Tax Reengineering: The Means to Improve Collection in Guanajuato

To meet the needs of citizens and have the resources to function efficiently, federal, state and local governments focus on raising revenue and making appropriate adjustments to facilitate compliance.

It is a task that requires constant updating of tax regulations and implementing advanced technological tools to address the ongoing threat of evasion, fictitious deductions, defaults and identity theft, among others.

The existence of legacy systems makes it difficult to detect illegal activities due to the inability to cross-reference information with different databases, identify patterns of behavior, as well as generating high rates of false positives. It is estimated that it can take up to three years before discovering that a taxpayer reported misinformation and requested a very high tax refund. This situation is aggravated if one considers that there may be thousands or millions of similar cases.

Aware of this problem, the government of Guanajuato has focused in recent years on implementing initiatives aimed at carrying out fiscal re-engineering, with a view to improving tax collection.

“To improve fiscal processes, the state government needed to update the regulatory framework defined in its tax code and standardize it with the current federal tax code,” explained Daniel Espinosa, Deputy Director General of Revenue at the Guanajuato State Tax Administration Service (SATEG). Speaking at a SAS webinar, he added that important changes were made in areas such as the tax mailbox, the Advanced Electronic Signature (FEA) scheme and the administrative enforcement procedures, as well as the updating of the Tax Law on Finance.

Based on the amendments and updates, SATEG was created on Sept. 1, 2020. It is a decentralized body of the Ministry of Finance, Investment and Administration, which has become a central point for collection in Guanajuato.

Through SATEG, adjustments were made to existing tax rates, which has helped to boost growth and maintain stability. SATEG has the technical capacity to manage itself and has the power to establish operational policies, evaluation and decision-making, as well as to create legal instruments for compliance.

“One of the objectives that was set with the establishment of SATEG was the incorporation of highly qualified personnel, and under a professionalization scheme, who would be in charge of the operations,” says Espinosa. “This was particularly relevant because the agency will use advanced technological tools.”

This was a great differentiator, since previously there were systems that did not allow the management, control and monitoring of data as required, says the official. “We had, for example, a database that recorded movements but did not allow accurate analysis to facilitate the auditing processes.”

Through the implementation of analytical tools, it has been possible for the taxpayer services area to speed up procedures and the provision of services; it has also increased its quality, while facilitating the fulfilment of taxpayers' tax obligations.

Anticipating Taxpayer Behavior

Since the creation of SATEG, many administrative processes have become more agile, which allows for timely audits.

According to Espinosa, one of the areas that have benefited the most from the implementation of technology and advanced analytics has been information. SATEG has access to information derived from registers, such as taxpayers, vehicle registration and licenses for alcoholic beverages, for example, as well as information about civil registration, public prosecution, land registry, water supply; but it is not enough to have so much information if you don't have a tool that allows databases to be exploited.

“State-of-the-art technology and analytics have allowed us not only to achieve outstanding results, but also to be an accurate and timely authority, and to anticipate the future behavior of taxpayers,” says Espinosa. “It allows decisions to be made and to carry out a proper audit, which has a positive impact on the collection.”

Collection Efficiency

The increase in revenue is creating the basis for Guanajuato to achieve its financial autonomy by generating greater revenues allocated by the federation.

In the last three years, revenue has increased significantly. In particular, in 2021, significant growth was observed as a result of the efforts and new collection strategies that SATEG put in place, according to Espinosa. Beyond incorporating new taxes to improve collection, he points out that the focus is on collecting efficiency.

As mentioned above, the changes make the tax authority more timely, agile and accurate. It is able to constantly monitor taxpayers to prevent them from falling into irregularity and it can act through the audit processes available to help them regularize.

For example, despite the pandemic, 2020 was a good year because significant growth was achieved. Although it raised MX$$600 million (US$30 million), below the estimated target of $616 million, there was progress compared to the previous year.

For 2021, there was a 130 percent higher collection than estimated, which represented about MX$2.3 billion (US$115 million) in additional revenue. By 2022, compliance is expected to be between 100 percent and 118 percent, resulting in additional resources close to MX$1.79 billion (US$89 million).

“Our growth expectations are very favorable because we are confident that all the processes and strategies we implement will allow us to achieve the results we are expecting for the coming years,” says Espinosa.

From the perspective of Espinosa, Guanajuato's fiscal reengineering was indispensable. “For a government to achieve the results it expects, radical changes need to be made,” he says. To carry out the fiscal reengineering process, advice was also received from institutions with extensive experience, and work tables were held with eight states that already have their own SAT.

“Each authority must innovate in all its processes. We have to catch up on technology and analytical tools, otherwise we become obsolete and lag behind to comply with taxes,” recommends Espinosa. “Compliance is easy when you have the support of areas such as human resources, IT, multidisciplinary teams, and when you have a vision and strategist based on assertive decisions,” he concludes.