Natural language AI advances VAT item classification and tax code choice in our VAT Advisor, part of our global tax engine and reporting application
As tax authorities push their global VAT digitalisation mandates, a new risk of incorrect classification of items for VAT, customs and other transaction taxes is emerging. Manually picking the right item description or tax code for purchase and sales invoices is a huge time sucker and wide-open to human errors. With live transactional e-invoice reporting, tax authorities are now able to scrutinise these choices in huge volumes of your taxable transaction for the correct categorisation to spot in real-time incorrect matching to VAT rates and treatments.
As well as item classification, we’re now offering AI VAT advice.
4 risk areas for VAT item classification
Because national tax authorities vary the VAT rates and treatments of various goods or supplies, getting the right item classification or tax code right is important. There are 4 Examples of where it can easily go wrong:
- The right rates:
Medical or pharmaceutical goods and services often enjoy reduced or zero-rated for VAT in some countries. Being able to correctly determine which to apply is a cash difference of around 21% (average EU VAT rates) on each transaction; - Entitlement of exemption:
Financial services and certain real estate supplies enjoy a VAT exemption in most countries around the world. But there are many carves out, particularly around secondary services which are liable to VAT. Attempting to determine if ancillary services can benefit from the exemption demands time-consuming tax research and potentially expensive tax advice. - Which country to charge VAT:
The general rule for B2B services is that VAT is due in the country of residence of the customer. So for cross-border services, the VAT ‘place of supply’ is generally not where the supplier provided the services, but where the customer is resident. However, certain services e.g. land or immovable property services, follow the special rule. This must be picked-up by the correct item identification. - Who is responsible for reporting the VAT
Certain fraud-sensitive B2B supplies are subject to the domestic reverse charge (e.g. Article 199 of the EU VAT Directive) such as micro-chips, mobile phones, carbon trading certificates, wholesale power. In this case, the obligation to report the output VAT via the reverse charge switches to the customer. Again, it is important to have precisely defined these services to understand the invoice calculations and how to get both parties’ VAT return reporting correct.
This is where AI can come to the rescue with tax engine technologies such as our VAT Calculator, providing instant checks and corrections on inaccurate and inconsistent tax determination before the tax authorities do.
Machine learning and generative AI to solve the product taxonomies challenge
There are a growing number of Artificial Intelligence tools that can assist daily item classification and tax code selection. In all cases, they can be supported by up-to-date ERP or tax engine coding to limit the need for extensive updates for training and manuals.
- Machine Learning tools study historical selections of supply tax mapping and via, algorithms is able to predict and suggest possible choices,
- Natural language generative AI can allow staff to use basic language product or services to propose a range of correct selections, including the percentage likely applicability.
The above advances on the first wave of AI, Robotic Process Automation, the simplest form of AI, mimicking human actions by executing pre-programmed rules on mostly structured data. This is commonly used for highly repetitive, structured exercises such as copying data from one document, summarising and inputing into forms (e.g. VAT returns) or other formats.
To learn more about how VATCalc uses AI to support tax code and item classification, and our use of AI to produce VAT advice, contact us for a demo of our VAT Advisor and other products.
