Digital Transformation, Informal Trade and Fiscal Traceability

Technological advances are transforming the way in which the tax administrations of the region operate, offering numerous opportunities for improvement for the modernization and digitalization of their services to taxpayers, the control of tax compliance, risk and performance management, among others. Technology is being a key factor in the digital transformation of tax administrations, enhancing their strategies.

This way, the digital transformation it is radically changing the internal operation of tax administrations by automating their operational processes and at the same time modifying the services they offer to citizens. Technological advances make possible to receive and store more and more information, in a timelier manner, and to exploit it more completely, significantly reducing the costs of generating, transmitting, processing and storing large volumes of information.

In particular, the continuous control of transactions, facilitated by cloud technology, allows tax administrations to receive information on all transactions occurring in the economy. Together with the increased capacity of processing tools, this helps analyzing larger volumes of information, even enabling the possibility of determining taxes and the amount of the citizens’ tax obligations from the received and stored transactional information.

For its part, the blockchain technology is proving its effectiveness in monitoring and traceability solutions of production processes, logistics and registration of documents or contractual conditions, and in the public – private sector in digital identity solutions, property registration and customs control.

Some tax administrations of the region, supported by powerful developments associated with electronic invoicing and the obtaining and processing of third-party data supplied by both taxpayers and other tax administrations, are working hard on redesigning their processes to develop them into evidence and indications supported by data, adopting advanced analytical tools and artificial intelligence for this purpose. The initiative of the CIAT Advanced Analytics Center and its first result, the development of the anomaly detector in electronic invoicing, is precisely in this framework.

The digital transformation of tax administrations is therefore key to achieving greater efficiency in the implementation of tax regulations and in effective and voluntary compliance by taxpayers. With this, the provision of digital services to the taxpayer improves the efficiency of operations at all stages of the tax cycle, and, potentially, depending on the tax system and the already existing level of voluntary compliance,  will contribute to an improvement in tax revenues.

In this perspective however, the informality remains a phenomenon that is still difficult to control. Informal trade affects free competition and generates disadvantageous conditions for taxpayers who conduct their activities in compliance with their tax obligations. These actors in the informal economy, in turn, also face other inefficiencies that restrict their growth, including better access to banking solutions or the social security system, to cite two examples.

The COVID 19 pandemic has generated an increase in electronic commerce in the region, adding electronic platforms and social networks as a sales and distribution channel, which represents a new challenge for the tax administrations of Latin America, since several of these developments operate in an informal environment, with transactions negotiated in instant messaging systems and payment mechanisms of direct transfers between individuals, generally of low value, through electronic payment systems or through the use of cash at the time of delivery of goods or provision of services executed in person.

The problem of informal trade is broad, and addressing it requires to design and implement a comprehensive approach that considers preventive, structural and corrective actions by the relevant regulatory bodies.

Some products subject to specific taxes, such as the traditional and electronic cigarettes and alcoholic beverages are illegally marketed within the informal economy, taking advantage of the smuggling of imported products or other fraud mechanisms such as the simulation of exports. These operations, in addition to representing millions of dollars in tax losses for the countries of the region, potentially cause enormous damage to the health of their population.

In the field of preventive actions, international organizations such as the World Health Organization (WHO), the United Nations (UN) and the World Bank (WB) recommend implementing technological systems to support the control of specific taxes on such products and VAT, through the fiscal traceability of products, which can be further enhanced with the use of information from electronic invoices and electronic documents for the transport of goods, which has been widely implemented in the countries of the region, thereby increasing the efficiency of such tools and tax administrations in their important and constant effort to reduce trade illicit, smuggling and tax evasion.

Thus, the digital transformation of tax administrations gives them, among others, the great opportunity to face informal trade with tax traceability technologies, greatly facilitating the implementation of technological systems to support the control of taxes on products such as cigarettes and alcoholic beverages that, as mentioned, represent millions of dollars in tax losses and cause damage to the health of the population. All this, also integrated with electronic invoicing, provide a strong opportunity to reduce illicit trade, smuggling and tax evasion.

The experience of tax traceability in Latin America and the Caribbean is varied. There are different models, solutions and initiatives for its implementation; some incipient others more consolidated.

The results available for some of these experiences demonstrate that it is possible to achieve higher levels of efficiency and effectiveness in the control of the illicit commercialization of products with a greater tax impact, increasing control and decreasing evasion, by standardizing models, applying cutting-edge technologies and taking advantage of best practices.

From the new CIAT Center for Technological Innovation and Advanced Analytics, we have proposed to form a working group with the participation of interested countries, to start elaborating a standard tax traceability and information analysis model for the tax administrations of the member countries. It would not only considers the needs and problems of our countries but also the experience gained in other areas such as the aforementioned anomaly detector with artificial intelligence, which may or may not also benefit from the implementation of a distributed database supported by blockchain technology to record transactions, movements and other relevant facts.

This post, which somehow materializes a conversation between us, (Fernando and Raul) that is already a couple of years old, is an open invitation to the administrations of the member countries, and to interested third parties, who may be interested in exploring the development of this joint initiative in the coming months. The conditions will be those of the Center, the models will be public, and the algorithms and their structure will be open source, built also on and only on that type of tools. What do you think?

Greetings and good luck.

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