Menu
Tax Notes logo

Global Momentum Builds for Digital IDs

Posted on Jan. 25, 2021

Over the past few months, many articles have questioned whether the COVID-19 pandemic will hasten the adoption of digital identification systems. Former U.K. Prime Minister Tony Blair — who long ago tried and failed to implement a national ID system in the United Kingdom — has taken up the mantle. So have companies like JPMorgan Chase, CVS, and Microsoft, which together have formed a coalition in the United States lobbying for better digital ID systems for anti-fraud and administrative reasons.

Digital ID systems can be a tough sell, particularly because of privacy concerns. But the World Bank is seizing on the momentum to promote an Identification for Development (ID4D) project, a wide-sweeping initiative to match hundreds of millions of people with legal IDs.

In October 2020 it doubled down on this project at its annual meeting, at which the president of Estonia and ministers from Indonesia, Nigeria, Sierra Leone, and Togo urged countries to fold digital IDs into their COVID-19 recovery strategies. It’s a multinational effort cosponsored by the United Kingdom, France, Australia, the Bill and Melinda Gates Foundation, and the Omidyar Network.

But the World Bank and U.N. were looking at this issue well before the pandemic hit. One of the U.N.’s 2030 sustainable development goals is providing legal identification and birth registration for all, a seemingly herculean task considering that nearly 1 billion people do not have a legal ID, according to World Bank calculations.

For administrative and compliance reasons, taxation is inevitably part of the ID4D discussion. Talks have assumed more weight in the wake of the pandemic with governments, particularly in developing countries, looking for ways to raise post-pandemic revenue. In countries that have large informal sectors and lower levels of tax compliance, establishing digital ID systems and broadening taxpayer roles could pay dividends in the long run, even if in the short term, taxpayers are unable to meet their obligations because of unemployment and COVID-19-related emergencies.

The Argument for ID4D

What is causing the 1-billion-person global ID gap? The World Bank finds that low- and middle-income countries generally lack adequate civil registration systems because they are often paper-based and can be vulnerable to fraud and data errors. Also, they may lack strong legal and regulatory frameworks with which to maintain proper privacy and data protection. That in turn impacts the value and usefulness of the ID systems. The three main principles for the World Bank’s ID4D project are:

  • inclusion — attaining universal coverage and accessibility;

  • design — ensuring an ID system is robust, secure, responsive, and sustainable; and

  • governance — building trust by protecting privacy and user rights.

Digital IDs can generate real and inclusive economic gains. But this benefit isn’t widely understood, according to McKinsey, which has carried out research on the issue. The firm observed seven countries — Brazil, China, Ethiopia, India, Nigeria, the United Kingdom, and the United States — to look for potential economic impacts of digital IDs. McKinsey found that implementing full digital ID coverage in those countries could unlock economic value equivalent to 3 to 13 percent of GDP in 2030.

More than half of those gains would flow to individuals. Ultimately, the case for digital IDs is a pragmatic one: Over 4 billion people — more than half of the world — have access to the internet, and large numbers of people continue to go online, according to the firm. Implementation costs get cheaper as technology gets better, and we already have the technology to support digital IDs.

ID4D and Tax

There are a few different ways in which countries can digitize their ID systems. They can institute foundational ID systems that provide proof of legal identity like civil registries, national IDs, and population registers. That’s where the World Bank’s attention is mostly focused. They can also institute functional ID systems like taxation and voting registers, to which the same sorts of tenets apply.

Forty-one countries are involved in ID4D, including Nigeria, Indonesia, Brazil, and Mexico. Several countries, among them India, Nigeria, and the Republic of the Congo, are embracing digital IDs for their tax functions. For emerging markets, digital tax IDs could be important in supporting not only standard tax regimes, but also presumptive tax regimes, like those in India and Kenya, which are often used to collect from those traditionally hard to tax. But it’s hard to implement a presumptive tax regime without an accurate register of taxpayers, and that’s where digital ID steps in.

India runs the world’s largest digital ID system, called Aadhaar. The system recently became linked with income tax returns after surviving several court challenges. It’s too soon to evaluate its effectiveness, because the 2019-2020 assessment year was the first in which all individual taxpayers needed to link their Aadhaar number to their income tax return. But attaching Aadhaar to tax is part of a broader tax and artificial intelligence campaign meant to expand the tax base and improve compliance.

In her 2020 budget speech, Finance Minister Nirmala Sitharaman laid out some of the government’s playbook. “Deep data analytics and AI tools are being used for the crackdown on [goods & services] input tax credit, refund, and other frauds and to identify all those who are trying to game the system,” she said. “Invoice and input tax credit matching is being done wherein returns having mismatch more than 10 [percent] or above a threshold are identified and pursued.”

Nigeria is running a Digital Identification for Development Project and one of its largest goals is to get a handle on the country’s taxpayer base. Over the past few years, the Federal Inland Revenue Service has doubled the number of taxable adults from 10 million to 20 million in a country of roughly 201 million. But there’s room to do more.

Within the next three years, Nigeria intends to register 150 million people, and a key part of that project will be establishing an e-taxation app with the Federal Inland Revenue Service and linking the e-ID cards with tax ID numbers so taxpayers can conduct self-service payments and receive immediate verification.

This project comes at a time when the country is on track to miss its revenue targets, exacerbated by the COVID-19 pandemic. The Ministry of Finance’s 2020 first-quarter estimates suggest the country may land only half of its 2020 revenue targets. A similar story is true in Kenya, which is rolling out a new digital ID system, the National Integrated Identity Management System. The government hopes that it can help the Kenyan Revenue Authority after years of missed tax revenue targets.

Similarly, the Republic of the Congo is in the process of unveiling a biometric tax ID system that will complement the country’s national ID system. Each taxpayer will receive a unique ID number in exchange for their biometric data. Importantly, that data could be cross-exchanged between various government departments, financial institutions, and other parties. The idea is that this will streamline bureaucratic processes throughout the country and with outside entities. The government says a third-party interface will be used for data exchanges with outside parties.

The setup is fairly straightforward. Individual and entity taxpayers must go to one of 10 enrollment centers at which they complete an online application complete with biometric data. The applications are reviewed by a main data center for potential fraud or duplicate applications. Once approved, the taxpayer will receive a unique ID number within 48 hours via text message or email. After that, the taxpayer will receive a chip-encoded and laser-engraved tax ID card.

All these projects are ambitious and in their infancy, but they are not without precedent. Estonia, a digital governance pioneer, has operated an e-tax system since 2000 and a digital ID since 2001. It shows what is possible with considerable effort and planning. Some 98 percent of Estonian companies are established online, and 98 percent of tax declarations are filed online. That, combined with a competitive tax code, has catapulted Estonia to the top of the OECD’s International Tax Competitive Index for seven years in a row. Moving forward, we could see Estonia’s imprint on future digital ID and tax ID projects, because the country’s e-Governance Academy is a contractor for the ID4D project.

Logistical and Technical Challenges

Installing digital ID programs is just a fraction of the battle. Cost is a major issue and depends on each country’s characteristics and specifics. Also, the very event that is driving some of this activity — the COVID-19 pandemic — is making it that much harder for countries to establish new ID systems. Taiwan, for example, had planned to release a digital ID system in October 2020, but was forced to roll it back to July because of pandemic-related delays.

Tactically, some governments have struggled with functionality, user experience, and coordinating their systems across different entities, according to McKinsey. For example, Nigeria has struggled to fully implement an e-ID program because of difficulties in integrating ID systems across the government and difficulties with public-private partnerships involved in the project, according to the World Bank.

Another challenge is persuading people to sign up. Consent is a major issue. A key tenet of digital ID design is that individuals must knowingly register for and use a digital ID aware of what personal data will be captured and how they will be used. That could pose a problem for countries that want to use the data across government entities and cross-exchange with outside institutions.

Litigation is another important factor. India’s Aadhaar has notably fended off challenges before several courts including the Supreme Court declaring the regime to be unconstitutional and an infringement on privacy. Some arose in the wake of alleged data breaches in 2018 and 2019. Kenya’s National Integrated Identity Management System has also been challenged before the High Court of Kenya over privacy concerns.

Slow adoption is another issue. But that may be less salient in light of the pandemic. The United Kingdom is a prime example of this.
Pre-COVID-19, the country’s GOV.UK Verify digital verification system, which helps residents access government services online, was averaging about 35,000 new users per week. After the pandemic hit, the government received over 640,000 new sign-ups between mid-March and mid-May 2020, according to government records.

Conclusion

Ultimately, digital ID and ID4D discussions strike at the heart of what taxing systems should look like post-COVID-19 and implicate ways to boost administrative efficiency and fairness. The revenue challenges presented by the pandemic could very well have an extended tail and with that will likely require tax administrations to do more with less. ID4D — challenges notwithstanding — could help solve this problem, as long as tax administrations can use it in a way that also protects taxpayers.

Copy RID