Paper 2024/1576

Verifiable Value Added Tax

Abstract

Value Added Tax (VAT) is a cornerstone of government rev- enue systems worldwide, yet its self-reported nature has historically been vulnerable to fraud. While transaction-level reporting requirements may tackle fraud, they raise concerns regarding data security and overreliance on tax authorities as fully trusted intermediaries. To address these issues, we propose Verifiable VAT, a protocol that enables confidential and verifiable VAT reporting. Our system allows companies to confidentially report VAT as a homomorphic commitment in a centrally managed permissioned ledger, using zero-knowledge proofs to provide integrity guarantees. We demonstrate that the scheme strictly limits the amount of fraud possible due to misreporting. Additionally, we introduce a scheme so companies can (dis)prove exchange of VAT with fraudulent companies. The proposed protocol is flexible with regards to real-world jurisdictions’ requirements, and underscores the potential of cryptographic methods to enhance the integrity and confidentiality of tax systems.