Three steps tax teams should take to prepare for quantum computing

Kristin Gilkes, EY Global Innovation Quantum Leader, says the great potential of quantum computing has led big tech, governments and venture capitalists to inject tens of billions of dollars into R&D in recent years. For many governments and corporates this has been a defensive move in anticipation that quantum may enable bad actors to decrypt sensitive data.

“Quantum has had a stunning growth trajectory over the past 20 years,” Gilkes says. “But in the past few years progress has triggered an exponential increase in funding from the global community, with investment more than doubling between 2021 and 2022.”

That “stunning trajectory” began in earnest in 1998, when a two-qubit quantum machine first demonstrated proof of concept. More than two decades later, IBM now lays claim to the world’s most powerful quantum computer, known as Osprey, which has 433 qubits.

To give an idea of the power of its 433-qubit processor, IBM says a conventional computer would need more bits than there are atoms in the known universe to achieve parity.

Not content with achieving this milestone, IBM is already developing a successor, called Condor, with more than 1,000 qubits, which is expected to debut this year. The company also has ambitions to build a 1 million-qubit machine by 2030.

The race to achieve quantum supremacy

The initial goal of IBM and other companies involved in the quantum race is to achieve a milestone known as quantum supremacy – the point at which a quantum-classical computer hybrid model will surpass the most advanced classical supercomputers.

To do this, Gilkes explains, researchers must overcome a host of challenges, including the ability to scale the number of qubits in each machine and the need to block out background “noise,” so those all-important subatomic particles can be monitored accurately. 

Quantum supremacy may still be years away, but the potential impact of the technology and the sheer speed of its evolution are already having a big impact beyond research and development laboratories. Legislators in the US, EU, UK, Japan and Australia, who are discussing how best to react to the advent of generative artificial intelligence, are already considering quantum regulation to ensure effective governance and high ethical standards.

Ensuring data encryption is quantum-proof is a foremost concern within governments and industry alike, with the US administration recently passing the Quantum Computing Cybersecurity Preparedness Act, obliging federal authorities to strengthen data security. Globally, companies in sectors such as financial services are also quietly taking steps to ensure their data is protected.

The implications for the tax profession are massive, says Jeff Saviano, a principal focused on advanced technology, policy and governance at Ernst & Young LLP in Boston. For example, a classical computer today can do an adequate job of modeling the primary impact of tax legislation, but it is not nearly as effective as modeling secondary effects.

When AI is powered by quantum computing, however, the amount of data needed to train the algorithm is dramatically reduced and its ability to handle significantly larger data sets is improved. In other words, quantum promises to supercharge AI (including generative AI and large-language models) far beyond what is currently possible.

Optimizing corporate tax strategies in real time

The potential use of quantum computing by the financial services industry to conduct investment portfolio optimization is also a model for how the tax business will be affected, Saviano says. Researchers are already investigating how quantum might be able to model complex investment landscapes, generate powerful insights and enable portfolio managers to produce the best possible return on investment for their clients.

Saviano says tax teams could tailor this approach to model complex organizational tax structures to optimize their corporate tax compliance strategy. This is currently an important and complicated task for tax teams, who must exhaustively model and scenario plan key aspects of corporate activity across jurisdictions to optimize tax compliance as best as humanly possible.

A powerful quantum computer, however, could potentially take each tax variable, create and assess an exhaustive list of permutations, and arrive at a set of recommendations.

“Tax teams already model data to a certain extent to achieve their goals, but that task is becoming ever more difficult due to increasing complexity, caused by regulation such as BEPS 2.0,” Saviano says.

Reacting faster in a crisis

This granular, high-speed tax compliance modeling would be particularly powerful during unexpected and disruptive events, such as the recent COVID-19 pandemic.

“During the first six months of the pandemic, when economies were in complete disarray, many governments took action using their tax policies,” says Saviano. For example, many delayed tax filing, eliminated interest charges and penalties, and issued rebates to fuel their economies.

Governments already have sophisticated tax modeling techniques at their disposal, but in some instances even these resources are not enough. Governments will enjoy greater resilience, however, if they can access the exhaustive modeling and powerful real-time tax insights quantum computing may one day make available.

“National, sub-national and local tax law changes, there are so many impacts and effects of this complex array of tax laws that we don’t even consider, because modeling methods are not yet sophisticated enough,” says Saviano. “When quantum is used – especially in conjunction with another powerful technology, such as generative AI – it is likely to be able to do that and generate a highly accurate percentage probability of outcomes taking place, the potential is pretty remarkable.”

Channing Flynn, EY Global Technology Tax Sector Leader, says tax audits are currently conducted on a historical basis, looking back over the past 12 months or more of legacy transactions. Quantum could change that. “Once adopted,” he says, “quantum audit technologies will likely not only simultaneously verify audits but also assess any deficiencies instantly. Disputes are also likely to be resolved much more quickly.”

Fraud detection is another use case with great potential for financial institutions and tax administrations, who hope quantum computing will one day help them identify the tell-tale signs of tax fraud, which are hidden within terabytes of data.

For example, Augmented Intelligence Labs, an Oxford University spinoff, partnered with EY’s global quantum team to explore fraud detection using a data set with 4,000 known fraud entities, each with more than 150 variables. The project determined which combination of variables indicated fraudulent behavior, strengthening audit and anti-fraud tax practices. 

Despite these promising use cases, however, there is also the very real risk that international criminal organizations will also be able to leverage quantum to hide their activity more effectively, triggering a potential quantum arms race between bad actors and tax authorities. 

These are just a snapshot of some of the potential use cases for quantum computing. Saviano suggests other opportunities lie elsewhere in the tax lifecycle, for example easing compliance obligations, improving tax-planning decision making, achieving fairer audit resolutions that are aligned with outcomes from similarly positioned taxpayers, and improving outcomes for policymakers, to name just a few. 

It’s unlikely tax teams will be equipped with quantum computers any time soon, Gilkes says. Commercially available machines not only cost around US$15m each; it is also unclear whether existing devices are particularly accurate, or even faster than conventional computers yet.

Eventually, however, costs are likely to come down, but Gilkes predicts quantum won’t necessarily make conventional computers obsolete. Instead, both types of devices are likely to work side by side.

“Quantum won’t solve every challenge,” says Gilkes. “I see it being used for specific use cases, generating specific data, and then that data will most likely be fed back into a classical computer environment. The IT ecosystem will still be 99% classical with these callouts to quantum, which will provide a very, very special endpoint solution to specific problems.”

Owning a multimillion-dollar quantum computer to solve specific challenges is also unlikely to make financial sense, so many commentators envisage corporations adopting a cloud-style, quantum-as-a-service solution.

“If you’re a tax professional concerned that quantum is going to totally change your job, then you shouldn’t be worried, because that won’t happen,” says Gilkes. Still, “if you’re a technologist or analyst working inside the tax domain, you should definitely be paying attention to quantum.

“Right now, it’s all about preparing muscle memory, so that when the really big quantum computers are available, you and your team are not left behind.”

Gilkes suggests the following three steps to ensure organizations have the necessary “muscle memory” to leverage quantum computing when a commercially viable service is available.

• Assess your tax team’s readiness

Ensure there are named individuals within your organization responsible for assessing quantum readiness. Their remit should be to identify emerging quantum use cases while assessing the tax team’s ability to adopt them.

• Develop an ecosystem of quantum partners

Considering the cost, complexity and speed of quantum’s evolution, organizations are well advised to tap into this fluid landscape and develop their own partnership ecosystems to successfully develop their quantum strategy. Close working with trusted third parties will ensure tax teams are quantum aware and quantum ready.

• Strengthen cyber defenses

Bad actors are known to be collecting encrypted data right now so they can exploit it when Q-Day – the point at which quantum is able to crack current industry-standard encryption – arrives. Tax teams should identify high-sensitivity data, and establish where it is located and how it is stored and transmitted. Equipped with this information, organizations will then be able to plan the best way to deploy quantum-resilient encryption technology – protecting at-risk, high-value assets first.

Who will enjoy first-mover advantage?

All new technology needs a trailblazing company, partnership or industry consortium to champion its benefits and drive transformation. In the past decade we have seen this process take place in the tax technology field with companies creating AI-powered tax preparation software, others using blockchain-based customs and shipping solutions (via ey.com US) and tax insights generated by advanced data analytics, to name but a few. The stage is now set for a forward-thinking organization or consortium to launch a tax use case and champion the use of quantum computing, blazing a trail for others to follow.

Summary 

Quantum computing has the potential to not only revolutionize the world of IT, but also disrupt huge swathes of the global economy.

The tax function has an opportunity to fast-track its quantum journey, repurposing cutting-edge use cases from other industries and ushering in an era of fairer audit resolution, and improved outcomes for policymakers, as well as high-definition tax modeling and real-time tax audits.

While no commercially viable quantum machine yet exists, tax functions are well advised to start preparing now if they are to develop the muscle memory needed to achieve first-mover advantage.