A critical look at the challenges and benefits of artificial intelligence (AI) in tax administration : A South African perspective

Abstract

This research addresses an important, yet largely unexplored area of South African tax law, being the use of Artificial Intelligence (AI) in the administration of taxes pertaining to individuals. The digitalisation of the economy through the introduction of new technologies and business models has placed a huge burden on tax administrations and challenged their ability and capacity to administer tax laws. Most tax laws were drafted with human beings and human functions in mind, thus, the introduction of disruptive technologies that mimic human functions but differ in some material respects has left existing laws unable to keep up with the digitalisation of the economy and the impact of disruptive technologies on tax administration. This has resulted in the need to incorporate new technologies into the tax administration system in order to keep pace with the rapidly changing tax and economic landscape. These technologies are Artificial Intelligence (AI) and machine learning (ML). Artificial intelligence, refers to the use of automation to enhance and develop the decision-making capabilities of machines, to enable them to replicate human thinking in order to improve processes. The use of AI has several beneficial applications in tax administration, including but not limited to (1) enabling the extraction of greater value from existing data, (2) creating possibilities for the development of novel and convenient services for taxpayers and, (3) enabling the better management and address of tax risks such as tax avoidance, evasion and fraud. Notwithstanding the aforementioned benefits of using AI in tax administration, such use also carries certain risks, such as (1) the entrenchment of systemic biases which result in discriminatory practices towards certain taxpayers, (2) threats to privacy where the rights of taxpayers to have their personal data protected is infringed upon in the extraction of data for tax administration purposes, and (3) the potential of AI tools to spread disinformation and lead to a proliferation of inaccuracies which can be detrimental to both the tax administration and taxpayers. The aforementioned risks of AI in tax administration require a robust and clear legal system to manage them. As of the date of submission of this research, the South African legislature has not yet introduced any laws aimed at addressing the use of AI in South Africa. It is for this reason that this research analyses the extent to which the vi existing legal framework in South Africa is suitable to manage the risks of using AI in tax administration. The research is conducted in the form of a literature review. It considers and analyses the writings of academic authors, legislation, policy documents, case law and various web sources on the subject of AI in tax administration. A comparison is made between the Indian legal system and the South African legal system for the determination of which system addresses the challenges of using AI in tax administration in the best manner. The research ultimately concludes that the benefits of using AI in the administration of taxes pertaining to individuals in South Africa outweigh the risks associated with such use. Further, the existing South African legal framework sufficiently addresses the current challenges of using AI in tax administration, while allowing for the extraction of the benefits associated with the use of AI in tax administration.