A year into his appointment as tax commissioner, Joseph Caruana must oversee a dramatic transformation of the tax department, including the introduction of AI software that will help the government catch tax cheats. He sits down with Mark Laurence Zammit to explain how, exactly, this will work.

Finance Minister Clyde Caruana’s announcement that the government is introducing artificial intelligence software to help catch tax evaders raised many eyebrows, with people questioning whether the state has a right to monitor people’s personal data and act as a ‘big brother’.

But Caruana said the software will not intrude into people’s personal lives or transactions.

Rather, it will help the authorities to process tax returns quicker and alert the government if an individual’s wealth significantly jars with their tax declaration.

“We will not turn into big brother. We are not trying to scare people, but we are trying to get everyone to be compliant because we need to sustain strong public finances,” Caruana told Times of Malta.

“We’re not intent on fining people or businesses. On the contrary, we will use the software to help people pay their dues more efficiently. The software will alert us when it detects that there might be discrepancies in tax declarations and that will allow us to contact people and allow them to rectify any mistakes early on before too much time elapses and the fines accumulate.”

The software will also make it far quicker for the department to process tax returns and VAT refunds, for instance. Refund processes that would sometimes take four weeks to be completed manually will now be processed within minutes, Caruana said.

During the launch of a comprehensive strategy for tax and customs administration last week, the finance minister explained that the €3 million software, which is already in use in the UK, New Zealand, the Netherlands, Ireland and Canada, will automatically alert authorities when a person or business’s declared income does not tally with their accumulated wealth, and make it easier and faster to detect tax evasion and act on it.

It is a high-end, statistical analysis system (SAS) that uses artificial intelligence to draw data from different registries to assess the individual’s liquid and illiquid assets, like property, land, vehicles and boats and compare them to their declared income in a bid to help the tax department keep tabs on income and tax dues.

“Some people will not appreciate this effort but this is the beginning of a much-needed culture change,” Clyde Caruana had said.

Software will create profile on each person

Joseph Caruana explained that the software will gather information from registries already available to the government, such as the Transport Malta registries in which vehicles and vessels are registered, to create a profile of every person and entity in the population and connects it with the profile of their spouses or immediate family members.

The software will not be privy to bank deposits and will not have access to people’s transactions, although the tax department will retain the legal right to ask banks for that information if it launches an investigation into an individual or a company.

The software will continually analyse people’s tax declarations against what property and other assets they own and will analyse whether the declared income tallies with the VAT and with the declarations of other, similar professions or businesses within the same sector.

The tax department is working with guidance from the International Monetary Fund (IMF) and the software will be up and running on VAT returns by the end of this year and on all other forms of taxes within the next three years.

“This software informs us when the numbers don’t tally, following which we will nudge the individual or entity, to inform them that there might be a mistake in their declaration,” Caruana said.

“Sometimes there really is no mistake, and on other occasions, people genuinely made a mistake, were unaware of a tax or forgot to declare some income – in which case it will help them settle their dues more quickly.

“Our aim is to create a digitalised system that revolves around the taxpayer and help them manage their taxes easily.”

Caruana admitted, however, that the system is not foolproof. Undeclared cash income, for instance, will likely still go unnoticed and the software will not be able to keep tabs on purchases of expensive clothes, jewellery or other objects that are not registered with a government entity. So, people might be earning an income they are not declaring, spending it lavishly on an expensive lifestyle and still going under the radar.

But Caruana is not concerned that the system could drive more people to barter or trade in cash because there is a physical limit to how much an individual can barter and a legal limit to cash purchases.

‘No need for spot checks’

He said the most drastic shift that the software is expected to create is in the way the tax department operates. 

The software will eliminate the need for spot checks, he said. Tax officials will not need to run random checks on people and businesses because they will now know exactly on which doors to knock because they will know which people are registering discrepancies.

“Out of every 4,000 random checks, our inspectors would find that some 3,000 individuals and companies were perfectly compliant. With the software, we will not go to those and will only need to go directly to the non-compliant 1,000,” he said.

More importantly, nobody will be able to say that the tax department is picking on them because the software has no intention of picking on anyone, he said.

Eighty-five per cent of all of the government’s revenue comes from different forms of taxes, and Caruana said there are still around €800 million in taxes that are yet to be collected.

Last year however, the tax department managed to collect €82 million of those arrears and an extra €240 million in VAT, and people are increasingly coming forward to regularise themselves and enter into repayment agreements.

Last year alone, repayment agreements increased by 41 per cent, he said, and most of them were companies that wanted to start settling old overdue.

A broader tax administration reform

Caruana, 64, was appointed tax commissioner just over a year ago but he has spent his entire career in the public sector, starting out as a clerk and working his way up to some of the most influential jobs in government.

Before his appointment as tax commissioner, he served as permanent secretary at the education and transport and infrastructure ministries, after completing a tenure as head of the paying agency at the fisheries ministry.

Now, he has at least two more years to oversee a broad reform in tax and customs administration, which he says will modernise outdated tax systems, automate all taxation processes and make the system increasingly taxpayer-centric, namely by collecting and connecting all taxes under one, digitalised system.

The tax department will also launch a My Tax mobile application around September, to allow people to keep tabs on their tax dues and refunds easily.

And it will introduce a system whereby payroll data of government employees will be directly passed onto the tax department every month, and eventually, so will the data of all other private employees.

“We want to change the backbone – to re-engineer the processes, to have a more automated compliance system. That, coupled with artificial intelligence, will give taxpayers more effective, efficient and 24/7 services,” he said.

“The investment will also better equip our officials and hopefully make our profession attractive to young people who want to pursue tax and customs as their career.”