For me, “Terminator” has been one of my favourite movies since childhood. In the 1990s, the concept of Skynet (network) taking over the world through robots (terminators) and going against the human race was fascinating and out of the imagination. Fast-forward to 2024, and most of the elements showcased in the movie exist. If the AI itself wants to turn Robots against humans, there is hardly anything we can do. But until then, we can pay attention to the brewing new structures around tax avoidance, this time not just through digital means (Pillar I) but with the combination of effective hardware and software intelligence in the form of Robots.

While the world is still grappling with a common solution with Pillar I and II, I can visualise a need for Pillar III around the “measures to counter tax avoidance due to artificial intelligence and Robotics”.

Robotic technology has transformed industries from manufacturing to services, increasing efficiency and reducing the need for human labour. As robots replace human roles, the tax base traditionally derived from labour (like income tax and social security contributions) diminishes. This shift affects not only local labour markets but also national revenue sources, necessitating a reevaluation of existing tax frameworks.

So what are the various ways in which Robots contribute to #Taxavoidance? Let us evaluate:

1. Capital intensive: Robots are capital-intensive resources. They could often be treated as assets and, therefore, could claim depreciation on the same, which is a non-cash but yet an allowable expenditure. This strategy can defer taxes indefinitely with the interplay between the creation of deferred tax liability and the reversal of the same. Further, instead of deploying human resources, robots take over jobs that could be contributed by human intellect, thereby raising unemployment in different tax jurisdictions.
2. Profit shifting: Multinationals with the money power may deploy robots in tax-friendly jurisdictions (say tax havens), where they could look at higher income attribution, stating higher functions, investments and risks. This could shift the overall base for taxes and contribute heavily to profit-shifting.
3. Shifting of employee taxation: Once the profit shifts as per sr no 2, this also means that robots would be undertaking the work of humans, which will replace humans and also taxes on the employment. One will need to find ways and means to tax robots in lieu of salaries, where the world comes together on such types of taxes on economic activities.

So what could be the plausible solutions to the above issue of tax avoidance through Robots?

a. Robot taxes – Similar to Carbon tax, the world could look at Robot taxes, where the company pays for the economic activity created by the robots to compensate for employment tax and corporate tax

b. Special VAT regime – Deploy a special VAT regime globally, like a digital tax or VAT, on activities undertaken by Robots

c. Formulary approach—Globally agree on a formulary approach to determining the value added by robots and taxing the remaining actual activities in the country via transfer pricing principles.

Next steps:

My aim in writing this article was not to highlight all tax avoidance schemes or explain methods of countering them but to bring to the readers’ attention that with the advent of AI and Robotics, there are significant tax challenges waiting to be explored. The world should unite and make global tax regulations capable of evaluating and rightly taxing modern-day businesses. If this remains unanswered, this may have a heavy impact on developing and tax-based economies, promote tax avoidance, and, in the end, lead to cross-border litigations with top names under the scanner.

I would love to hear your views on this. You can feel free to write to the author at info@transprice.in