Simplify, simplify, simplify and then buy the computers

How Chile's tax service learned to do more with less, while becoming a paragon of efficiency and convenience

By Paul Constance

Walk into a customer service facility run by Chile’s Internal Revenue Service, and you’ll be prompted to press a button and take a slip of paper printed with the current time. If you are not helped within the next 30 minutes, an official from the service will take the relevant documents, process your request, and mail them back to your home for free. Guaranteed (see Watch the clock, at right).

Granted, very few people have actually tested that guarantee, because 99.6 percent are served in less than half an hour, according to statistics published by the SII, as the service is known in Spanish. And thanks to the SII’s aggressive adoption of Internet-based transactions, the number of people who need to go in person to its offices is dropping fast. In 1999 fully 88 percent of all Chilean companies and 25 percent of all citizens used the Internet to report, process, correct and settle their tax obligations (a level much higher than in the United States or most industrialized countries). With more than 750,000 password-protected users, the SII’s website (www.sii.cl) is the number one Internet destination in Chile.

The SII shines in other respects as well. Between 1990 and 2000, overall tax evasion in Chile (including value added, income and other taxes) dropped from 33 percent to 24 percent—giving it by far the lowest evasion level in Latin America. During the same period the number of people filing income tax returns nearly doubled, to 1,832,384.

LEAN MACHINE
One measure of a tax service's efficiency is the number of citizens per tax service employee. Chile is a world leader in this respect.
Chile
U.S.
Italy
France
England
Spain
Germany
	Citizens per tax service employee
SOURCE: GENERAL TAX DIRECTORATE OF FRANCE, 1999

Perhaps most significantly, the SII has done all of this with just 2,953 employees (of whom only 1,021 are tax auditors). That amounts to roughly one employee per every 4,051 Chilean citizens, a ratio that makes the SII one of the leanest and most productive tax services in the world. By contrast, all of the industrialized countries of Europe have less than 1,000 citizens per tax service employee, according to a 1999 study by France’s General Tax Directorate. Even the United States., usually considered a leader in automation and efficiency, has only 2,657 citizens per tax service employee, according to the study.

Useless procedures. Things were not always this way. In 1990, when Javier Etcheberry was appointed director by then-President Patricio Aylwin, public opinion surveys showed that the SII was considered the most time-consuming and onerously bureaucratic service in the public sector. Etcheberry, who had spent many years as an executive in the corporate world, also saw alarming signs of inefficiency and duplication in the SII’s procedures.

“I started out focusing on costs and on the uselessness of many of the procedures tax officials were carrying out,” Etcheberry said during a recent interview at SII headquarters in Santiago. “Instead of immediately raising salaries and asking Congress for a budget increase, I set out to prove that the same staff and the same budget could be used much more effectively to combat tax evasion.”

Etcheberry began by hand-picking the SII’s 150 top managers strictly on the basis of their qualifications (see Wanted: tough bosses, at right). He made headlines by hiring a head-hunting firm and by choosing to retain a few highly competent managers who had joined the service during the Pinochet regime (instead of replacing them all with friends of the Aylwin administration). And finally, he ordered his managers to begin conducting much more rigorous performance reviews of all staff (see The carrot versus the stick, at right).

Then, before spending any new funds on information technology, Etcheberry ordered his managers to review the entire tax system and identify procedures that could be eliminated or simplified without breaking the law. “You gain a lot more from eliminating a procedure than from automating it,” he said. “People used to think that all these problems were the fault of the law, but we found that based on the same laws we can do things very differently. This has been the central focus of our approach: Why do we have to do it like this? Let’s invent a better way.”

Radical Engineering. The notion of “reengineering” a service in this manner has been a staple management theory in the corporate world for many years. But when Etcheberry and his managers applied it to Chile’s tax service, it met with stiff resistance from employees, professional accountants and others who were accustomed to the status quo. Etcheberry said the SII ran into all manner of obstacles—including strikes and lawsuits—during the overhaul, but sentiment began to change as soon as employees noticed that new, simpler procedures made it easier for them to do their job well.

Etcheberry also gained allies in Congress. He made headlines by enforcing a zero-tolerance policy toward corruption and periodically firing employees who failed to meet the SII’s code of behavior. And as the months went by, he was able to show that the SII was delivering noticeable reductions in tax evasion without significant increases in its operating expenses.

The resulting credibility enabled the SII to enter what Etcheberry called “a virtuous cycle.” Congress and the government’s budget planners became more willing to allocate funds for salary increases and investments in information technology once they saw evidence that the money would be well spent. These investments subsequently raised morale among the SII’s employees and helped improve customer service. “There was a significant change of culture among our employees,” Etcheberry said, particularly in the area of performance evaluations and incentive pay (see The carrot vs. the stick, at right). Although many outside observers think technology has been the key to improvement at the SII, Etcheberry insists these cultural and procedural changes, combined with the quality of his managers, were at the root of the service’s turnaround.

Today, the SII is pushing Chilean taxpayers to adopt the Internet for an ever-expanding range of tax services. Using authentication and security software, the service is beginning to conduct some transactions online that previously would have required signatures. “Our goal is to put practically all relevant data on our databases and then allow taxpayers themselves to access and verify the accuracy of that data,” Etcheberry said. “We even hope to let people change that data online, based on certain rules.”

The SII has also launched an ambitious plan to fulfill president Lagos’ pledge of reducing Chile’s overall tax evation rate by four additional percentage points—to around 20 percent—by 2005. For that, however, Etcheberry will actually need to hire more auditors. “We’ve completed our reengineering and made the most obvious improvements,” he said. “Now we simply need more people.”

Date posted: March 2002