auditors, tax authorities, thus data block is recorded in the blockchain;

- transfer price data signal is sent to the ERPs or accounting systems for recording a transaction and/or transactional terms;

- transfer pricing data record for each transaction in the blockchain is being held and is accessible until agreed by parties.

From a software means perspective, the following technical elements make the method operable: - SDK (Software development kit) - software means, which allows to access transfer pricing related data, residing in blockchain.

- Adapter: Custom software means using SDK to perform inter communication between ERPs and blockchain, e.g., retrieve data from ERPs and submit this data into blockchain.

- Smart Contract(s): software means, residing inside of blockchain, applying custom transfer pricing related formulas based on provided data, returning the calculation results and sending custom notifications to subscribed SDK clients.

Communication Channel: additional security and encryption might be added to default communication channel between blockchain and SDK.

Interested parties: custom applications, using SDK and delivering final solutions to users, e.g., dashboards, tax authority applications, auditor applications.

1. Adapter retrieves or receives required data from ERP via REST API, websockets or other inter communication protocols (22). Different Adapter may be developed and provided to communicate with a concrete ERP system. Custom authentication solutions might be used to ensure security between different ERP systems and Adapter.

2. Adapter then submits data into blockchain using secure communication channel to ensure data security and integrity (23). HTTPS protocol can be used to transfer the data.

3. Smart Contract(s) is/are executed to process the data, apply formulas and calculate desired output. Transaction is validated and committed by blockchain if smart contract is executed without errors. Notifications are sent out to subscribed clients (24). Smart Contracts are dedicated to performing transfer pricing calculations. Notifications might be sent out via secure Communication Channel or standard blockchain communication channel, e.g. websockets.

4. SDK delivers dedicated transfer pricing related API to enable clients to request specific information and display custom metrics or perform transfer pricing related operations (25). Dashboards are using SDK to retrieve transfer pricing data and display real time calculations, made by Smart Contracts. 5. Adapter also receives notification from blockchain about committed transaction and calculations performed. It may deliver these results back to ERP systems (26).

The common technical platform allows interoperability and differing format data feeding to or pulling from different ERP and accounting systems. By feeding the transactional supply chain data from different data silos into a single blockchain, the complexity and inconsistency of connecting different data is reduced and it allows gaining of an end-to-end visibility into the entire supply chain.

At the initial stages of this method a need for determination of transfer price occurs from international parties - group entities, thus one of the parties initiates transfer price calculation in their ERP. Related financial transaction data such as cost of goods, operating expenses, revenues and/or other are prepared to be fed to this method implementing software means. Mentioned initial financial data related to transfer pricing calculation is being fed to or being puled from by the software means of this invention. Having all related data to calculate transfer price, transfer pricing calculation method and applicable margin is also being fed to or being pulled from by the software means of this invention or is being selected based on defined requirements. Transfer price between two entities is being calculated according to selected transfer price calculation method. Blockchain data block is being created which comprises transfer price and all data related to the particular transaction. New data block is being pushed to the transacting entities, auditors, tax authorities and other blockchain nodes which are involved in this transaction. Transacting entities, auditors, tax authorities and other stakeholder nodes then validate, authorize, approve, confirm or monitor the transaction terms and calculated transfer price. In other embodiments of this invention there can be other nodes which must approve data block or nodes which have only view or for information mode, i.e. they do not validate the transaction, but have a monitoring role. A verified blockchain data block containing verified transaction details is being created and recorded in blockchain. In such way immutable record is created and linked to the previous transaction records, thus creating one trusted, incontestable, indelible, immutable version of data record trusted by all involved parties. Application of a blockchain based method and system therefore means that transactional data is shared, verified and timestamped between the parties which may not necessarily trust one another. This facilitation of simultaneous real-time verification and timestamping of transactions eliminates the trust gap between business participants, auditors and tax authorities. Eliminating trust gap eliminates or reduces the need for compliance and reporting which was previously a means to provide auditability and traceability between the parties which do not trust each other. After verified data block is being recorded in blockchain, parties can use information from this data block for their needs, e.g. to monitor or predict financial parameters, company revenue from this transaction, cost, profit and other financial results can be calculated, local tax rate for this transaction can be applied, in this way company tax liability is estimated for this transaction. Data from verified data block in the blockchain can be pushed to company ERP, tax authorities internal systems, etc.

Usage of the described method enables benefits and efficiencies as following: transactions are automatically verified, audited or monitored by the auditors and tax authorities in real-time, thus reducing or eliminating tax compliance burden, tax audit risk or need and associated costs. Additionally, disclosed method automates compliance and reduces tax risks, compliance efforts, burden and cost. Using of blockchain in transaction pricing enables end-to-end view of the supply chain in real time or within any historical time-period, allowing more efficient planning of tax expenditure and collection. Any unusual transactions and therefore tax liability increase or decrease can be detected immediately and risk mitigation actions can be undertaken. The method permits to assess and monitor both direct and indirect taxes, including corporate income tax, VAT and customs duties.

The method and system eliminate the need to test transfer prices ex-post, as part of the annual documentation process, i.e. after the transaction was already concluded. The requirement that actual results are at arm’s length is met automatically on a transaction-by-transaction basis and in real-time, therefore eliminating the need for year-end adjustments. Situations where the actual year-end or interim financial results of the group companies are not in line with the arm’s-length principle are eliminated.

Application of blockchain for transfer pricing significantly reduces the risk of data tampering and increases security within the system. This feature in ensured by blockchain principle itself: before writing data to the blockchain, data is being checked and verified by several nodes.

Fig.1 is a block diagram providing an overview of data flow between blockchain nodes, between company ERP systems and blockchain. To apply transfer pricing rules (5) for the intercompany transaction (1 ) using blockchain (2), financial transactional data, including costs and revenues, is pulled from the ERP or accounting systems of the intercompany entities (4). Transfer pricing rules (5) are applied and transfer price (6) is calculated. Based on this transfer price (6), company revenue from the transaction, cost, profit and other financial results are calculated. Local tax rate is then applied, and company tax liability (8) is estimated for this transaction (1 ).

The transaction (1 ) and transfer price (6) are recorded on the blockchain (2) and pushed to the ERP or other accounting system of the participants (4) and (9) to the transaction. The company revenue from the transaction, cost, profit and other financial results are pushed to the ERP or other accounting system of the company (4). Transfer price (6) is pushed to the ERP or other accounting system of the other party (9) to the transaction (1).

FIG. 2 is a block diagram providing an overview of the validation and approval of the transaction. Transaction (1) between the parties (4) and (9) to the transaction is validated, approved or monitored by all authorized participants to the transaction and/or other stakeholders, such as tax authorities (13), (14), auditors (15), (16) and group CFO (21 ). Each time a new transaction occurs, an immutable record is created and linked to the previous transaction records. This creates end-to-end immutable audit trail, enabling enhanced integrity of the data, including traceability and non-repudiation.

This real-time approval by the business participants (4), (9), compliance stakeholders (15), (16) and/or tax institutions (13), (14) creates timestamped, verifiable, incontestable and immutable transaction (1 ). An immutable version of data record trusted by all involved parties is created and distributed among many different supply chain business participants (4), (9) and other stakeholders, to provide auditability, consistently apply transfer pricing policies and estimate tax costs.

Tax authorities (13), (14) can monitor and assess corporate income tax and VAT and apply VAT risk assessment tools and strategies (19). Based on transactional data, customs authorities (20) can monitor and assess customs duties. Group CFO (21 ) and other group financial, tax and accounting departments, tax authorities (13), (14) and auditors (15), (16) have better visibility into the application of transfer pricing rules within the supply chain and the impact on direct and indirect tax due in each country.

This invention can be applied for the existing taxation but also for the introduction of new taxes and compliance thereof. To illustrate and describe how this invention can facilitate an introduction and management of new tax, a description of modification and variation of embodiment and implementation is provided below. This invention can be applied to introduce and effectively manage the new taxation of the digital economy. The taxation of the digital economy is envisaged and discussed by a number of global taxation stakeholders, including international organizations, tax authorities and multinational enterprises.

If user participation were to be recognized in the allocation of taxing rights and taxable profits of the digital economy between countries, the method and system would need to be applied for a unified, consistent allocation of these rights and profits, agreed by all the jurisdictions where digital businesses operate. A practical approach has to provide consistent outcome across different businesses and jurisdictions and avoid multiple layers of taxation.

This approach requires a simultaneous global residual profit split between almost 200 jurisdictions (subject to any thresholds) based on the user created value in these jurisdictions. The blockchain based solution, which also can be called and regarded as a distributed ledger technology, has the necessary technological components which will solve the complexities inherent in this taxation approach. The complexities arise out of estimating the weight of the user participation value driver in the overall digital business profit generation and simultaneous allocation of taxing rights among multiple tax jurisdictions.

The method and system involve 3 calculation stages and will enable automatic, mechanical, updated in live mode, universally agreed and verified by all jurisdictions global profit split. The method and system will not require any significant changes to the existing systems and will operate based on the currently available financial and business information of the digital businesses. No additional user tracking data will be collected. The method and system will autonomously calculate the tax profits and allocation, which may sometimes be different from the current accounting profits in various jurisdictions. The allocations will be fully transparent and can be audited anytime by all participants.

The method and system will not result in any additional administrative burdens for the tax administrations. For the digital businesses, the tax compliance will be significantly simplified, providing consistent, predictable taxation, and eliminating double- and non-taxation of global profits.

Method stages:

I. Establishing the residual profits of the business after routine functions within the group were remunerated at arm’s length. The value a business derives from user participation sits with the companies that receive the residual profits, i.e. the profits of the business after the activities of service providers have been awarded an arm’s length return. All tax jurisdictions will agree and verify the automatic application of transfer pricing methods for routine functions of the business, e.g. cost plus 5% for customer support. The financial data will be pulled by the method and system and routine profits will be calculated as described in more detail above. The application of transfer pricing methods, margins and the resulting routine profits in the respective jurisdictions will be verified by all tax authorities, will become immutable and visible in real time. This will ensure that any residual profit is captured centrally even if it is spread in profit pools between different jurisdictions on an accounting level. The remaining total global residual profit after the remuneration of routine functions within the digital business operations can be spread throughout the digital business group entities. However, for taxation purposes the method and system will calculate the total residual profit pool after the remuneration of routine functions globally, potentially even if it is not yet remitted to the principal company. This stage is optional and can be skipped if the global residual profit is already correctly accounted for in the principal jurisdiction.

II. Establishing the deemed value of user participation relative to other group activities. Only certain part of residual profit is related to user participation and the materiality of user participation may differ across different digital business models. The financial values of costs captured by the method and system in the first stage of routine return calculations, could be then used in the calculation of ratios between different costs. The ratio of costs relating to user participation and other costs could be calculated, e.g. proportion of costs relating to user solicitation, retention, support and experience vs. costs of brand marketing and technological R&D. Based on these ratios, the residual profit will be split between user generated and other profit. This will ensure that the amount of user generated profit is commensurate with the value created by local users, and there was sufficient recognition of the value derived from other functions. The user created residual global profit will be allocated to different jurisdictions at the third stage.

III. Global profit split based on user-created value allocation to different user jurisdictions. For certainty and administrative ease among many different jurisdictions, the method and system will further enable a mechanical approach for splitting user generated profits between user jurisdictions (subject to activity thresholds, if any). There are certain limitations in relying purely on user number, given the value created by individual users will differ based on the level of activity, individual user network and the extent to which their engagement with the platform can be monetized based on their affluence and consumption habits. Therefore, the method and system will capture the number of active users in each jurisdiction and the business revenue attributable to that jurisdiction, potentially along with other platform specific aggregated metrics, such as the number of uploads, rides, shares, articles and other characteristics of a user that are most important for value creation in that business model. To respect user privacy, only an aggregated information by country will be provided by the digital businesses. Based on this aggregated global user participation data split by jurisdiction, the global residual user generated profit will be split and taxed among all user tax jurisdictions. The universal, simultaneous and automatic blockchain based calculation, visible and verified by all participating tax jurisdictions, will ensure that the profits are not doubly taxed and that the companies are not subject to tax on profits, which could be also taxed in other group companies or countries.

Therefore, this will be single trusted, incontestable method and system which will calculate the profits attributable to user participation and allocate these profits among all jurisdictions where the business operates. The method and system will provide a live, end-to-end view to all participants, with the live accumulating profits per each jurisdiction.

Given that the same principal entity (or pool of residual tax) will be taxed by all jurisdictions at the same time, the coordinated blockchain based approach should be used where all participants agree on the identification of user created profits and the breaking down of these profits between the different countries in which users are located. The application of the method and system, to which all tax jurisdictions are participants, will represent a fair system for dividing taxing rights. At the same time, these taxing rights will be constrained through pre-determined parameters for the share of residual profit allocable to users. This will eliminate both double- and non-taxation and will significantly reduce administrative and compliance burdens, while strengthening the arm’s length principle and the whole corporate taxation system.

The implementation of the method and system will not require significant financial investments from any of the participants. Moreover, it will empower tax administrations will less developed tax collection systems to participate in tax allocation process without additional administrative burdens and investments. Furthermore, this system may create synergies and new opportunities for other tax policy matters.

Client ERP Server (30) (Fig.4) is connected to ERP transformation server (31 ) using secure communication channel to be able to expose relevant data to Blockchain system (34). ERP transformation server (31 ) is used to transform incoming data from ERP server (30) into Blockchain data. ERP transformation server (31 ) may be hosted on client's premises. Cloud solutions might be proposed as an alternative to in-house hosting. Cloud network might be created by service provider and relevant data might be stored on service provider's premises.

ERP transformation server (31 ) then transforms data and delivers this information to Blockchain network (34). Blockchain network (34) is a set of servers where each server is communicating with other ones using delegated blockchain protocol. Blockchain network (34) might be hosted the same way as client ERP server (30) depending of client's organizational structure. There might be one or more Blockchain servers per client's organization.

Blockchain network (34) applies smart contract and returns back to clients ERP transformation server (31 ) or notifies other interested authorized software delivery servers (32) about the changes what were made during blockchain transaction. Authorized software delivery server (32) is dedicated Application Server for each client, providing different functionality, based on client type. This kind of authorized software delivery server (32) might be hosted the same way as client EPR server (30).

Authorized User (33) then connects to authorized software delivery server (32) and gets information about new transactions based on user roles and access rights.

To illustrate and describe this invention, description of preferred embodiments is given above. This is not a complete or limiting description aimed at prescribing a precise embodiment or implementation option. The description given above should be regarded more as an illustration than a constraint. Obviously, the specialists in this field may clearly see a multitude of modifications and variations. The embodiment has been selected and described so as to enable the specialists in this field to best understand the principles behind this invention and their best practical application for different embodiments with different modifications fit for a specific application or embodiment customization. The invention scope is defined by the attached claims and their equivalents wherein all the terms used have the broadest possible meanings unless stated otherwise.

Embodiments described by specialists in the respective field may contain changes that do not depart from the scope of this invention, as described in the claims given next.

Claims

1. A method for implementing transfer pricing and estimating tax, comprising steps of: receiving request to calculate transfer price; select appropriate rule to calculate transfer price; apply transfer price in transactions; generate reports;

characterized in that

it additionally comprises steps as following:

receiving signals with data from related ERPs, accounting systems to form initial data for transfer price determination;

having transfer price and including other data related to transaction, a signal with data block in the blockchain technology is formed, distributed using blockchain;

signals with data in the blockchain verified, validated, approved and monitored by other parties and stakeholders involved in the transaction including auditors, tax authorities, thus final signals with data block is recorded in the blockchain,

transfer pricing signals with data for each transaction in the blockchain is being held and is accessible until agreed by parties.

2. The method for implementing transfer pricing and estimating tax according to claim 1 , characterized in that the method uses blockchain technology.

3. The method for implementing transfer pricing and estimating tax according to claim 2, characterized in that the method is implemented in private blockchain.

4. The method for implementing transfer pricing and estimating tax according to preceding claims, characterized in that every transaction must be validated by the involved parties and stakeholders, such as entities participating in transaction, auditors, tax authorities, etc.

5. The method for implementing transfer pricing and estimating tax according to preceding claims, characterized in that the method implementing software means, based on blockchain, uses data from transaction parties’ ERPs and accounting systems not considering data format.

6. The method for implementing transfer pricing and estimating tax according to preceding claims, characterized in that the method comprises three levels: protocol layer, networking layer, application layer.

7. The method for implementing transfer pricing and estimating tax according to preceding claims, characterized in that the method and system create verifiable, incontestable and immutable transactions, visible and distributed among many different supply chain business participants and stakeholders, providing auditability, consistently applying transfer pricing policies and estimating tax costs in real time.

8. The method for implementing transfer pricing and estimating tax according to preceding claims, characterized in that the method create transactions, which are automatically validated, audited and approved in real-time by all participants to the transaction and stakeholders, including tax authorities, auditors and group management, thus reducing or eliminating compliance and audit requirements, cost and risk.

9. The method for implementing transfer pricing and estimating tax according to preceding claims, characterized in that the method enable involved parties to use every transaction data from blockchain for their need, e.g. to predict financial parameters, to calculate company revenue from this transaction, cost, profit and other financial results, to apply local tax rate for this transaction, and in this way estimate company tax liability for this transaction.

10. The method for implementing transfer pricing and estimating tax according to preceding claims, is applicable for the existing taxation but also for the introduction of new taxes and compliance thereof.

1 1. The method for implementing transfer pricing and estimating tax according to preceding claims is applicable to introduce and effectively manage the envisaged taxation of the digital economy.

12. The method for implementing transfer pricing and estimating tax according to preceding claims on the application of the envisaged taxation of the digital economy, characterized in that the method comprises three steps: establishing the residual profits of the business; establishing the deemed value of user participation relative to other group activities; global profit split based on user-created value allocation to different user jurisdictions.

13. A system to implement method according to claims 1 -12, wherein the system comprises

Client ERP server suitable to expose relevant data to Blockchain system;

ERP transformation Server suitable to transform incoming data from ERP server into Blockchain data;

Blockchain network which is a set of servers suitable to implement blockchain protocol,

authorized software delivery server suitable to expose user related data to authorized user.