Artificial intelligence-enhanced tax compliance and optimization in insurance firms

AI is revolutionizing several sectors, influencing highly specialized areas such as tax regulations and consulting. By fully enhancing tax compliance, tax optimization can be achieved, as all data is seamlessly available in real time. This can be done without excess costs via in-house solutions. Tax compliance is relevant for all sectors of an economy. Because of the relatively high complexity of tax issues insurance companies are facing, compliance is not always easily achieved. Due to real-time compliance advantages AI-assisted software technology might help insurance companies predominantly in terms of foreign withholding tax and insurance premium tax. However, the need for state-of-the-art tax solutions might also lead to specialized tax consulting, withholding, and payment service solutions (Kogler et al., 2013; Bailey & Borwein, 2019).

The compliance risk of insurance companies is predominantly relevant for foreign withholdings tax. Insurance companies enable private individuals and corporations to financially mitigate risks such as fire damage, burglary, environmental damage, personal accident, illness or death, company bankruptcy, and natural disasters. In return, they continuously receive premiums, i.e. an amount of money that corresponds to the sum of possible insured losses adjusted for the risk of the insured event occurring. Potential tax issues arise when excess funds are generated, which lead to the allocation to general reserves. For insurance companies with international exposure, the general reserves can lead to substantial foreign withholding tax burdens. Because insurance contracts are concluded over several years, the business activities of the insurance holder can be subject to taxation in different countries during the term of the contract. If the business activities are subject to taxation in different countries, foreign withholding tax might arise if the excess funds are transferred to the corporate holder’s home jurisdiction at the end of the term of the contract (Schreiber & Zolt, 2020; Omar et al., 2021; Simons & Choudhury, 2022).