When Rafael Audibert, a hairdresser from the Brazilian state of Rio Grande do Sul, needs to refuel, he no longer goes to the nearest gas station. He first consults the Melhor Preço (Best Price) application on his cell phone to find the best-priced fuel in the area.

“The application is very useful. It also gives information on the prices of products in the supermarket and is updated every day. It’s a great help in these times when we all need to save,” says Audibert, one of the more than 100,000 users of the application.

Like this hairdresser from the southern city of Bento Gonçalves, two million people have benefited from a profound transformation that has taken place in Brazil in the last 12 years: the digitization of invoices.

This means that when a company issues an invoice for the final consumer or for another company, the information is also sent electronically to the finance ministries of each state and the federal government. The data helps authorities monitor tax payments and compliance, in addition to feeding the database of the application that Audibert uses to save on purchases.

The digital transformation of tax management in Brazil from el BID - the IDB on Vimeo.

Brazil's decision to invest in the digitization of its billing system arose from the need to expand collection to pay for and improve public services such as health and education without creating new taxes. The solution was to improve the efficiency of the tax system by migrating from an essentially analog model to a digital one.

With updated federal legislation, political support from the states, and assistance from the Inter-American Development Bank (IDB), the digitization of the Brazilian tax system has allowed governments to manage their fiscal policies more transparently and effectively. The process began in 2008, with financing and technical advice from the IDB through the Brazilian Tax Revenue Management and Integration Support Program (Profisco I).

In addition to the digitization of invoices, Profisco I also supported the adoption of digitized corporate accounting books. In other words, in addition to monitoring in real time all taxable transactions of goods and services, the government can now also digitally access corporate books to verify if the taxes declared and paid coincide with the invoicing. The change has led to a drastic increase in tax transparency.

“Before, audits used to be carried out by sampling: for example, out of every 100 companies, we selected five or six to verify their tax compliance. Now, we verify all 100, and in real time, with less staff and paperwork, and more efficiency and transparency,” says André Cordeiro, Planning and Management advisor at the Ministry of Finance of Bahia.

Advantages for governments, companies and citizens

The immediate results of Profisco I were an increase in tax collection, the simplification of burocratic procedures  - businesses now process their tax obligations digitally - and, from the citizen's point of view, an improvement in taxpayer assistance services and greater transparency. In addition, digitization and the simplification of procedures lowered the cost of tax compliance and even contributed to an increase in workers in the formal sector of the economy, according to a Profisco impact evaluation study carried out by the IDB.

The reforms also reduced the paperwork for companies, contributing to an increase in competitiveness. For example, freight trucks no longer need to spend hours or even whole days at inspection posts. Now, a device attached to vehicles allows authorities to carry out inspections electronically, using big data analysis tools that help detect irregularities and risks of fraud and corruption.

“Before, invoices were printed by the thousands and made at least in triplicate: a copy for the seller, another for the buyer and a third for the State. In addition there were stamps, verifications and audits.  Every step was prone to fraud and errors. We had come to use trucks just to transport all the paperwork. Today, with just a few clicks we have a complete panorama in real time,” says Fernanda Pacobahyba, Secretary of Finance of Ceará, the first” state that joined Profisco, 11 years ago. Since then, it has been the scene of major transformations as a result of the digitization of invoices and the modernization of tax collection.

Coordination at the national level

In 2008, the transition to a computerized model required overcoming various obstacles in Brazil, a large, heterogeneous federal country. The main challenge was to get all 27 federate entities and the central government to agree on the billing model that they should all adopt. Likewise, they had to act in a coordinated manner to enable the implementation of the solution in all federated entities. To this end, a Fiscal Management Commission (Cogef) was created, bringing together representatives of the states, the Ministry of Economy, the IDB and the federal revenue service.

"We were facing not only a need, but also an opportunity to modernize the Brazilian State," explains André Cordeiro, who is also the president of Cogef. The commission was created “with the objective of advancing the organization of technology in the states, the review of work processes, and the training of personnel to perform in accordance with the new possibilities opened by technology and legislation,” he adds.

It was in the same context that Profisco I emerged, allowing the integration of fiscal information from the country's financial bodies and the modernization of national tax management. In addition to financing the modernization of tax management, the program provided the methodology for states to make that transition in the best possible way, while promoting the exchange of experiences, André said.

Along with the Federal District, 22 states participated in the first stage of the program, to which the IDB allocated almost US$ 586.2 million between 2008 and 2018. The initiative helped the treasuries of each state to update their technology, a necessary step to process electronic invoices implemented by the program. Likewise, it guaranteed training for public servants, promoted the standardization of documents and procedures among the states, and strengthened financial management.

"If it weren't for Profisco, several initiatives would have been forgotten in the archives," says Ana Carla Abrão, former Secretary of the Treasury of Goiás, the first Brazilian state to electronically monitor trucks on the roads. "But thanks to the program, we managed to modernize the tax sector, implement electronic invoicing and even develop innovative solutions, such as real-time remote monitoring of cargo transportation to control the payment of the corresponding taxes," he adds.

One benefit leads to another

The digitization of tax information also opened the door to other innovations, some already completed and others to come. For example, when migrating from paper to the cloud, data on the purchase and sale of goods and services became part of powerful data banks, which among other things allowed for better prices in public procurement.

"As all the information on the purchase and sale of any good or service acquired by the state can be accessed in our data banks in real time, we can share the information on the best price achieved by one agency with many others,” says Guilherme Petry, Deputy Undersecretary of Finance of Rio Grande do Sul. "In this way we arrived at what we call 'reference prices', which allowed a saving of almost one billion reais over eight years (over US $177 million), without increasing the tax complexity,” he adds.

"Soon, instead of estimating inflation, we can have accurate data: we will know how much prices have fluctuated, or even which sector of the economy is doing better and which needs help, for example," says Petry.

The next stage

The second stage of the program, Profisco II, began in 2018 with the aim of deepening improvements in tax administration and further strengthening the management of public and financial spending.

With Profisco II, which is already being implemented in seven Brazilian states, the IDB is making the most of the possibilities provided by big data to use the tax information available online to achieve better fiscal management, especially with regard to finances and public spending.

In the midst of fiscal and socioeconomic scenarios aggravated by COVID-19, these efforts have an even more relevant role to play: they will be crucial for the different levels of government to act efficiently and actively, helping set the country on a path to growth.

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