The tax industry has many components, including tax planning, structuring, compliance and tax policy. Technological advancements will significantly impact each of these components. This will lead to the current tax landscape changing dramatically over the next 5-10 years. This article will explore advancements in Artificial Intelligence (AI) in detail, with a spotlight on the way businesses and governments will collect, format and report tax information in the future.
The Tax Industry Today:
According to professional recruitment firm Robert Walters, there has been an increase in demand for VAT specialists due to the “Making Tax Digital” policy that launched in April 2019. This new policy means that complex businesses have to embrace the digitalisation of tax, causing in-house tax teams to look for VAT/tax technology specialists to join their businesses. These specialists will help advise businesses and implement new processes that fit seamlessly with the digitalised business environment. Consequently, tax managers with 7-15 years of experience in the field are currently in high demand. This is drawing many people towards the tax industry, as it represents a lucrative career path compared to other professional service lines.
In 2019/20, the British government received £634.64bn in tax receipts, a figure which has increased steadily every year since 2002 (£324.73bn). These values epitomise the importance of the tax industry to businesses and governments alike.
Artificial Intelligence, also referred to as AI, is a branch of computer science concerned with building smart machines capable of performing tasks that typically require human intelligence. Machines can now replicate or simulate human intelligence and advancements in machine learning and are creating a paradigm shift in many industries, including Tax.
PwC argues that the tax function needs to be nimble and accurate, able to provide information that the enterprise needs for business decisions. They split AI’s capabilities into three areas: sensing, thinking and acting. ‘Sensing’ includes natural language processing (e.g. scanning and converting tax notices into text) and machine learning, where the text is understood, and data is extracted. Machine learning is also incorporated in ‘thinking’, where statistical learning techniques are applied to identify patterns in the data automatically. ‘Acting’ includes the simplest form of AI, which is robotic process automation (RPA), where machines mimic human actions. It also includes cognitive automation, which makes inferences based on information found in unstructured data.
The potential advantages of AI are summarised by Martin Fiore, managing partner in EY’s eastern US region tax practice. He believes “80% of the tax function’s time is spent gathering data and 20% analysing it. AI allows us to almost invert that, creating a massive gain in value.”
His colleague Channing Flynn, EY’s tax technology leader, believes the coming decade will see huge leaps in the way in which AI is used and developed. He believes that AI will allow unprecedented reach and insight into data, transforming how transfer pricing comparables are done. ‘Currently, transfer pricing is more art than science and a major challenge for both taxpayers and governments alike,’ he says. ‘AI will also radically change controversy and planning – which are time-consuming and complex areas. AI will allow companies to manage risk and do predictive analyses far more quickly and powerfully than is possible today.’
For all of AI’s advantages, the glaring critique is the fear that AI will replace people, causing job losses in the process. However, AI will enable tax professionals to work better, smarter and faster, which will mean more time to carry out value-adding activities. As Fiore says: ‘The higher-level, higher-tech work that AI allows will encourage the best and brightest to enter the profession; it will help them learn faster and it will provide greater career satisfaction.’
Outcomes will likely vary by geography, industry, type of work, and other factors. The 2019 Gartner report predicts that AI will create jobs in the health care, public sector, and education industries, whilst the manufacturing sector will be most affected by job losses.
Another issue arises in the form of governments income tax revenues. For example, if the use of AI increased corporate profits and reduced employee costs, governments would witness a decrease in tax revenue as employees are taxed at a higher rate than businesses. Charles Davis, EY’s Global Tax Lead Analyst in London, believes “The balance between the two could become a really tough question, over time, because – if value creation moves from being delivered by humans to robots – you’re talking about a big potential hit to government revenue”.
As the debates over robotics, AI and the impact on the tax industry intensify, businesses must pay close attention. An understanding of the one- to three-year horizon must be developed, and a plan must be drafted for various tax and employment scenarios as a result of the digital transformation. According to an EY report, corporate training programs should be continually re-evaluated, given the acceleration of these advanced technologies and the growing intensity of the surrounding debate. Governments will need to balance their responsibility to sustain employment and the social fabric with the need to support new technologies that could bolster future economic growth.
Whilst there are many moral and social issues associated with AI, it’s benefits to the tax industry cannot be questioned. The implementation of AI will streamline tax processes, allowing tax professionals to focus on the high-level tasks which require the majority of their attention.