October 17, 2024
In El Salvador, imported mass-market products like meat, beverages, and cookies used to be held for up to five days in customs, resulting in higher costs for companies and consumers.
“Everything used to be on paper,” said Blanca Alicia Roque, Executive Director of the El Salvador Distributors Association (ADES), whose members are responsible for the distribution of 85% of the country mass-market products, in reference to customs declarations. “We’re not talking about one, two, three, or four pieces of paper. It was a whole file with copies and copies of more copies.”
This began to change in 2018 with a $30 million loan from the Inter-American Development Bank to modernize the country’s tax administration. The project supported the digitization of several tax and customs procedures to combat evasion, fraud, and smuggling, and to bolster the administration’s efficiency, tax control, and, especially, tax collection levels.
The program financed improvements to internal tax management, like digitizing tax documents, as well as enhancements to taxpayer service centers and online services. It fostered the adoption of cutting-edge digital technologies for faster and more robust customs inspections. The program also modernized the entire infrastructure and information management process of the Vice-Ministry of Tax Revenue.
“The program is laying the foundations and paving the way for a solid and efficient tax administration, which will help increase tax revenue, improve tax equity, and build trust in the tax system among citizens and businesses,” explained Margarita Libby Hernandez, the IDB’s chief of operations in El Salvador.
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Digital Transformation of Customs
The project supported initiatives to modernize the country’s main customs offices and update the customs code. It also created a new customs system that is now part of a strategic plan for modernizing the main ports of entry.
More specifically, the project improved control and inspection of goods at the port of Acajutla, with such operations now done remotely. And at San Bartolo’s customs office, a scanner is now responsible for aiding in most inspections of goods, speeding up the inspection process.
Digital technologies have also improved the traceability of goods once they pass inspection. Customs officials now can install seals with GPS tracking in the back of cargo trucks for increased security.
These advances were introduced in 2021 and were made possible by the IDB-backed program, which financed the acquisition of critical technology and supported the implementation of a transactional platform for the customs system that allows cargo manifests to be sent electronically, streamlining the inspection process.
Through the program, customs offices also acquired drones, state-of-the-art computer equipment, radiofrequency identification (RFID) technology, and video surveillance systems, which have led to a more controlled flow of commerce and more efficient transit at the ports of entry.
These investments have drastically reduced inspection and verification times. Now customs clearance can be done in 30 minutes instead of 72 hours, according to José Benjamín Mayorga, Director General of Customs in El Salvador.
The digitization of cargo manifests and improved risk management has allowed El Salvador’s customs office to begin offering a Blue Channel, where goods can be physically checked at company facilities by customs officials, streamlining the process for taxpayers considered to have low risk of noncompliance.
Electronic Invoicing for Efficiency and Environmental Sustainability
The project also supported the digitization of tax documents, including electronic invoices. It focused on the value-added tax (VAT), which is one of the country’s main sources of tax revenue. This helped increase VAT collection to 8.7% of GDP in 2023 from 3.5% in 2017, according to the Finance Ministry.
Digitizing tax documents makes it easier for taxpayers, whether large or small, to declare and pay their taxes, and for the tax authority to confirm compliance.
“Before we had a business sector with a split running through it. Companies managed their finances and taxes separately,” explained Marvin Sorto, Director General of Internal Revenue of El Salvador. Now they have an “integrated platform where they can manage their taxes and finances with real-time results.”
So far, 6,897 taxpayers are using the tax document digitalization solution, cutting their paper use and storage costs. The government estimates that as of September 2024, the project has saved 29,157 trees and reduced water consumption by 208.6 million liters.
Digital and Physical Infrastructure that is Taxpayer-Centered
For successful digitalization, the project supported reforms of laws and internal regulations, as well as an overhaul of the taxpayer registry database and of how taxpayers are classified. This enhanced the government’s capacity for control and for analyzing information to close the VAT gap.
“One of the project’s most innovative aspects was that it was citizen-centered,” said Project Team Leader Ana Cristina Calderon. “The goal was to make the tax administration as accessible as possible for taxpayers.”
The project is working to expand digital services for small taxpayers. It restructured six express service centers and expanded their capacities and physical infrastructure to help taxpayers use the services and processes offered digitally.
“It has come a long way,” said Félix Alfredo Pineda, a teacher who uses the San Vicente Express Center. He can now do his taxes in a well-lit, air-conditioned room with comfortable chairs. “Their online service makes everything much easier.”
To support digitization, the Finance Ministry upgraded its technological infrastructure, including the server network and network communication. The project also financed an initiative to integrate the databases of the different directorates in charge of collecting taxes, as well as to launch a private cloud system.
This infrastructure has increased the availability of online services, reducing the risk of outages during peak demand before tax deadlines, according to Moisés Dubón Carranza, head of the National Directorate of Financial Administration and Innovation.
Impacts on Tax Revenue
This project has contributed to a $2 billion increase in revenue from 2022 to 2023, allowing tax receipts to reach over 20% of the country’s GDP, said Jerson Posada, El Salvador’s Finance Minister.
The project has also helped reduce tax evasion through better oversight and law enforcement, and has improved tax processes, significantly shortening taxpayer service times.
“Here in El Salvador, we have made major strides towards consolidating public finances,” said Posada. “We need to keep up this pace of digital modernization to continue increasing tax collection levels and completely eliminate the tax evasion gap.”
Calderon Ramirez,Ana Cristina
