How could data science be used to tackle tax evasion?

Data tax evasion

30th January 2023

Data is everywhere in the modern world and is utilised in almost every imaginable field, from targeted advertising through to identifying the performance statistics of footballers. But while the use of data has at least been partly adopted in the tax field, it could be argued that authorities around the world are yet to harness its true potential, and lag behind many other sectors and industries when it comes to the use of high-level data science. However, according to a report produced at the latest International Anticorruption Conference, that could all be about to change.  But what is the true potential of data science in the fight against international tax evasion and how could it be leveraged to enable governments and their respective authorities to claw back lost revenue from law-breakers across the globe?

The fight against corruption

The International Anticorruption Conference (IAC) is the largest and most influential assembly of its kind and, in December, hundreds of professionals gathered to discuss the latest trends in tax evasion and avoidance and the ways to slow and ultimately stop the flow of illegal transactions that have been impacting national revenues for decades. This is no easy feat; multinational corporations, individuals and criminal groups have established processes with mind-boggling levels of complexity and layers of measures designed to muddy the waters and make it nigh-on impossible for authorities to stop them in their tracks. The latest data has revealed that over $50 trillion (yes, trillion) has been hidden away in just the past few years alone and in 2021 it’s estimated that countries around the world missed out on over $480 billion in tax – and that is seen, in some fields, as a relative under-estimate. These criminals utilise intentional opacity to confuse authorities and are leveraging high levels of data science to conceal their wrongdoing, which is why it’s never been more important for governments to adopt the same approach – in a legal way, of course. If they don’t, they risk being left behind and will ultimately concede this fight against tax evasion to the, admittedly, relatively small number of individuals, businesses and other groups that are cheating the system.

Tackling tax evasion with data

The methods being considered by authorities are highly varied; the growth of data science and, more broadly, technology has meant that there have never been more or better technological options at their disposal and if reports, from the ‘Washington Declaration’ agreed at the IAC, are to be believed, nothing is off the table. Within the Conference a group called ‘Tech for Transparency’ is looking at this approach in the most detail and has published its full findings in a report labelled In Pursuit of the Hidden Economy’. It found that the ability of authorities to identify the true owner of legal entities and major assets – often referred to as beneficial ownership – is central to any effort to tackle evasion and fraud. It also identified a number of viable and implementable options that are now truly accessible for authorities with the backing of their respective governments. These include areas like Web3 and Blockchain that would enable the delivery of decentralised and tamper-proof records of financial information and transactions.

In addition, AI and machine learning technologies create opportunities to identify discrepancies that humans simply can’t. At a practical level, data is usually collected via the ‘know your customer’ and due diligence process, however it’s when authorities have to identify and quantify the quality of that data that problems begin to arise. AI and machine learning mean that government-sourced data could be triangulated with other Big Data sources to identify whether a series of shell companies based in the Cayman Islands, for example, really do all have Mr Joe Bloggs as their ultimate owner or not. Humans simply don’t have the capacity to do this, not least on a major, global scale when all efforts are being made to throw them off the scent by those committing crimes.

There are other potential areas of opportunity including pattern recognition, zero-sum proofing and more. They could all, potentially in a combined way, lead to authorities being able to identify the aforementioned $50 trillion in lost wealth and begin to extract at least some of the near half a trillion in lost tax income, enabling governments to invest in more positive ways for their citizens. This doesn’t just give authorities more options, it gives them an opportunity to implement these options at a speed and on a scale that up to now has not been possible.

The report outlines these suggestions in significant detail and highlights that not only are they available to authorities, but that they can be implemented relatively easily. Yes, the ‘relatively’ in that sentence is doing some heavy lifting, but by utilising blockchain in every major port on the globe, for example, we could begin to tackle the criminal mis-invoicing of global trade via the shipping industry which is estimated to cost upwards of $800 billion per year. This enables trade-based money laundering, trade fraud and the evasion of customs duties, VAT and other taxes and plays a significant role in global financial crime.

The future fight against tax evasion

All of this technology that’s now at our fingertips presents a major opportunity for authorities that frankly can’t be overlooked. Criminals are riding on the crest of the technological wave and it’s vital that governments tackle them on the same level if they want to be able to take down the major illegal infrastructure being built around the world. While Tech For Transparency is leading the fight, there are numerous other groups looking at additional methods, highlighting that the appetite for change and technological adoption on a much greater level is clearly there.

What does this mean for agencies placing talent around the globe, often in countries with already complicated and hard-to-navigate tax regulation? Most importantly, it’s never been more important to remain compliant. Governments around the world are now looking to claw back revenue at least part of that $50 trillion in missing wealth and while there are some major criminals to tackle, they won’t overlook lower levels of non-compliance. We recognise the challenges experienced by agencies trying to wade through these potential minefields and equally we understand the severity of punishments on offer for individuals and the agencies that place them. If you’re looking for leading advice on how to remain compliant and on the right side of the law then don’t hesitate to get in contact.

6CATSPRO is part of WorkwellTM Group

To read more of our blogs click here

And follow us on LinkedIn

Contact Us