How advanced technology could make tax controversies easier to avoid

Tax controversy is inefficient for everyone involved. It’s costly, it’s burdensome, it’s wasteful and it can engender a distrustful relationship between taxpayers and tax administrators. This is especially true for large, multinational businesses, many of which are subject to tax authorities’ continuous examination programmes. Tax controversy also confuses shareholders, who generally lack the expertise to assess the nuances and implications of issues in dispute, let alone legislative and political responses.

Regrettably, businesses expect an era of more intensive and voluminous audit activity as jurisdictions around the world adopt global tax reforms, including the global minimum tax rules developed in the Organisation for Economic Development (OECD)/G20 Inclusive Framework. More than half of corporate tax leaders say they expect to experience more tax disputes in the next two years, according to the 2023 EY Tax Risk and Controversy Survey.

Information asymmetry is one of the most material factors of this historically challenging relationship between business and tax authorities. Taxpayers report what is required on tax and information returns, administrators question or challenge items on a tax return and request more documentation to validate those returns. When these requests lead to disputes, they can be exacerbated by information that is hard for taxpayers to locate or extract on the timeline demanded by tax examiners because disputes are often happening many years in arrears.

The good news is that advanced technologies, including generative AI, may soon change this dynamic. Increasingly, taxpayers can better obtain and manage the broad data necessary to confidently comply with a proliferation of new and complex laws more efficiently, timely and accurately. Further, they can store and retain this data virtually in the cloud.

Co-pilot tools, for example, already instantaneously clean and sort data from a variety of sources including business travel expense reports and invoices from accounts payable. We are also seeing application of these technologies to intercompany transfer pricing documentation and support. Transfer pricing has been identified by tax leaders as their biggest risk for controversy in every EY Tax Risk and Controversy Survey in the last decade and a half, including a recent one, which will be published in January. Another example is that companies are able to file VAT returns at source more accurately versus subsequent adjustments years later for over/under payments discovered by manual examination of documents.

These technologies can give governments immediate access to an unprecedented amount of information. As a result, the entire tax filing process is transforming from being a historical accounting of financial activity during the year, toward a record that may be reviewed and fought over many years later. Taxpayer-administrator interactions can now move to more real-time reporting and accounting of transactions as they happen, allowing any concerns to be addressed quickly and with a common set of data. We already see this happening in the area of VAT.

This new era of digital tax administration is one major reason businesses are investing so much in tax function transformation and digital tools. Standardizing data is critical to interact effectively with modern tax administration systems. New tools and processes also can make useful information about their own businesses easily accessible to tax departments; advanced technologies like Generative AI will make it easier for them to consistently apply corporate policies, including those governing transfer pricing and ESG. Ultimately, mutual adoption of advance technology may result in a more efficient, effective taxpayer compliance and tax authority enforcement relationship, one that is focused on areas of interpretational differences versus a retroactive hunt for possible errors or omissions.

As trust is built, it can create a virtuous circle. We already see increased enthusiasm for pre-filing tools such as advance pricing agreements (APAs). These negotiations essentially allow taxpayers and tax authorities to agree on tax positions before they are taken, providing both parties with certainty and reducing the likelihood of future disputes. Indeed, the just-completed 2024 EY International Tax and Transfer Pricing Survey of 1,000 tax professionals found taxpayer interest in participating in APAs has more than doubled from past surveys; for their part, tax administrators may increasingly recognize the benefits of investing in a robust APA programme that includes the potential for multilateral APAs.

In the longer term, AI may have an even more dramatic effect on the taxpayer-tax authority relationship. Among other things, AI may soon monitor organizations’ tax data on an ongoing basis, helping to achieve real-time compliance with changing laws and regulations. It should accelerate real-time data sharing between taxpayers and tax authorities by making the process easier for both stakeholders. We may even get to a point where the corporate tax return itself becomes a relic of the past, like the abacus and spreadsheets.

Can real time data and technology convert the taxpayer-tax administrator relationship away from one generally described as antagonistic? Perhaps — and if new technology makes tax administration less costly and more effective for governments and compliance more efficient for taxpayers both will reap enormous benefits. The underlying foundation of that process will continue to be the need to solve for trust. Solving for timely and accurate data that both parties can agree on will be a significant step forward in the trust equation.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.