A Real-time tax compliance architecture for VAT split payments with Making Tax Smart and Open Banking

Abstract

This paper presents Making Tax Smart with Open Banking (MTS-OB), a novel DLT-based architecture designed to integrate real-time VAT compliance into the existing payment system through split payments and Open Banking. Motivated by the substantial VAT gap, the research investigates how leveraging the informational value embedded within payment transactions can reduce the tax administration burden. MTS-OB, a proof-of-concept application built on R3 Corda, facilitates automated, real-time VAT split payments (VSP) without disrupting current payment infrastructure. MTS-OB integrates with existing banking systems via Open Banking APIs, enabling secure information management for VAT collection, reporting, analytics, and automated compliance enforcement. The system uses traditional bank deposit money as a real-time information sensor thereby extending its functionality to include "money as a medium of real-time taxation". Scalability testing demonstrates the system's ability to maintain operational stability under increasing transaction loads, illustrating its potential for real-world deployment. The key finding is the necessity of redefining money to include its informational value for real-time tax compliance, requiring a redesign of the money system while adhering to existing regulations and standards. This research demonstrates the feasibility of integrating tax functionality directly into payments, offering a path towards "hard to get tax wrong" compliance and a potential reduction in the VAT gap without compromising financial stability.