A report published this week by ICAEW – Digitalisation of Tax: International Perspectives – says that the COVID-19 pandemic has put a spotlight on the resilience and adaptability of tax authorities as tax audits and administration have been forced to adapt to lockdowns and embrace remote ways of working. Tax authorities are becoming increasingly central to government operations as they become more digitalised, it finds.

David Lyford-Tilley, ICAEW Technical Manager and author of the report, says the more digitally- prepared countries enjoyed greater success at weather the economic storms brought on by it. “Many countries turned to their tax authorities to administer emergency relief funds and schemes, as the department with the most information on taxpayers’ affairs, and tax authorities had to quickly pivot to support these new duties – as seen in New Zealand.” 

The latest edition of ICAEW’s landmark series, Digitalisation of Tax: International Perspectives (2022), examines 10 countries, looking at how each has embraced digital transformation in their tax administration. It analyses technologies, barriers, and the impact of COVID-19, and draws conclusions to help policymakers, tax professionals, and taxpayers to assess their own country’s journey. 

The pandemic has in many cases served to accelerate digital transformation of tax systems as many countries have relied on their tax authorities to administer COVID-19 emergency support schemes. Even now, their duties continue to be reinvented, the report finds.

However, despite the benefits digitalisation of tax systems promises, challenges remain. “The most pernicious issue that modernisation schemes face is that of digital exclusion – how to handle taxpayers who can’t or won’t move to digital filing,” Lyford-Tilley warns. “And in our case study on Kenya, we look at the impact of mobile money, and how digitalising tax can support modernisation of the wider economy.

The report warns that some taxpayers are unable to keep up with changing requirements due to an inability or unwillingness to use digital methods to interact with the tax authority. Although the underlying reasons are broad, ranging from a lack of digital skills, distrust of online interaction, internet infrastructure issues, poverty or disability, the report warns that digital exclusion remains a key consideration for any digital development programme. “Tax authorities need to consider different responses for different groups of the digitally excluded,” the report urges. 

At the same time, factors including change management, delivery capability, and underlying complexity of the tax system due to rules and legacy systems are highlighted in the report as key issues stalling progress. It also warns that tax authorities must have the necessary legislation in place to keep up with digital advances. However, embedding tax into the systems that taxpayers naturally use, such as accounting software, can make the changes easy and invisible.

“This transformation relies on data analytics and automation that require connecting datasets together and consistently identifying taxpayers,” Lyford-Tilley says. “The report looks at the importance of digital identities that are robust, widely used and secure. In countries like the UK, with no national identity system, we see how this puts limits on what is possible. And we reflect on how good digital identity systems are becoming increasingly important, not only for tax, but for online life in general – and the potential benefits a robust system can bring, as seen in Estonia.”

The report lays down important lessons to be learned for any country looking to progress its own digitalisation plans. “Many have benefitted from pilot schemes, or carefully managed rollouts of new reporting requirements. However, these must not be rushed or their lessons will come too late,” Lyford-Tilley says. 

Access the full Digitalisation of Tax: International Perspectives report free of charge.