Artificial intelligence (AI) is usually discussed as a technology issue. It may also be viewed through the lens of privacy, intellectual property, employment, cybersecurity, or governance. But businesses should also start having this conversation: AI is increasingly becoming a tax issue.
This does not necessarily mean that governments will impose a special tax on robots, or other generative AI tools. The implications are much broader. AI is changing how businesses create value, deliver services, deploy people and intellectual property, and operate across borders, and may change workforce requirements and alter traditional business models. At the same time, tax authorities are increasingly using AI to improve tax administration and enforcement. In 2016, only 9% of tax administrations surveyed by the Organisation for Economic Co-operation and Development (OECD) reported using AI. By 2023, this had increased to 69%, with another 24% in the process of implementing AI solutions.
The intersection between AI and taxation therefore works both ways. Governments must consider how tax systems should adapt to an AI-driven economy, while businesses must operate in an environment in which is used by tax authorities to assess compliance and detect risks.
AI IS ALREADY A PHILIPPINE TAX ISSUE
The Philippines has already expanded the application of value-added tax (VAT) to digital services through Republic Act No. 12023 and its implementing regulations since June last year.
The more difficult question arises when AI is no longer merely a service that a company purchases but a key driver of the value it creates. International tax rules have traditionally relied on concepts such as residence, physical presence, func-tions performed, assets used, and risks assumed. AI can make their application more complicated.
Consider an AI product developed in one country, using intellectual property owned by an entity in another, trained on data from several markets, hosted elsewhere, and sold to customers around the world. Where, then, is the value created and which government is entitled to tax the resulting profits?
These questions are not easy, but also not entirely new. AI amplifies and adds another layer of questions that multinational businesses and tax authorities have been grappling with for years on profits from intangible assets.
For multinational companies, it may no longer be sufficient to ask which company legally owns the technology. Tax authorities may also be interested in who actually developed and improved it, who controls the relevant risks, where economically significant decisions are made, and which entities perform the functions that ultimately generate income, and this may be spread across several jurisdictions.
WHEN AI BECOMES A LABOR-SAVING DEVICE
While greater productivity is generally viewed as beneficial, if AI allows an employee to complete in one hour a task that previously took an entire day, the business case appears obvious. The more uncomfortable question is whether those productivity gains will eventually reduce the number of employees required to perform the work.
This question has particular significance in the Philippines, where labor laws allow employers to terminate employment due to, among others, the installation of labor-saving devices or redundancy, subject to the substantive and procedural requirements imposed by law. The implementing rules provide that labor-saving devices must involve the introduction of machinery, equipment or other devices in good faith and for a valid purpose, such as saving costs or enhancing operational efficiency. Fair and reasonable criteria must also be used in selecting affected employees.
As AI becomes more capable, Philippine businesses may have to confront a difficult question: Could certain AI systems eventually constitute a labor-saving device for purposes of Philippine labor law?
The issue extends beyond employment because fewer workers may also mean fewer participants contributing to the tax base. Government derive significant revenues from economic activity associated with human la-bor. Employees earn salaries and pay income taxes; employment generates mandatory contributions; and workers spend their earnings on goods and services that generate further taxable economic activity.
If a company becomes more productive and profitable while employing fewer people, the State loses some of the revenues associated with human labor, but the economic value does not necessarily disappear; it shifts. Employers may obtain higher margins, technology providers earn revenue, and shareholders may ultimately receive greater returns. The policy question is whether the tax system adequately captures that shift when a growing share of economic value is attributable to capital, ownership of intellectual property (such as patents, and trademarks) and technology rather than human labor (where high-value skillsets are needed).
This is one reason discussions about a so-called “robot tax” have emerged internationally. Simply taxing AI, however, could discourage investment and productivity-enhancing innovation.
The better question is not whether governments should tax the robot, but how they should address the changes that AI creates. One approach is to ensure that revenue, even from existing broad-based taxes, is allo-cated to retrain, upskill, and provide support in regions and sectors immediately affected or undergoing rapid change. Currently, the Technical Education and Skills Development Authority (TESDA) is offering an AI Certi-fication for AI-900 exam. We still have a long way to go but these initiatives can help the terminated labor force adapt and find a place in the changing landscape.
THE TAXMAN WILL USE AI TOO
Tax authorities will not only be using AI; they are already doing it. The OECD reports that AI is being deployed by tax administrations for analytical work, taxpayer services, case selection, and the automation of high-volume repeti-tive tasks. The BIR recently provided automated, risk-based selection for audits that draw data from eFPS and eBIR forms, third-party reports (e.g., withholding and import data), and is preparing to roll out the Electronic Invoic-ing/Receipting system (EIS).
The same capability then raises the question about how automated analysis should interact with taxpayer’s rights.
If an algorithm identifies a company as a high-risk taxpayer, the company may reasonably ask why. It may also need to know what information the system relied upon, whether that information was accurate, and how much weight a revenue officer placed on its recommendation. These are not merely technology questions; they are questions of due process. An anomaly is not necessarily evidence of tax evasion. Human judgment, transparency, accountability, and an opportunity for taxpayers to challenge conclusions that materially affect them should therefore remain part of AI-enabled tax administration. As a precaution, businesses should proactively document le-gitimate corrections when they occur, so that any automated inquiry can be addressed promptly and supported by contemporaneous evidence. However, maintaining records is only one side of the equation.
TAX SHOULD HAVE A SEAT AT THE AI GOVERNANCE TABLE
Most companies currently approach AI governance through their technology, cybersecurity, privacy, legal and compliance teams. Tax should increasingly be part of that discussion. Decisions about where an AI system is developed, which entity owns the relevant intellectual property, how affiliates use the technology, how customers purchase the service, and where resulting revenues are recognized may all have tax consequences.
The technology may be new, but the underlying tax questions are not: Who created the value, where was it created, and who gets to tax it? As economic activity is pushed toward algorithms, data, and intangible assets, can our tax system primarily designed for physical and labor-driven work keep pace? AI is going to make the answers much harder.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Cabrera & Co. The content is for general information purposes only and should not be used as a substitute for specific advice.
Mara Angeli Villegas is a senior legal advisor at Cabrera & Co., a Philippine member firm of the PwC network.
mara.angeli.villegas@pwc.com
When AI becomes a tax issue
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