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12/16/2018 Embedding A.I.

and block-chain in Digitalized Economy Tax policy design


Embedding AI and blockchain into

next-generation tax policy design

Management, Innovation & Technology, Regulated Sectors, Tax 7 min

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If there is one regulation we can partially convert into code,

it’s tax.

Author: Ignacio Longarte, Expert in Digital Economy Taxation

I feel that we need to change the way we structurally design the tax law production
process in order to adapt it to -driven regulation that bene ts from the evolution of
technology and business in a digitalized global economy. Redesigning how we
conceptualize some tax law segments to make them AI processing-compatible will be
a landmark rst step that can lead to many other possibilities. Though this is easier
said than done, it’s possible to make signi cant progress in the international taxation
eld. We must seriously consider doing this as soon as possible and completely out of
the current international “battle eld circuit” of digital economy taxation, in which tax
sovereignty and taxation rights for the new era are being discussed in a heated basis
and with clear and of cially recognized discrepancies between different country’s
interest groups and economic blocs. We must then advance and work on the structural
approach and the logic of the system in parallel.

Machine-readable tax policy can improve public services dramatically, contribute to

leveling the international playing eld and foster digital businesses real-time iterations
while generating ef ciency savings for taxpayers—but rst, we need a strategic
visionary architecture with a comprehensible logic to inform the system.
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12/16/2018 Embedding A.I. and block-chain in Digitalized Economy Tax policy design

The capacity of a country to autonomously write up and design its tax code system is a
critical foundation for each sovereignty, and there is no need to break with this entirely
to rede ne the boundaries of this concept for a data-driven, technology–centric global
economy and make it a reality. Nonetheless, some sacri ce in national autonomy is
absolutely necessary if we want to magnify rather than obstruct the economic
interdependencies among countries and blocs in the digitalized economy.

Much has been written about the need to regulate the elds where AI will make a
signi cant impact. However, the idea behind this article is different: it explores how we
can rethink the way we design regulations to make them suitable for post-coming-
into-force automatic execution and building applications for them that contribute to
social progress. And “tax regs” would be a perfect lab.

The idea would be to develop a structural AI-driven regulatory design that can be used
by supranational organizations, governments and local tax administrations as a
founding base to foster international commerce and provide certainty in some parts of

For doing so, we need to develop teams that can build up a comprehensive
understanding of the production/reduction of tax policy problems/objectives within the
logic of computation, at least for some segments/pieces of every new tax regulation
where that “logic-reduction” would be perfectly possible for an expert in the eld.

This article explores how we can rethink the way we design

regulations to make them suitable for post-coming-into-force
automatic execution and building applications that contribute to
social progress.

De ning a new taxonomy for each tax regulation would probably be necessary. It
would be dif cult and impractical to carry out this exercise without connecting the
approach to related elds where regulations use part of the same data. In any case, a
strategy and roadmap must be de ned.

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12/16/2018 Embedding A.I. and block-chain in Digitalized Economy Tax policy design

In the last 10 years, we have seen an increased, vibrant focus on applying AI to legal
systems, mainly oriented towards developing knowledge-based systems and smart
information retrieval tools.

Most AI-based research is focused on enabling machines to perform tasks that would
otherwise require human intelligence. In the legal eld, past authors proposed
semantically driven web services that could allow end users to negotiate and mediate
in consumer disputes, family commerce, etc[1].

But let’s take a step back and elevate ourselves to gain a broader perspective. Only
then we will realize that we need to produce some segments of the digital economy
regulations to be AI-ready, integrating machine-dominated logic that can help us focus
on other parts of the regulations or international economic agreements.

We could assert that all regulations have two types of articles in their body text:

Objective regulatory segments: the articles within any law that establish
objective requirements or set off triggering elements that place you within the
bounds of that regulation, and enumerate the consequences if you fall within it
and fail to comply with it. In these segments, thresholds, numbers, percentages,
formulas and measurable data are behind the key concepts and are more easily
processed using NLP techniques.
Subjective regulatory segments: They are subjective in nature, or at least require
a level of interpretation and a value judgment.

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12/16/2018 Embedding A.I. and block-chain in Digitalized Economy Tax policy design

The objective regulatory segments are hard-fact driven and have the support of data
available for machines to review their application with precision. These segments,
whose text or requirements can be more easily reduced to be comprehended by a
machine— which is connected to the right data sources with the right timing or
sequential logic—can be used to establish co-relations with data from taxation and
other disciplines as well.

Tax policy regulations also have subjective segments, just like any other regulation, and
the more we move to the supranational level, the more they have. This is a discipline
with probably one of the highest proportions of objective segments, which are typically
measured in numbers, attributes related to numbers, parameters or formulas, or data
that can be gathered regularly from a company’s or digital platform’s enterprise
reporting systems. Redesigning the way we produce these segments to increase the
quality of their objectivity for later machine automatic potential processing will produce
very positive synergies.

If we start to produce some common tax law segments in

“containers” like modern software development techniques
suggest, we’ll ensure interoperability and scalability.

A digital culture-driven approach to rede ning tax

regulation production
Tax regulatory framework needs to lead by example. Although it contains some
segments/sections/parts that can be interpreted as any other regulation, there are
many other parts of corporate tax, personal tax, VAT regs or transfer pricing whose
logic can be reduced to a machine-driven language in order to enable immediate
application, operation and review-audit of the regulation’s compliance or adherence

In comparison with other regulations, it will have a relatively bigger proportion that can
be “software-de ned,” precisely because part of what it covers is a structured type of
data with strong numeric and categorization base. So clustering information in this
eld for the purpose of training the machine and de ning an AI strategy should be
easier to apply than in other regulatory elds (such as penal/criminal law for instance).

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12/16/2018 Embedding A.I. and block-chain in Digitalized Economy Tax policy design

The structural de nition itself will require a separate article that will follow later, but
will need to be initially based on supervised learning from an AI-technical outlook.

There are many bene ts that can be achieved in the international tax scheme by
applying this type of framework, but the most evident is moving to automatic returns
in personal income tax and in the more complex eld of corporate tax returns for big
MNEs or automatic custom clearance for products at borders.

Here are some indicative examples of other use cases:

Uni cation of elements to facilitate having just one value for all taxes (corporate
tax, VAT, customs, as well as accounting).

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12/16/2018 Embedding A.I. and block-chain in Digitalized Economy Tax policy design

Machine learning to process and test an enhanced objective de nition of tax

substance with supervised data taken from an MNE’s ERPs and other data
sources, or to determine the main areas where value is produced in an MNE.
Tax and accounting asset management and control chains.

Simplify rst before securing controllable tax

regulations as code through blockchain-based
It is no secret that software will rule the world. Telecom networks are moving to
software-de ned networks and data centers are moving to a hyper-converged data
center infrastructure, and the same is expected for the regulatory production process.
We need to move towards software and AI-de ned regulations and execute tax policy
directives more than in other elds— for what it represents internationally in terms of
gross GDP impact on any country in the world, and because it ts the purpose well (as
indicated earlier).

Once we do the necessary preliminary work to greatly simplify international tax

principles, we’ll need to reduce some segments of tax regulations to a machine-
learning mode so every tax regulatory body will have a “legislation as code” portion.
When this challenging—but possible—task is complete, we’ll need to shift our
attention to the issue of algorithmic governance, [1] although this is clearly further out:

“Algorithms can be used to monitor and to control iterative cycles of information

within, and between, database ows. Algorithmic governance means governance by
algorithms, in addition to the already existing governance of algorithms”.[2]

This recent concept requires a socially-driven research approach. Concern that humans
will lose the capacity to control self-trained algorithms is reasonable, but distributed
ledger technology that informs blockchain comes into play at this point in the tax

Many organizations, like the New York University’s AI Now Institute, are indeed
warning about the potential “bias” introduced by some algorithms and they
recommend that every public agency that employs automated decision systems should
carry out what they call “Algorithmic Impact Assessments”, in order to evaluate their
potential bias level and allow public stakeholders and external auditors to examine it.

Due to the nature of tax regs, if we are smart in the way we structure the reg code, we
can greatly increase the algorithms’ objectivity.

In addition, in the tax eld, we can use some of the theoretical attributes of underlying
blockchain technology, like the immutable transaction record and the capacity to in-
brick logic into the system, to our bene t.

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12/16/2018 Embedding A.I. and block-chain in Digitalized Economy Tax policy design

The issue of the algorithm’s solvency and bias is a separate topic in itself, but perhaps
we need to seek out the solution in the consensus process ruling the smart contract
that governs the execution of speci c tax regulation segments, where voluntary
taxpayers and tax administrations joined the regulation execution network on an
automated basis—that’s why it’s absolutely necessary to simplify international tax
principles and regulations rst.

By introducing blockchain into the tax policy production process equation, other
questions around best public-private collaboration strategies arise. As in other elds,
we can envision several initial blockchain nimble use cases to begin testing, but it’s
paramount to de ne the right strategy and priorities beforehand.

I don’t think we can support the whole new tax-coded regs through blockchain; we
should instead begin by working on the critical parts that DLT tech contributes.

Most of the disruption in this distributed ledger arena comes from the startup level of
the ecosystem, but the business model around a technology that could be used/ruled
by a public body and by companies or individuals will likely need more than a public-
private partnership code of conduct. We must rst de ne open-collaboration initiatives
and grant them funding, with full stakeholder involvement.

I know an initiative that is working in developing a block-chain based ecosystem to

remove the cost, burden and complexity of the withholding tax refund process for the
Asset Management industry in some transactions. This is a good example of an
application development for pieces of tax regs affecting international funds
movements that could have previously been converted into code to be applied by any
fund, vehicle or industry player on an automated basis bene ting all participants in the
value chain.

I know of an initiative that is working to develop a blockchain-based ecosystem to

remove the cost, burden and complexity of the withholding tax refund process for the
asset management industry in some transactions. This is a good example of an
application developed for pieces of tax regs that international funds movements and
that could previously have been converted into code to be applied by any fund, vehicle
or industry player on an automated basis, bene ting all participants in the value chain.

There are two main emerging digital elements that led to the rise of the digital
economy between 2005 and 2018, and that generated heated discussions around the
BEPS Action 1, which the EU participates in with rm determination. They are AI,
which is becoming a reality, and blockchain, which is now working in our favor as the
basis a new way of producing international tax regulations supporting a highly
principled and more nimble tax policy design.

The fundamental supranational issue here is that the enormous economic

interdependencies generated between countries/regions through the digitalized
economy collide with many countries taking unilateral paths under their tax
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12/16/2018 Embedding A.I. and block-chain in Digitalized Economy Tax policy design

sovereignty. That’s why we need to de ne a minimum set of system logic rules we can
use to automate the execution of certain parts of the international economy tax system
on a controlled basis, through some tax regulation segments being transformed into
software code and matching the dynamism of the digital economy.

For that, all countries will need to render a piece of that sovereignty in favor or a more
elevated objective. Otherwise, the system will collapse at a point.

For this to happen, all countries will need to surrender a degree of autonomy in favor of
a higher objective. Otherwise, the system will collapse at a point.

Our new role should be to embed the core logic and control the parameters that go
into the international tax system affecting the digital economy from the foundation of
the process. And to do so, we need a master plan soon.

Ignacio Longarte is an associate professor at IE Law School and member of

our Hub editorial committee. He is an expert in Digital Economy Taxation, Digital
Business Models and integrating regulatory, tax, IP and data governance
elements across the international value chain to create new business models —
his focus lies in innovating through data-driven business models. He has
profound expertise in transfer pricing, digital value chain, international taxation,
intangibles and permanent establishment risk mgmt. He is currently Chairman of
DET3, a European based “Digital Economy Taxation Think Tank”, and a strategic advisor of listed global
multinationals developing core digital elements in different sectors. Longarte is co-author of the rst Transfer
Pricing book in Spanish (2009-2011): Business Restructuring and Permanent Establishment chapters, is
member of the Board/Advisory Board in European based Digital companies and a start-up investor. 

Note: The views expressed by the author of this paper are completely personal and do not represent the
position of any af liated institution.

[1] Marta Poblet-Pompeu Casanovas and others: ”Arti cial Inteligence Approaches to the complexity of
legal systems (Springer, 2009)”.
[2] See: “Algorithms, Performativity and Governability”; Lucas D. Introna, Lancaster University.
  See also www.governingalgorithms.org

International businesses call for global tax solutions


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