AI Revolutionizes Tax Audits in South Africa and Nigeria, Prompting Calls for Fair Governance

Artificial intelligence is rapidly transforming the practice of tax law, particularly in transfer pricing audits, with South Africa and Nigeria emerging as leading African jurisdictions in adopting these advanced technologies. Both nations are characterized by sophisticated compliance methodologies and complex multinational group operations, making them prime candidates for AI-driven enhancements in tax administration.

The global landscape of tax audits is evolving due to expanding and fragmented value chains, re-examined profit allocation rules, and intensified reporting obligations. This shift is compelling tax authorities worldwide to embrace more sophisticated technologies. While previous risk assessment tools, such as those developed by the African Tax Administration Forum (ATAF), relied on manual intervention, the advent of Generative AI (GenAI) and Natural Language Processing (NLP) allows tax authorities to analyze vast datasets and documentation with unprecedented speed and efficiency.

Specific applications of AI in tax audits include advanced taxpayer selection and risk assessment, leveraging detailed country-by-country reporting data to identify high-risk multinationals. AI also streamlines the audit initiation phase through automated document extraction and classification using OCR and NLP, significantly reducing administrative burdens. Furthermore, AI can enhance the substantive review of intercompany transactions by supporting structured functional analyses, aiding in comparable selections, and improving preliminary economic methodologies, as exemplified by the South African Revenue Service's ongoing digital transformation efforts.

However, this technological advancement introduces an "emerging AI dilemma." Concerns arise that AI-generated inferences might fail to accurately reflect the true economic reality of a taxpayer’s business, potentially tilting the playing field against them. Transfer pricing is inherently a judgment-intensive discipline, requiring the consideration of multiple complex factors. Without proper governance, AI-driven assessments could systematically mischaracterize legitimate business arrangements, underscoring the critical need for robust frameworks to ensure fairness, transparency, and the correct application of arm’s-length principles.

Nigeria's Federal Inland Revenue Service (now Nigeria Revenue Service) is also undergoing significant digital transformation, migrating tax filings to platforms like TaxPro Max and Rev360 to create a "one source of truth" for tax data. While a full-scale AI-driven audit system is not yet confirmed, foundational architecture is being laid. This necessitates that Nigeria, like South Africa, proactively establishes safeguards and maintains a "human-in-the-loop" principle to protect taxpayer rights and ensure that AI systems enhance, rather than compromise, the fairness and robustness of future transfer pricing audits.