What if organisations could automate tax classification and verification work that currently takes thousands of man-hours to complete? Or process millions of transaction records within seconds?
It may seem a far-off fantasy, but Artificial Intelligence (AI) is set to revolutionise the tax systems of the future.
Tax authorities and financial institutions have traditionally been the guardians of compliance in a complex field, however as innovative technologies come to the fore, their roles are beginning to change.
The tax rules in NZ encourage voluntary compliance by clearly setting out your obligations and by applying standard penalties and interest for non-compliance.
Non-compliance isn't uncommon in New Zealand
An impact statement by the Treasury and Inland Revenue (IRD) says "high-level analysis" of taxpayer compliance with the existing bright-line rules suggests voluntary compliance is less than 50 per cent. In other words, less than 50 per cent of folks selling a residential property paid tax under the two-year bright-line rule.
The bright-line property rule was updated on March 29, 2018, extending the bright-line test from two to five years. This means tax is payable when you buy and sell that residential property within five years.
This doesn't solve the lack of voluntary disclosure and the IRD says non-compliance is likely to continue with the extension to five years.
In another case, New Zealand was at the centre of a global financial data scandal in 2016, infamously called the Panama Papers, which has come from one of the world's secretive offshore law firms. New Zealand has been named as an important part of this scandal with more than 12,000 offshore trusts in New Zealand that pay no tax on foreign earnings.
Fast forward to 2018; we are at a time where information is more accessible than ever. There is a massive shift happening with financial institutions moving from being a responder to a crucial part of the tax reporting laws and data exchanges between tax authorities globally.
AI will disrupt tax-cheats
The Inland Revenue's data collection powers have increased in many ways with their recent $1.9 billion IT transformation project.
They are now equipped with analytical and AI tools to "detect any non-compliance" using customer information from third parties.
AI is faster and more accurate at identifying patterns by clustering the data, such as grouping the tax implications in transactional data including sales tax, capital gain, indirect taxes, and detection of unusual behaviours in expenses and purchasing.
AI-powered virtual support systems (such as Siri, Alexa and Google) can be used to assist tax authorities in detecting non-compliance behaviours and potential tax evasions.
Combating global tax evasion
Globalisation has made it easier for people to invest money outside their tax residence jurisdiction. This has provided opportunities for offshore tax evasion and non-compliance.
New Zealand is one of the 105 countries that has entered into international agreements and has passed amended legislation to support the Automatic Exchange of Information (AEOI) between New Zealand IRD and the tax authorities of other participating countries.
These exchanges aim to reduce global tax evasion.
This information is required by law to be collected by banks and other financial institutions around the world for reporting to tax authorities. Tax authorities will exchange this information to ensure everyone pays the right amount of tax.
If you currently hold (and, in certain circumstances, control) an account with a New Zealand financial institution, your financial account information will be reported to IRD.
If you are identified as a foreign tax resident and if New Zealand has an AEOI exchange agreement with your jurisdiction of tax residence, IRD will send this information to the tax authority in that jurisdiction.
This also means that the IRD receives better information about New Zealand tax residents' offshore investments and they intend to make the first exchanges of information by September 30, 2018. This will assist the IRD in verifying whether NZ tax residents have paid the correct tax on their offshore investments.
Recently Stuart Nash, the Minister of Revenue, spoke regarding the IRD's AI developments and said, "The information which will be supplied to Inland Revenue will be a rich data set, and it's best that we don't try to hide foreign assets as the IRD will know more than the investors realise. It's best to declare foreign assets and pay the tax before IRD come knocking at the door."
New Zealand is increasingly reliant on skilled migrant workers to fill key roles, this is particularly apparent locally within the medical, IT and professional service industries.
These workers are more likely to have offshore investments and are therefore potentially susceptible to the current global financial data exchange practice.
The tax systems globally are ripe for disruption, and so seeking financial advice is a key step to secure your financial wellbeing. It is critical for investors to understand what might lie ahead, and AI is just the beginning.
• Nick Stewart is the CEO and Authorised Financial Adviser at Stewart Financial Group, a Hawke's Bay-owned and operated independent financial planning and advisory firm based in Hastings.
• The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961.