Three steps tax teams should take to prepare for quantum computing

Rodrigo Madanes, EY Global Innovation AI Leader, says the great potential of quantum computing has led to more than $45 billion in public investment, meanwhile private investment also continues to grow.

Evangelos Karamatskos, EY Global Innovation Quantum R&D Leader, reports that there has been a surge in major announcements from big tech companies related to research in quantum computing. The R&D advancements in the past year have accelerated quantum roadmaps, positioning full-scale quantum computing within reach in the next five to 10 years. IBM forecasts that quantum systems with 100,000 physical qubits capable of carrying out one billion operations per execution[1] will be available by 2033.

“Although the first ever realization of qubits was demonstrated just before the turn of the millennium, the current quantum hardware landscape is far more diverse, featuring different quantum chip modalities. These technological approaches are competing for the role of the quantum transistor as quantum CPUs (QPUs) evolve to become more robust, scalable and resilient,” Karamatskos says.

The race to achieve quantum advantage

The initial goal of IBM and other companies involved in the quantum race is to achieve a milestone known as quantum advantage – the point at which a quantum computer surpasses the most advanced classical supercomputers when addressing classically intractable computational problems.

To do this, Karamatskos explains, researchers must overcome a host of challenges, including the ability to scale the number of qubits in each machine, to implement error-correction methods to filter out background “noise,” so those all-important qubits can be addressed accurately and efficiently. 

Quantum advantage may still be a few years or a few decades away, depending on the use case, 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. Countries including the US, EU, UK, Japan and Australia, who are discussing how best to react to the advent of GenAI, are already considering how to ensure effective governance and high ethical standards.

Frank Putman, EY Europe-West Deputy Tax Innovation Leader, says quantum will have a massive impact on the tax profession. For example, a classical computer today can do an adequate job of modeling the primary effect of tax legislation, but it is not nearly as proficient at modeling secondary effects.

“Quantum computing, combined with AI, promises to revolutionize this space,” says Putman. “Tax professionals could soon leverage quantum-powered models to simulate entire tax landscapes, taking into account countless permutations and interactions that were previously too complex to compute.

Improving corporate tax approaches in real time

Quantum technology also has the potential to transform real-time decision-making in tax analysis and risk assessment, according to Putman. By harnessing quantum algorithms, tax teams could Improve corporate tax strategies across multiple jurisdictions, simultaneously balancing compliance, financial outcomes, and regulatory changes. He also explains that quantum’s ability to process large volumes of data in parallel enables a more holistic and forward-looking approach, shifting the tax function from a reactive compliance exercise to a proactive strategic partner within organizations.

“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 global regulations such as BEPS 2.0,” says Dennis Post EY Global Blockchain Tax Leader; Partner, Tax Technology & Transformation, Ernst & Young Belastingadviseurs LLP.

Reacting faster in a crisis

This kind of quantum-powered, granular and high-speed tax compliance modeling would be particularly powerful during unexpected and disruptive events. 

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, subnational 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 Post. “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 Alliances and Ecosystems Architecture Lead, 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.”

Tasks such as real-time transfer pricing analysis, dynamic VAT compliance across countries, and advanced scenario modeling for complex supply chains could all benefit from the massive processing power of quantum systems. These applications could reduce errors, accelerate processing times, and support better tax governance and transparency.

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, collaborated 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.

Quantum is also poised to dramatically reduce the time and cost required to carry out tax audits. When used alongside AI, advanced analytics and multidimensional ledger analysis, quantum presents an opportunity for near real-time processing of taxpayer transaction audits.

These are just a snapshot of some of the potential use cases for quantum computing. Post 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. Commercially available enterprise-level 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 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 Madanes. “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 special endpoint solution to specific problems.”

Owning a multimillion-dollar quantum computer to solve specific challenges is also unlikely to make financial sense. The technology is evolving so fast that the business case for purchasing and deploying a computer on premise does not exist. Instead, many commentators envisage corporations adopting a cloud-style, quantum-as-a-service solution, accessing systems remotely and paying only for the time they spend using the machine.

“The fusion of quantum computing and tax services will create a new frontier for precision in modeling and forecasting. It’s not just about speed; it’s about the depth of analysis that quantum can provide,” says Madanes.

“To harness the full potential of quantum computing, companies must begin laying the groundwork now by establishing strategic partnerships and developing the necessary capabilities. The time to invest in quantum-ready algorithms is today, ensuring we’re prepared for the future.”

Madanes suggests the following three steps to ensure organizations are well positioned to leverage quantum computing when a commercially viable service is available.

Establish your quantum strategy: Assess your tax team’s readiness and secure leadership buy-in. 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. Confirm business units are aware of the potential of quantum computing and create space for interdisciplinary teams to match business needs to quantum-based solutions.

• 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 (“Harvest Now – Decrypt Later”) 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 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 leading-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.

Tax functions are well advised to start preparing now if they are to develop the muscle memory needed to achieve first-mover advantage.