Ann Low, US Department of State: Combat Corruption by Enabling Tax Payment – El Salvador Case Study

In May 2016, the US Department of State funded a project in El Salvador’s third-largest city, Santa Ana, to discover whether incentives for business registration and enabling tax payments could reduce corruption and rebuild trust in government.

Two years later, the results are in — and they are promising, as well as worrying. A third of the small business owners surveyed reported that they suffered from extortion, and half had considered migrating to the US to escape corruption. Less alarming, but troublesome, was the unsurprising discovery that tax payment forms were too numerous and too complex, and many businesses didn’t have a reliable way to calculate how much tax they owed. Less than 10% of El Salvador’s working age population filed income tax returns in 2015, despite those filings being mandatory for all workers with yearly incomes above $4,064.^[1]

Business registration creates records, alerting federal and municipal government agencies that a business exists and is taxable. In El Salvador, “informal” businesses — with no legal right to exist^[2] — employ more than 60 percent of the labour force.   Most businesses are not registered because compliance with administrative procedures is too difficult and costly. The owners of these businesses, and their employees, are vulnerable to extortion and bribery from gangs and unscrupulous government officials.

“The project recognised that Salvadorans need immediate improvements in the areas of personal safety and welfare to cut illegal migration to the US.”

The project recognised that Salvadorans need immediate improvements in the areas of personal safety and welfare to cut illegal migration to the US. In 2015, El Salvador was labelled the most violent country in the world, with 104 homicides per 100,000 population^[3] (4.9 homicides per 100,000 population in the US^[4]). Salvadorans had an average of 6.9 years of schooling and $6,898 per-capita annual income.  Americans had 13.4 years of schooling and an average per-capita income of $54,941.^[5]

The project provided technical assistance (skilled people paid by a donor) from the United Nations (UN) Business Facilitation programme to help Salvadoran government staff simplify business registration, tax payment, and the provision of public services. They created novel IT approaches, a citizens’ hotline, and training programs. They harvested data from the new systems to simplify work processes and make compliance with governmental obligations easier.

The project design was demand-driven (responding to requests from the government of El Salvador), and informed by expert advice from the UN and the US Department of State.  It leveraged three existing UN Business Facilitation systems in El Salvador, and substantial in-kind contributions. Altogether, the government of El Salvador and municipality of Santa Ana assigned 45 staff to the project. Officials from 11 Salvadoran government agencies contributed.

Salvadoran Project Leader’s Perspective

The results are best highlighted by Nelson Pérez, the Salvadoran Project leader. “We developed or expanded nine systems to improve governmental services, and we built a mobile app to track progress,” he said. “Initially, we planned to document the process to pay taxes, create an anti-corruption hotline (call centre) in Santa Ana, register businesses and issue identity cards to entrepreneurs to prove their legal status.

“The processes for small businesses to register and pay taxes were so complex that we were unable to promote massive business registration because we first needed to identify and document all the steps to pay taxes, which was much harder than we anticipated. Then we needed to begin simplifying processes so entrepreneurs could fulfill their obligations without having to hire an accountant or spend several days each month on governmental paperwork.”

The project added national level tax payment information for individual merchants and companies to the national business registration website (https://miempresa.gob.sv/). “We established 32 public-private partnerships to offer immediate benefits from business formalization, such as access to lower cost credit,” said Pérez. For the first time in El Salvador’s history, a small business can find all the information it needs to pay national level taxes on one website, including downloadable forms, and it can compare an array of benefits (health services, insurance, credits and guarantees, technical assistance) available to formalised businesses from 32 private sector suppliers.

While the expanded website is a major improvement, there are still 14 mandatory annual or monthly filings, involving multiple dates, forms and government agencies. There are also municipal-level obligations, which were documented for Santa Ana and San Salvador, but not for El Salvador’s 260 other municipalities.

“In July 2017, my government made the national business registration website the unique channel for registering a business in El Salvador,” said Pérez. “The quantity of registrations through the online system increased 392 percent over the life of the project — from 1,735 in 2016 to 8,528 in 2018.”

This represents a significant improvement in legal compliance and potential  increase in tax revenue.  “Once we documented how to pay taxes, we simplified some of the most frequently used and cumbersome processes.”

The work began with the automation of the process for filing the mandatory annual statistical solvency certificate, so companies no longer need to travel to the office of DIGESTYC in San Salvador to file. That office estimated the online process saves each of El Salvador’s 26,000 registered companies about $40 per year in opportunity costs, amounting to $1 million annually.

“In Santa Ana, we automated issuance of the municipal tax solvency declaration, which reduced processing time by 86 percent and eliminated the possibility for municipal agents to delete files or forgive obligations as happened in the past. Businesses in Santa Ana can now go to the city hall and get the tax solvency declaration in less than an hour.

“We interviewed small businesses and discovered that not only were tax payment forms too numerous and too complex, many businesses didn’t have a reliable way to calculate how much taxes they owed. We learned that a third of our 20 sample entrepreneurs suffered from extortion, and half had considered migrating to the US to escape corruption.

“We also learned that the amounts the entrepreneurs paid the extortionists were typically greater than the taxes they owed, and that the extortionists were typically gang members who threatened the entrepreneurs’ families with violence. Were entrepreneurs able to pay taxes and count on police services to keep their persons and property safe, everyone would be better off.

“When we launched the anti-corruption hotline in Santa Ana in mid-2017, operators received many calls about inefficient municipal services.  Gross administrative inefficiency is considered corruption under Salvadoran law.

“We realised that to rebuild trust in government, we had to create an online administrative system for Santa Ana, so the operators could direct complaints, such as poor electricity services or missed garbage collections, to offices that could help. We discovered many municipal offices didn’t have, or enforce, standard operating procedures for providing services, so service levels were inconsistent. We worked with government agents to document 44 municipal procedures online, involving 210 steps, 124 documents, 17 laws, and 19 municipal employees (https://santaana.eregulations.org/).

“In that process, we discovered Santa Ana had over 200 taxes, permits, and fees which were not well publicized and inconsistently collected, giving the impression that compliance was unnecessary or arbitrary.”

Santa Ana received 870 calls on the hotline through January 2019, including calls about gang members infiltrating the municipal police, bribes to municipal agents in exchange for incorrect registrations, public employment in exchange for money, and extortion. This co-operation led to eight corruption cases being transferred to the General Prosecutor’s office.

“When we focused on creating the entrepreneur card, we discovered that many small business owners did not have the time to comply with the multiple documentary requirements and complex formalities that are mandatory to register a business and work formally,” said Pérez. “We partnered with the Small Business Administration (SBA) and the National Registry of Natural Persons which entrepreneurs can join with just a copy of their national ID. The MYPE registry gives entrepreneurs access to technical assistance, fairs, and expositions to help their businesses grow.^[6]   As of March 2019, 3,700 entrepreneurs had joined the MYPE registry.

“During the project’s two-year life span, we trained over 500 government officials and trusted third parties, such as lawyers and accountants, on how to use the new systems, including how to harvest productivity data to identify bottlenecks and improve services. For example, by analysing information in Santa Ana’s new tax database, the tax manager identified 30,000 accounts that didn’t receive invoices because the addresses were located in dangerous areas and that 54 percent of households that did get bills had not paid their municipal services taxes.

“My government needs to further simplify business registration and tax payment to enable widespread compliance.  It also needs to implement more content management systems in government agencies, so taxpayers get better services.  Rebuilding trust in government requires a sustained effort, but we are headed in the right direction.” ^[7]

The Mayor’s Perspective

According to Milena de Escalon, the mayor of Santa Ana (2018—2021), the “Línea ciudadana unidos contra la corrupción” (citizens hotline), Santa Ana’s online administrative systems, and the behind-the-scenes work processes that those systems track have increased productivity and transparency in the municipality and improved municipal services.

“Since the citizen’s line was launched, 870 cases have been addressed, resulting in improvements to public lighting services, solid waste collection services,  maintenance of public works (sidewalks, walkways, streets), and inspections of businesses that were reported to violate regulations.  At the same time, the system has motivated municipal officials in all departments of the municipality to be more responsive to requests for public services, so that citizens don’t complain about them.  And the system has made it possible to detect acts of bribery by municipal employees.

“We hope to continue expanding the project with the United Nations and the Department of State of the United States, so that we can offer more municipal procedures online and facilitate the declaration and payment of taxes,” said Mayor de Escalon. “I have personally guaranteed the transparency of this project by requiring that cases be sent from the Citizens hotline Contact Centre to the mayor’s office, which distributes the cases to the corresponding dependencies within the municipality, tracks them to resolution, and ensures that citizens are notified through the Contact Centre of actions taken to resolve their complaints.”^[8]

The UN’s Perspective

According to Frank Grozel, the UN Business Facilitation Programme manager, who oversaw the project’s implementation from Geneva, “The El Salvador project brings the world closer to a replicable model of technical assistance that can enable widespread business registration and tax payment.

“My team had a decade of experience helping governments reduce corruption and enable economic growth through administrative systems and trade portals.  Now we have experience simplifying tax processes and integrating IT solutions with a citizens’ hotline and public-private partnerships.

“I believe many reform-minded governments could improve governance in a few years through a four-tier process of technical assistance. First, simplify one ministry’s processes and put them online (estimated costs $200,000).  Second, pursue a more complex project to standardize more administrative functions online, implement a citizen’s hotline, develop public-private partnerships, and provide businesses with a simple accounting system, modelled on the El Salvador project (estimated costs $750,000 annually for two years). Third, re-think tax rules to make compliance easier for small businesses, who are over 90 percent of potential taxpayers in most countries.

“Fourth, once compliance is simplified, implement a communications campaign (estimated costs $1 million annually for several years) educating entrepreneurs about how to register businesses and pay taxes.  Throughout the process continue improving all government services and expanding partnerships with the private sector, so new taxpayers experience immediate benefits from legal compliance, such as access to lower cost credit and the ability to bid on government contracts.^[9]”

Conclusion

The El Salvador project provides reform-minded governments and donors with a tested, low-cost model to reduce corruption and improve public services through technical assistance from the UN Business Facilitation programme.  The government of El Salvador and municipality of Santa Ana were able to simplify compliance with their laws and improve services through a citizens’ hotline and online administrative systems.

Their combined efforts, and those of UN staff, multiple US agencies, other donors, and private enterprises who co-operated with this project generated measurable results in just two years. In the process, the project identified areas where more work must be done to simplify governmental processes, expand access to municipal and national services and enable payment for those services.

The El Salvador project creates a replicable process to improve governance, enhance security, and build trust in government by enabling and encouraging formalisation of small businesses and tax payment.

Additional Accomplishments

• Contributed to a 22-place improvement in El Salvador’s World Bank 2018 Ease of Doing Business rating.
• Created baseline statistics for the nation and municipalities of Santa Ana and San Salvador against which progress can be measured.
• Created a system for the secure exchange of information among government ministries and with the user.
• Continuity: Upon the project’s completion, the government of El Salvador committed 15 staff to continue maintaining, updating, and improving the online business registration and tax information system (https://miempresa.gob.sv/), the municipality of San Salvador committed staff to maintain its system (https://sansalvador.eregulations.org/), and the municipality of Santa Ana committed five staff members to maintain the citizens’ hotline and its administrative system (https://santaana.eregulations.org/).
• Created a certificate programme with the National School of Public Training (ENAFOP) to begin institutionalising data-informed policy making.
• Partnered with the electric company, to inform over 70,000 households about the Santa Ana citizens’ hotline in their January 2018 electric bills.
• Created a prototype government central board which the government could build to track business registrations and compliance with rules for businesses in El Salvador.
• Created a prototype simple accounting system which the government could integrate with a simplified tax payment process to enable easier compliance with governmental obligations by small businesses.

About the Author

Ann Low is the Knowledge Leadership Division Chief at the US Department of State. She designed the El Salvador project with the UN and the Government of El Salvador, Identified funding, and monitored implementation.  She has represented the United States on boards and committees of multiple UN agencies (UNDP, UNICEF, UNCTAD) and international organizations (APEC, OECD, ITC) evaluating their programs and developing best practices.

References

^[1] UN Business Facilitation Program  Manager Frank Grozel based on data from the Finance Ministry.

^[2] International Labor Organization, ILOSTAT, Informal Employment, last updated February 15, 2019, https://www.ilo.org/ilostat (accessed February 17, 2019).   In addition, the project estimated that in 2015, 91% of El Salvador’s working age population did not file income tax returns, despite those filings being mandatory for all workers with incomes above $4,064.

^[3] El Salvador National Civil Police (PNC) records.

^[4] Index Mundi, Intentional homicides (per 100,000 people) – country ranking, https://www.indexmundi.com/facts/indicators/VC.IHR.PSRC.P5/rankings (accessed February 3, 2019).

^[5] United Nations Development Programme, Human Development Reports, 2018, http://hdr.undp.org/en/2018-update (accessed February 2, 2019).

^[6] National Identification database and National Taxpayer database News coverage,  August 15, 2018, https://elmundo.sv/mypes-podran-registrarse-en-linea/ (accessed February 10, 2019).

^[7] UN Business Facilitation Program, Interviews with El Salvador Project Team Leader, Nelson Pérez, by author, February 6 -10, 2019.

^[8] Note from Mayor Milena de Escalon, Santa Ana, February 2019

^[9] UN Business Facilitation Program, Interviews with Program Manager, Frank Grozel, by author, February 6 -10, 2019