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Can Artificial Intelligence produce VAT advice?

Will ChatGPT and other natural language Artificial Intelligence chatbots produce reliable VAT advice?

No. And yes.

Whilst Artificial Intelligence (‘AI’) tools have boomed in the hunt for VAT evasion, its over confidence in ‘generative AI’ in delivering ‘hallucinatory’ written advice has sunk it as a credible advisor. Its lack of expertise or semantic intelligence means it is flawed for a heavily coded subject like tax. AI does not know any tax laws or case law. It just looks for patterns, millions of them, and tries assemble them. And where it can’t find a clear result, it will make one up – hence the ‘hallucinations’ of sometimes harmful and biased results.  This inherent problem – no knowledge or common sense – is not some bug that will be fixed soon. It’s inherent to how generative AI

But it’ll be overcoming that problem soon via integrating with existing tax tech, with its logic and complete legislative knowledge to produce something very close to the advice that is today produced by traditional advisors.

But that still leaves questions over its adoption. For example, how to charge for instant AI advice if it didn’t require a highly qualified VAT (insert any tax or law professional) 2.5 hours at €250 per hour?

AI and VAT – made for each other

VAT is all about millions and billions of transactions. That’s data which should be following strict tax laws and highly predictable outcomes.  AI needs, no, loves Yottabytes of data to learn from.  It’s a match made in cyber heaven.

As a result, the first major wave of AI tools, such as Machine Learning, have already been revolutionising VAT administration – like most sectors. Its ability to perform repetitive tax tasks and data review in milli-seconds opens up huge opportunities for efficiencies and deeper understanding of VAT issues for the authorities or taxpayers. It is already proving highly beneficial for tax code and item classifications for VAT determination.

Tax administrations’ adoption of AI to identify tax errors and evasion has been breath taking. Malta is the latest to deploy an AI service for VAT return analysis already used in the UK, Canada and other countries. Italy –owner of over one quarter of the €93 billion EU VAT Gap – is many years ahead of most with its VeRa algorithm. India is just adopting AI this month to spot fraudulent input credit deductions from falsified GST registrations.

Other labour-intensive VAT areas where AI is making headway include:

  • AP invoice review, coding and approvals;
  • Live tracking global VAT changes from thousands of jurisdictions;
  • Enriching transactional data to help ensure VAT determination e.g. item or customs classification for VAT and duties calculations, respectively;
  • Interrogating and harvest company VAT data and compliance procedures to identify missed processes and deadlines, particularly most repetitive of questions;
  • Training tools, with user-friendly Q&A, to help staff understand VAT compliance procedures and routines; and
  • VAT reclaims, examining transactional data for flags of vat recovery opportunities – whether domestic or via foreign reclaims.

Yes, analysis. But advice?

The advent of natural language AI chatbots, such as ChatGPT and Bard, open the possibility of a human interpretation of VAT transactions and liabilities on the most complex situations. This includes bringing in case law interpretation to produce full advice in addition to simply reading the texts of tax laws.

However, spend ten minutes asking about chain supplies and application of Hans Bühler – “The case you’re referring to is not well-known. I might be able to offer some general information related to VAT in the European Union”  You’ll soon see the perils of VAT advice sourced from AI. We must not think of ChatGPT as artificial intelligence. It creates a deception of expertise; but it has no semantic component.

And it’s this hoax that (so far!) decks this latest generation of chatbots. They produce totally convincing answers, written grammatically at least as well as most of us – if not better.  But it’s that habit of making it up or pulling in utterly random strands to bias its results that make it dangerous.

Aside from trust, other concerns include:

  • Errors – Who is responsible for any error or ommissions? God luck attempting to sue a chatbot for not understanding the domestic reverse charge ‘may’ provisions.
  • AI skills – Is AI able to bring in client issues and context. This depends on the questions, or ‘prompts’, the user address to the chatbot. There’s a real skill to be learned that may take some more years to master on how to interrogate chatbots to ensure the tool knows what to look for.
  • Completeness – Is all of the legislation, implementing regulations, guidance, tax cases etc  available? What about actually practise where the tax authorities are informally accepting certain treatments or practices.
  • Client confidentially – What information can you give without fear of divulging your clients identify and private financial affairs. While European data laws protect a person’s personal data, whether they post that info publicly or privately.
  • Taxpayer trust – it may take years for taxpayers to come to know and trust chatbots for financially sensitive tax issues. The tax profession – like law – is known for (fairly!) well-regulated, educated and trained providers. Who oversees the bots?

So VAT and tax professionals have been quick to write it off.  Mistake.

AI to integrate with established tax tech logic to aid humble advisor?

So AI is impressive but flawed for VAT (and other taxes)? Yes. But, what if it is integrated with established tax tech – like tax engines – built on the certainties of a known tax legislation articles, regulations and case law world. That could be formidable.  Think of chatbots as the human interface with the rules-based tax rule coding. That would give it the logical context it lacks, and power it with all the experience and knowlegde of most (all?) VAT experts.

So the newest wave of AI will certainly provide invaluable support for tax professionals and advisors. Like Excel did for finance thirty years ago.  But the path for the next phase, usurping basic VAT advice, may now be clear.

Contact us to learn about how VATCalc is integrating Artificial Intelligence tools into our global tax engine to get invoice VAT calculations, audits and VAT return or e-invoices right.


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