TOKYO -- Japan's National Tax Agency has announced that as early as fiscal 2021 it will be implementing a new artificial intelligence (AI) tax inspection system to decide which companies to investigate for potentially misreporting their financial data.
The AI system will analyze financial performance and report documents, as well as voice recordings of company managers explaining their business performance. From there it will whittle down which companies it suspects may be participating in questionable practices such as evading tax. In using the system, the agency aims to improve tax inspection efficiency, speed up its ability to identify misconduct, and strengthen auditing.
At present it is envisaged that the system will primarily be used to inspect financial reports and other documents released by large companies. The AI will first be trained using real tax evasion and income misreporting case histories. Then it will analyze publicly released data, and among other comparisons it will check whether the accounts of earnings contain descriptions similar to those often found on documents that have been used to avoid tax.
Additionally, the system will analyze voice recordings of companies' executives who attended results briefings, pictures of top managers in annual business reports, and what kind of messages they have enclosed in the files. It will then try to deduce how inclined toward risk-taking the individuals are and whether they provide explanations using self-aggrandizing language -- characteristics that were, in previous examples, often associated with illicit financial reporting executed by paying large sums to auditing firms and colluding with them.
The results of the AI's analysis are then examined alongside insider information obtained in previous tax inspections of the concerned firms. From there, it is decided whether to proceed with an inspection of the suspected company.
Failure to declare companies' taxable income is on an upward trend. In the year that ended in June 2019, the National Tax Agency's inspections found some 74,000 cases of evasion, a rise of 1.8% from a year earlier. The undeclared income came to around 1.38 trillion yen, a 38% increase.
Cases involving trade with foreign companies were particularly serious, with about 696.8 billion yen in undeclared income, a rise of 1.9 times the amount from the year before. Methods for avoiding tax appear to be becoming increasingly sophisticated.
(Japanese original by Takashi Narumi, Business News Department)