During the plenary meeting of the OECD’s Forum on Tax Administration (FTA) held from 28 to 30 September, a report was released looking at the state of maturity of the use of digital identities within tax administrations. This was one of a number of reports on aspects of tax administration released during the meeting.

The report with the title Tax Administration 3.0 and the Digital Identification of Taxpayers reviews the use of digital identities within tax administrations for domestic tax assessments and for cross-border analysis. Further work may be carried out within the FTA on continued knowledge sharing on this subject and on the development of cooperative procedures in cross-border cases.

Digital identity is one of the core building blocks of future tax administration as envisioned in the Tax Administration 3.0 report. Digital identification of taxpayers permits the matching of administrative processes such as tax return filing to a particular individual or business. Registration and identity verification processes have traditionally been used as part of paper systems, with matching through taxpayer identification numbers or similar identifiers. With digitalisation of the system, these identifiers become integrated into digital identities, an electronic representation of the taxpayer that identifies them when they are acting online.

The digital identity consists of two elements. Firstly, digital attributes of the taxpayer such as name, address, residency, and other details; and secondly the authentication of the taxpayer through checks against aspects of the digital representation.

If countries can implement effective digital identity management this will enable tax administrations to make progress in linking their own systems with the systems used by taxpayers in operating their business, to ensure that tax reporting can be done by taxpayers digitally on the basis of the information already prepared for their business operations.

More secure and sophisticated digital identity systems are being introduced by tax administrations to permit a wider range of taxpayer services to be performed digitally such as registration, data management, tax returns and payment of tax. Digital identity can also be used to link up various government services.

When digital identities are more widely used across tax administrations it will be possible to create identities for use across borders. At the present time this is not possible on a global basis as they are not accepted by all tax administrations, but progress has been made on a regional basis such as in the European Union. Until global cooperation is achieved in this area there will continue to be unnecessary compliance costs, friction and compliance risks.

The lack of international coordination causes problems for taxpayers who operate across borders. They need to deal with different rules for digital identity systems or for paper procedures to register and submit returns. Compliance with the requirements therefore requires considerable time and costs.

In the case of third parties that hold relevant data, there are different rules for data collection and reporting in different countries. There may be difficulty in establishing the tax status of the parties to transactions and determining the country to which reports need to be made. Institutions where high volumes of transactions take place are therefore faced with extensive compliance work.

With increased digitalisation in the world economy and increasing numbers of cross-border transactions, tax administrations that use paper processes face growing compliance costs and difficulties with coordination between different specialisations within the administration. The result can be a risk of double taxation or non-taxation.

Further work could be done to develop a framework for using domestic digital identities in certain areas of cross-border taxation.