As part of its smart taxation reform plan, China aims to completely digitalise the tax system by 2025. Big data and artificial intelligence (AI) will be used to automate the process, ensuring accuracy and eliminating the possibility of tax fraud or tax evasion.
AI will personalise individuals’ taxes to maximise benefits and prefill forms. All they will need to do is confirm and pay using their smartphones.
The reform – the third by the government, following revisions to streamline tax collection in 2015 and 2018 – will advance capabilities in law enforcement, service and supervision.
It will also involve major upgrades in technology, using the cloud, AI, big data and blockchain to support smart taxation. The aim is higher efficiency, lower costs and greater social satisfaction.
The Golden Tax IV system, to be launched later this year as part of the smart taxation plan, will use big data and AI to build a web of information about corporations and taxpayers.
Data will be gathered nationwide from both tax and non-tax sources, such as banks, market regulators, invoices and transactions.
Big data allows China’s tax authority to connect the dots and create a detailed profile of a company or an individual and their network of relationships, as well as how money is transacted.
For example, it can compare any data submitted with the bank accounts of the relevant taxpayer, related company personnel, and revenue, costs and profits of related industries.
Big data and AI can also spot false accounts, false invoices, abnormal tax declarations, and so on.
China is not alone in leveraging the benefits of big data and AI to prevent tax avoidance.
Bloomberg reported in 2018 that the US Internal Revenue Service is developing a system to catch tax cheats using data from bank transactions, phone records and even social media posts.
The system also has access to an individual’s text messages, passport number, criminal history, and even their mother’s maiden name.
The UK’s HM Revenue and Customs (HMRC) has the Connect system, which uses big data to cross-check a billion HMRC and third-party data items to expose hidden relationships between people, organisations and data.
This allows HMRC to uncover anomalies among things like bank interest, property income and other lifestyle indicators.
In 2020, the Australian Taxation Office began building an AI system that uses big data to map out multilayered relationships between taxpayers, allowing it to detect potential patterns of tax avoidance.
The challenge in using AI and big data to connect the dots is making sure there are enough “dots,” or data sets, to make those connections. Here, China has a unique advantage due to the rapid growth of it digital economy. Many of its money- and finance-related activities are already digitalised.
The world’s second-largest economy is largely cashless and has the highest penetration rate of fintech services among major economies, at 87 per cent. In 2019, China’s mobile payment market was worth US$29 trillion. QR codes for mobile payments are ubiquitous in both big cities and more rural areas.
China is the largest e-commerce market globally, generating almost half the world’s transactions.
It is also the first nation where e-commerce has surpassed traditional retail in sales, with 52.1 per cent of purchases in 2021 made online, in part owing to the pandemic. China’s e-commerce market is now estimated to be larger than those of the US, UK, Japan, Germany and France combined.
Another advantage China has is in its adoption of electronic invoices (also known as e-fapiao) to track value-added tax, a major source of fiscal revenue.
All business transactions are recorded on fapiao to combat tax evasion and ensure compliance with trade laws.
To further boost smart taxation, China is exploring the use of blockchain technology to record real estate transactions and registrations, and the collection of social security contributions.
This facilitates efficient decentralised information sharing, while ensuring security and privacy.
China has also led the way in developing a central bank digital currency (CBDC). By the end of 2021, China’s digital yuan app had 261 million unique users and was accepted by more than 8 million merchants in China.
Transactions totalled US$13.8 billion. The digital yuan further improves the efficiency of China’s payments systems, allows for greater financial inclusion and helps curb money laundering and counterfeiting.
As a side note, the Hong Kong Monetary Authority has also been working on a CBDC, piloting the use of the e-HKD with peer central banks in cross-border applications, with potential consumer retail applications later this year.
Of course, the collection and storage of so much financial data raises security and privacy concerns. To alleviate those concerns and ensure high standards for security and privacy, China passed two new laws last year: the Data Security Law and the Personal Information Protection Law.
These have been hailed as the world’s strictest data-privacy laws. Indeed, over the past year, tech companies have scrambled to ensure compliance.
Such protection is a must when using AI and big data for tasks such as taxation that have a big impact on people and businesses. In the long run, it helps instil greater trust.
As interest in the metaverse, NFTs, cryptocurrencies, and virtual digital assets grows, it makes sense that taxes should also be heading towards digitalisation.
Thanks to its already strong cashless digital economy and its push for wider adoption of the digital yuan, China has a clear head start in AI-driven smart taxation.
Andy Chun is a vice-president and convenor of the AI Specialist Group at the Hong Kong Computer Society and regional director, technology innovation, at Prudential