KPMG has decided to “refresh” its DLT strategy, according to new U.S. blockchain lead Arun Ghosh, who took over the group in September

Big Four consultancy has taken to expanding its blockchain activities beyond the pure financial services work it had been doing, to explore a less-traveled path.

Specifically, KPMG is homing in on the point where cross-border manufacturing and supply chain meet finance, customs duty, taxation and compliance. This is different than the usual supply chain use case, Ghosh said.

He said:

“You hear that supply chains have been addressed by DLT – but have they? If you peel back the layers, these supply-chain implementations are simple track-and-trace. The value is missing.”

Where this value resides, in KPMG’s view, is in customs and trade. Getting into detail, this concerns intra-company transactions involving different manufacturing components and revenue recognition around those transactions, which basically means the specific conditions in which revenues are accounted for under generally accepted accounting principles (GAAP).

This also includes a complex array of value-added tax (VAT) and customs duties on these components depending on different jurisdictions and trade zones.

Stepping back, KPMG is progressing with previously announced financial services and trade finance blockchain initiatives, including a major asset management project with the Luxembourg Stock Exchange scheduled to go live in January 2019.

Yet its new blockchain leadership team under Ghosh leans toward tax and audit applications with David Jarczyk, KPMG U.S. blockchain tax leader, and Erich Braun, KPMG U.S. blockchain audit leader.

That helps explain the new focus. Rather like other digitally forlorn areas within global trade, cross-border manufacturing transactions and tariffs are today accounted for using a mishmash of shop floor systems, shipping and receiving systems, and bills of lading, with much of the customs work being outsourced.

As a corporate tax consultant to many large companies and conglomerates, KPMG is well aware of the complexity and pain points around the movement of unfinished goods from one country to another country or jurisdiction for those to be either finished, integrated, or added to a broader bill of materials.

“You have customs agents and customs brokerage that handle things for you. They use a third system, so the shared sense of truth or the universal ledger today is a very manual, intensive reconciliation exercise,” said Ghosh. This is the case in “aerospace, auto, any heavy engineering manufacturing industry,” he said.

So Ghosh and his team have combined KPMG’s enterprise efforts around testing and evaluating private and permissioned blockchains with its customs and duty expertise in this area.

“Customs and trade and the ability to manage compliance of tariffs is a very hot issue these days,” said Ghosh. “Unique in my mind, we are taking the same type of advisory or tax work we have done for so long and now putting a blockchain lense to it, because we can and we should.”

Taxing complexity

To test the idea, KPMG started in the first half of 2018 looking at how blockchain could be applied in a simple parts provenance exercise for a particular aerospace component.

It was anything but simple, however, involving imports between three regions and at least 20 manufacturing sites, with thousands of components comprising the bill of materials for a particular aerospace part.

Ghosh said containing and managing all this on a blockchain is one thing, “but designing the system so you can understand your VAT implications, your duty drawbacks etc is another thing altogether.”

Duty drawbacks, which are refunds of certain duties, internal and revenue taxes collected upon the importation of goods, can vary depending on whether a component was designed in a particular country (in a free trade zone, for example), which may mean tax credits can be applied for, even if it’s made elsewhere.

Blockchains and the applications that run on top of them can cut through this complexity and automate the whole process, Ghosh said.

“The tax component, or the customs and trade and the duty drawbacks component, all become smart contracts that reside on the blockchain, which is now giving you the immutable ledger for the parts and the parts that are either having finished components that are taxable or not,” he said.

Using a blockchain (KPMG is using Hyperledger Fabric) also makes it simple to show a regulator where a part or component may have gotten integrated with a bill of materials, which is now not taxable because of a free trade zone, for example.

Looking ahead, Ghosh said that in addition to traditional industrial manufacturing (including aerospace, automotive and heavy machinery), the firm is also investigating the use of this type of customs blockchain in the high-tech vertical, where it could track the integration of servers to hard drives down to the chips.

Acknowledging the enterprise blockchain world’s difficult transition from an overload of lab testing, and what he described as “pilot-itis,” Ghosh vowed that KPMG’s customs work was no mere experiment, concluding:

“It’s important to distinguish this from a proof of concept or a small scale pilot; this is being designed for production grade.”

Also read: Blockchain startup Adhara has secured $15 million in new funding from Consensys