Bharat @2047: Enhancing Bharat’s global competitiveness in the area of fintech

Tax departments all over the world play a very important role in sustaining the economies of countries, being responsible for collecting revenue that ultimately funds the development of the nation, optimum revenue collection depends largely on the efficiency and effectiveness of tax administration. Therefore, having an efficient tax administration system becomes crucial for fostering economic stability and creating a tax-savvy destination for taxpayers. With the turmoil in most of the countries in the region, one of the attraction points for any investor apart from political stability is the fairness of the system. For the last decade, the Government of Bharat has invested heavily in technology which has borne fruits, be it Direct Benefit Transfer, Unified Payments Interface or FASTag, technology has ensured that the last person of the society is benefitted. With the advancement of technology, it is natural that AI can now be used for bringing about efficiency in tax administration and Bharat can be a world leader and torch bearer in this area. The use of AI can make Bharat a preferred jurisdiction for businesses.

Technology has always been a helpful tool in tax administration, with the advent of Artificial Intelligence (“AI”) and Machine Learning (“ML”), the debate on the extent of integration of these technologies in the field of tax compliance has become more relevant than ever. More than 80% of the 58 tax administrations report that they are already using or in the process of implementing technology to reduce human interference and increase efficiency by freeing up resources as per the OECD Tax Administration 2023 Comparative Information on OECD and other Advanced and Emerging Economies . However, AI and ML come with their own drawbacks with regard to data privacy and their inherent probabilistic nature. Tax departments all over the world are now endeavouring to find the perfect extent to which these technologies can be deployed. Nevertheless, one cannot deny the numerous benefits AI poses to the administration and compliance of tax from the perspective of both the taxpayers and the authorities. With the use of predictive AI, now the authorities can assess the quantum of incompliance and the viability of initiating proceedings against such incompliances. Tax departments can obtain reports on the probability of succeeding in litigation before pursuing the same before various forums, thereby saving the cost and time for both the assessee and the department. For instance, by analyzing historical data and identifying patterns, AI can predict future compliance and litigation issues, allowing authorities to address them proactively.

Transfer pricing (“TP”) refers to the pricing of goods, services, or intellectual property transferred between related entities within a multinational corporation. As simple as it may sound, arriving at the Arm Length Price (“ALP”) involves a complex procedure that may vary depending on the jurisdiction. With the increase in multinational transactions, an effective transfer pricing strategy is the need of the hour for all the companies engaged in such transactions. With an increase in the OECD recommendations, compliance requirements by tax authorities around the globe are getting complex and intricate.
As discussed, TP compliance can be lengthy and burdensome, in order to achieve cost and time-efficient TP documentation, companies are resorting to AI technology. There has already been a positive development in the realm of TP documentation through the advent of various AI software . Through the integration of AI in TP proceedings, tasks that were traditionally complex and time-consuming are now streamlined as AI can analyse bulky data and information with ease and provide an accurate breakdown of such data.

Through the analysis of historical data and performance of companies, AI can provide comprehensive information that will be beneficial in arriving at the most appropriate method for the purpose of calculation of ALP and shortlisting the most appropriate comparables for the TP study. Technology-driven transfer pricing policies accompanied by automated benchmarking and AI-based Function, Assets, and Risks (FAR) Analysis, companies can avoid penalties and assessments from tax authorities. With the help of predictive AI, companies can predict the ALP on a quarterly basis by analysing the market indicators such as currency fluctuations, demand and supply, etc, on a real-time basis and can alter ALP based on such changes in the market conditions.