VAT in the digital age – How AI Would Impact the VAT System?

Artificial intelligence (AI), and within it machine learning (ML), have recently become topics that particularly capture the human imagination. The fame that AI has gained is due, among other things, to the hugely popular ChatGPT chatbot and, before that, to virtual assistants in the form of, for example, Siri, Alexa or Cortana. Coming into contact with the above solutions was for many people the first demonstration of the possibilities of artificial intelligence. However, the actual possibilities of using AI are almost limitless, and the list of opportunities that this technology brings with it is as long as the list of risks that it may entail. On the one hand, AI can make our lives easier, increase the productivity of businesses, it can make scientific breakthroughs and free humanity from having to do repetitive tasks. On the other hand, AI can pose a threat to our privacy, workplaces or even security.

There is, however, a relative consensus among experts that the AI revolution will change the current order, transforming business models, communication methods, the labour market and our way of life, among other things. The transformation of reality resulting from the development of AI will not bypass the world of taxation either.

AI in taxes

The revolution in taxation has been under way for many years now, and AI is one of the tools that is increasingly being used by both tax administrations and taxpayers. Tax authorities have been using tools with AI elements for years to tighten tax systems and, as a result, to increase budget revenues. Businesses, on the other hand, are increasingly turning to modern solutions using AI to automate and increase the security of their tax settlements.

In the face of these changes, the tax system must constantly adapt to the new challenges of a dynamically changing world, trying to catch up with technological advances and impose an appropriate legal framework on new business models, products or services. The VAT system is today grappling with how to tax Internet sales, metaverse activities, cryptocurrencies or NFTs, among others. In the near future, there will be many more new issues, this time related to AI, which the tax system will have to keep up with.

AI in the service of the fiscal authorities

In recent years, we have seen intensive digitalisation in tax reporting, especially in the area of VAT. Tax authorities are now obtaining huge amounts of structured data (such as uniform VAT control files, SAF-T or JPK in Poland). Moreover, the trend of the digital transformation of the tax administration is bound to continue, and soon tax authorities will be able to obtain real-time detailed data on every transaction carried out, which will be achieved through the introduction of ongoing reporting systems based on structured electronic VAT invoices in individual countries. As a result, the tax administration will have an ever-growing database of extremely high quality data, which, due to its structured nature, can be analysed relatively easily and efficiently. Such an environment provides an ideal basis for the application of AI solutions.

AI-based models have long been an extremely effective tool in the hands of the tax administration, which, by analysing the data it holds, is able, for example, to monitor taxpayer activity on an ongoing basis, detect tax fraud and select taxpayers for tax audits. An example of such a solution is the Polish STIR (Clearing House Information and Communication System) – a tool used by tax authorities to counter VAT fraud. This system analyses bank operations carried out in real time and, in the event of identifying high-risk transactions, informs the tax authorities, who can block the bank account in question.

However, AI solutions are not only used to monitor taxpayers and their activities. AI can also assist tax authorities in their dealings with taxpayers, acting as a consultant to manage their affairs. Such a solution, in the form of a rather simple virtual assistant, is used in the UK by the tax administration there (HMRC). In other countries, solutions to support the tax administration in dealing with taxpayers take different forms, where, for example, Spain has introduced a chatbot to support taxpayers with their VAT returns.

However, a key issue that may pose some barriers to the development of AI on the part of the tax authorities, particularly in terms of possible dispute resolution or interpretation of tax law, are ethics and respect for general taxpayer rights, such as the principle of resolving disputes in favour of taxpayers or the principle of conducting proceedings in a way that inspires confidence in the tax authorities. Moreover, tax law in some countries is not very stable and the interpretation of tax laws often does not follow the rules of logic. As a consequence, particularly complex cases, which need to be assessed on the basis of experience, varied (often contradictory) case law and certain unmeasurable rules, may still require human involvement for some time to come.

AI as a route to VAT settlement automation

AI solutions are still somewhat of a novelty for taxpayers, who are not yet using them as widely as tax administrations. The most obvious use of AI in the tax calculation process on the taxpayers’ side is to use it to automate certain repetitive tasks, the preparation of VAT registers and the submission of tax returns. There are also tools on the market using AI models that can assist taxpayers in other areas affecting VAT settlements –  in particular data analysis, verification of the correctness and completeness of uniform VAT control files, contract analysis, VAT invoice settlement, payment verification and VAT tax risk assessment.

The number of commercial solutions using AI in the field of VAT itself is already very large. At the same time, due to the dynamic development of this technology and the growing confidence in this still new solution, the role of artificial intelligence at the service of taxpayers in their VAT settlements is bound to grow.

Tax advice from AI?

More and more people are turning to conversational language models such as ChatGPT for advice, including on tax issues. These AI-based technologies can provide quick answers to basic questions by analysing huge databases in a fraction of a second.

However, while AI-based solutions can help with simple questions, they are no substitute for a tax adviser. Tax law is complex, dynamically changing and requires a case-by-case approach. Language models do not have the ability to assess the reliability of the information provided by the user, which can lead to erroneous conclusions.

Tax advisors not only have the knowledge, but also the experience and ability to assess the nuances and specifics of a given situation. Therefore, while conversational language models can be an excellent support tool, final decisions and consultations on tax matters should be conducted with a trusted specialist in the field.

New challenges for the tax system

The biggest AI-related challenge the tax system will face is the need to adapt to the new digital world, in which AI will replace the human factor in many areas. In order to remain effective in this new reality, the tax system will have to adapt to new and changing business models.

For example, financial services and medical services are exempt from VAT. Therefore, will services performed by AI in the field of finance (e.g. providing automated trading of financial instruments) or medicine (medical consultations performed by AI) also be able to benefit from the VAT exemption in the same way that the services of brokers and doctors currently benefit from it? Can AI affect the determination of the place of business, and therefore taxation, of a given taxpayer? Should AI be given tax subjectivity for VAT purposes? Since AI is intended to replace employees, should it not therefore be subject to taxation as human labour, for example, is currently taxed? There are already proposals in the tax debate to tax AI, such as requiring companies using AI solutions to calculate the aggregate value of their services/goods that is created due to the use of AI. Such added value could be taxed at an increased VAT rate. These and many other challenges will soon have to be faced by the world of taxation.

In this rapidly changing reality, it will also be necessary to pay attention to the ethical and social implications of the introduction of AI taxation, including the potential impact on human employment. In a global context, on the other hand, differences in approaches to AI taxation between countries may lead to ‘tax havens’ for technology companies.

Perhaps solutions to the above issues can be worked out with the help of AI!