Case study: Mexico’s digitalisation of tax
Mexico’s experience in digitalising its tax processes offers salient lessons as European countries consider a similar approach.
It was not long ago that the country — with a historically large ‘informal’ economy — would be singled out by global authorities for its record levels of tax evasion and avoidance.
At its peak, as many as 60% of workers were in the informal economy, which was estimated to be worth as much as 30% of GDP. Tax regulations were complex and confusing and erosion of the tax base had drastically reduced funds available to the Government.
“There were a huge number of people who didn’t pay any taxes at all or who were in minor programs paying a fixed rate that just wasn’t enough for the development of the country,” says Baker Tilly Mexico Tax partner Eliel Amaya.
“The World Bank named Mexico as one of the worst countries to do business with. It took 87 weeks to conduct a corporate income tax audit. There were serious challenges.”
But a decades-long program of digital investment in Mexico’s tax system has turned many of those challenges around, with a series of initiatives that have slowly brought economic activity into the mainstream.
Starting with point-of-sale registration in the 1980s, Mexico moved to introduce e-invoicing and e-signatures, third-party certification of transactions, and the roll-out of e-accounting, in which company data is shared directly with tax authorities.
“You need to understand what data will be relevant and what will be expected of you in reporting your income.” – Eliel Amaya
Increased data matching is designed to reduce the administrative burden — while enforcing greater transparency of corporate accounts. Electronic audits have been in place since 2016, and individuals have their taxes estimated, reducing the complexity of filing tax returns.
Overall, Mexico now has one of the most advanced digital tax administration systems in the world, Mr Amaya says, which has boosted the amount of tax paid and curbed evasion and informal business activity.
“The tax base has grown by more than 150% and tax evasion of firms has fallen from 35% to 16%, so that’s a huge outcome based on the policies,” he says.
The side-effects of the change have also been interesting, with Mexican businesses forced to professionalise and digitalise their operations to comply with the stringent tax regime.
Mr Amaya says lessons for other countries embarking on a similar strategy include ensuring investment is budgeted beyond the political cycle, as changes can take years to implement and show success.
For businesses, it is also important to ensure data and information is ready for additional scrutiny.
“You need to understand what data will be relevant and what will be expected of you in reporting your income,” he says.
“Having a constant understanding of your data and ensuring it is clean and from the right sources is important.”