Jaime Bustamante | How digitalization will revolutionize the tax process

Latin America is a diverse continent in many ways. One of the most intriguing points is its tax system. While Uruguay may have the lowest global rating for tax complexity, Peru – just 3,000 km, 3 borders and 2 time zones away – may have the highest rating.

Unlike Brazil, often cited as having the most complicated tax system in the world, the International Tax Competitiveness Index ranks more positively: Costa Rica (22), Mexico (26), Chile (35) and Colombia (38).

However, this should be the year that Latin America’s tax laggards receive a significant boost to move beyond the labyrinths of bureaucracy toward a streamlined tax processing future. All this, thanks to the continent’s recently discovered superpower: digitalization.

From 2012 to 2022, internet access in Latin America increased from 43% to 78%, with up to 90% access in high-income countries such as Chile, making the continent more connected than China. This explosion of connectivity has created a boom of innovation, giving rise to some fast-growing startups and the most exciting digital entrepreneurs in the world.

An example of the union of innovation and digital penetration to revolutionize and radically simplify a previously complicated industry These are digital banks, which have had notable success in Latin America. And, precisely because of this success, I estimate similar and promising opportunities to improve the continent’s fiscal processes.

Before the mass popularization of the internet, the banking sector in Latin America was dominated by traditional financial institutions, which had no incentive to innovate. Often resulting in:

• bureaucratic procedures;
• exorbitant fees on transfers, savings and loans;
• poor customer service;
• high levels of user dissatisfaction; It is
• significant informal economy, derived from unrecorded physical cash transactions.

However, as the internet became democratized, opportunities increased for new formats of financial institutions, such as Nubank, to challenge traditional banks by using digitalization to boost their offerings, resulting in financial inclusion, efficient services and reduced fees, increasing customer satisfaction.

According to a recent CSIS report on digital innovation in Latin America, there are now 90 million Nubank customers in Brazil, Colombia and Mexico, with 60% considering Nubank as their main banking service. The report also presented the impact of fintechs not only increasing the availability of financial services for SMEs and other underbanked consumers, but also offering an alternative to cash transactions, which reduces tax evasion and helps combat money laundering.

The document also shows that, from 2018 to 2021, digital transfers increased from US$17 billion to US$123 billion. This growth was driven mainly by the implementation of the Pix platforms, in Brazil, and Sinpe Móvil, in Costa Rica.

Which brings me to my 2nd point of optimism: startups and entrepreneurs may have started the digitalization revolution in Latin America, but this technology’s potential to drive change has also encouraged governments to reform, thus providing more fuel for growth.

To exemplify the influence of changes beyond entrepreneurs and startups, we can look at Brazil, the continent’s largest economy. The country is currently recognized by the World Bank as the 2nd best leader in digital government in the world, highlighting that the transformations will continue beyond the private sector.

The Brazilian government was recognized by the World Bank for its digital public services offered through the gov.br platform, which already has 140 million users, equivalent to 80% of the country’s adult population. Among the advances mentioned is the availability of pre-filled Income Tax declarations to citizens through gov.br accounts.

Furthermore, this year, the government launched a new assistant powered by artificial intelligence to assist tax payers with their Income Tax returns. Mexico has also implemented a similar initiative.

As the Brazilian government moved forward with the biggest tax simplification reform in a generation, the startup industry had already pushed tax transformation as one of the hottest topics at Web Summit Rio 2023. Because of this, I believe it’s just a question of time until the ‘Tax Nubank’ emerges, encouraging even more simplification movements by the government. This initiative could have extremely positive repercussions for all of Latin America.

Ecuador’s tax technology pioneers like Taxo have already expanded into Mexico, promising to save up to 90% of operational work for accountants in a potential market of more than 12 million Mexicans. Dootax, in Brazil, the country’s 1st tax automation platform, is ready to process R$85 billion in taxes for clients such as Ambev, Magalu, Nestlé and Renner in 2024, earning more than R$28 million in the process.

AI-powered tax processing systems are also being launched by startups like Tak and local governments in the states of Goiás and Santa Catarina, with very positive initial results.

Of course, there is still a long way to go before a country like Brazil can join tax simplification leaders like Estonia, Switzerland, Uruguay and Costa Rica. But the success of Nubank and Pix shows that this transformation is possible, and I believe that this is the year in which it will be carried out, through a combination of legislative reforms, stimulated by entrepreneurial innovation – all driven by increasing digitalization.

As I mentioned before, this initiative could have a huge ripple effect, in addition to tax simplification. After all, it was the tax reform that led the main rating agencies to improve their investment ratings for Brazil for the first time since 2011.

If there is more tax simplification, as I clearly believe there will be, investment will increase, boosting ratings, which could soon lead to Latin America becoming much less diverse in the best possible way: as a place where simple taxes allow companies to and citizens reach their full potential.