World Bank Discussion Panel: Tax for Development April 11, 2011 Commissioner Juan Ricardo Ortega Lopez DIAN (Colombian

1. Tax administration modernization programs in the context of improving tax transparency: the case of the MUISCA Model World Bank Discussion Panel: Tax for Development April 11, 2011 Commissioner Juan Ricardo Ortega Lopez DIAN (Colombian Customs and Tax Administration)

2. Table of contents • Origins of the MUISCA model and its objectives. • Evaluation of MUISCA’s objectives in the context of improving tax transparency. • Customer service and modernization • Taxpayer’s information • DIAN processes still not under the MUISCA model • Misuses of the RUT – Ponzi schemes and money laundering: the DMG case • Conclusions

3. Birth of MUISCA Model Context in which the MUISCA was created • Problems • High levels of tax evasion, smuggling, and foreign exchange offenses. • Low levels of voluntary compliance. • Poor customs competitiveness. • Lack of main customer services. • Disarticulation of information technology. • Structural deficiencies in the quality, control, and articulation on the taxpayers’ information. • Internal organizational and staff problems. • Actions implemented by DIAN • Development of internal organizational reforms as well as legal reforms required to improve the agency’s performance. • Develop and employ MUISCA model: • Introduce a new way of managing the tax administration. • Increase revenue. • Control, measure, and analyze customers and employees’ behavior. • Increased usage of technologies to boost the agency’s performance. • Integrate concepts, data, and procedures.

4. Implementation of MUISCA Model New customer services and modernization • New customer services • New customer service centers and call centers • E-mail assistance • Web information on preparing tax returns • Modernization of information processes and systems • Creation of RUT (Taxpayer’s single identification number) • Introduction of electronic tax returns, electronic tax payments, electronic tax receipts, and digital signature. • New systems to capture and receive information from DIAN processes(from taxpayer’s information given by a third party to complaints.) • Standardization of tax files • Validation of entry and exit of data to ensure traceability of processes • Implementation of high security standards • Modernization of DIAN’s technology • Expansion of the capacity to process and store information. Between 2003 and 2010, thecapacity to process and store information grew approximately by 1200%.

5. Table of contents • Birth of MUISCA model and its objectives. • Evaluation of MUISCA’s objectives in the context of improving tax transparency. • Customer service and modernization • Taxpayer’s information • DIAN processes still not under MUISCA • Misuses of the RUT – Ponzi schemes and money laundering: the DMG case • Conclusions

6. Income Tax Returns Corporate tax returns (2000-2009) Income tax returns filedTaxpayers filing ITRTaxpayers with balance dueTaxpayers entitled to a refund Source: Direction of Organizational Management. (February 2011)

7. Income Tax Returns Individual tax returns (2000-2009) Income tax returns filedTaxpayers filing ITRTaxpayers with balance dueTaxpayers entitled to a refund The gap between people filing their tax returns and those who pay actually has grown Source: Direction of Organizational Management. (February 2011)

8. Customer service Number of cases of personal assistance and number of customer service centers Source: Direction of Organizational Management. (April 2011)

9. Customer service Call centers and e-mail assistance In New Zealand, during the 2009-2010 tax year, 242,299 counter enquiries were made, while 4,230,914 calls and 4,569,785 correspondence items were answered. One of DIAN’s objectives must be to decrease counter enquiries by increasing impersonal services such as phone calls and e-mail services. Source: Direction of Organizational Management. (April 2011) Source: New ZealandInlandRevenueAnnualReport 2010.

10. Electronically filed tax returns Corporate income tax Source: Direction of Organizational Management. (April 2011)

11. Electronically filed tax returns Personal income tax Source: Direction of Organizational Management. (April 2011)

12. Electronically filed tax returns VAT Source: Direction of Organizational Management. (April 2011)

13. Electronically filed tax returns VAT, Corporate and Personal Income Tax In New Zealand, during the 2009-2010 tax year, 42.7% of alltaxreturnswerefiledelectronically. Source: Direction of Organizational Management. (April 2011) Source: New ZealandInlandRevenueAnnualReport 2010.

14. Electronic payments Number and percentage of total tax returns In New Zealand, during the 2009-2010 tax year, 56.8% of all tax payments were made electronically. Source: Direction of Organizational Management. (April 2011) Source: New ZealandInlandRevenueAnnualReport 2010.

15. Electronic payments Revenue from electronic payments and percentage of total revenue *One US dollarisaproximately 1,805 Colombian Pesos. Source: Direction of Organizational Management. (April 2011)

16. Taxpayer’s information given by a third party Number of entries of information Despite growth in information collection, the DIAN still does not take full advantage of it. Analytical tools and processes are yet to be developed more thoroughly. Source: Direction of Organizational Management. (April 2011)

17. DIAN processes that are not part of the MUISCA model Challenges and problems • Tax Refunds • Lack of control and supervision has led to an irregular growth in tax refunds. • Serious cases of corruption have been identified. • Customs operations • Some of the systems and process are outdated and have become an obstacle to the competitiveness of Colombian customs. • Some current processes stimulate corruption and dishonesty. • Settlements and liquidations • Due to deficient control and supervision, the DIAN has reached unfavorable settlements with delinquent taxpayers. • Administrative processes • Due to lack of control, some administrative processes have led to considerable losses of resources. • Human resources • Lack of efficient management has led to discontent amongst some employees.

18. Ponzi schemes and money launderingDMG: beginning and expansion • Mixture of Ponzi scheme and money laundering scheme. • DMG offered returns between 30% and 100% every six months in exchange for bringing additional clients. • Started in Putumayo (a poor coca-growing region with a long tradition of lawlessness) collecting over US$ 9 million between January 2006 and October 2007. • In 2008, DMG established 52 branches in 35 towns across the country, including 11 regional capitals.

19. Ponzi schemes and money launderingDMG: operation and fall • DMG signed “publicity contracts” with clients that required inscription in Colombia’s Single Tax Registry (RUT). • Clients brought cash and got two cash-cards in return. • DMG was dismantled in November 2008 triggering massive protests and riots. • The National Attorney’s office stated that DMG laundered at least US$ 120 million.

20. Ponzi schemes and money launderingInscription of individual tax returnsin the RUT in Putumayo

21. Ponzi schemes and money launderingInscription of individual tax returns in the RUT in Putumayo Nov 15-2008 Oct 02-2007 Business oversight agencyintervenes DMG Police shuts downDMG’s 52 offices

22. Table of contents • Birth of MUISCA model and its objectives. • Evaluation of MUISCA’s objectives in the context of improving tax transparency. • Customer service and modernization • Taxpayer’s information • DIAN processes still not under MUISCA • Misuses of the RUT – Ponzi schemes and money laundering: the DMG case • Conclusions

23. Conclusions • The MUISCA model has allowed the DIAN to improve its processes, services, and management. • Since its implementation, customer service, information services and processes as well as technological services have improved. • However, there still a long way to go. • DIAN’s customer services, information processes and services, and technological services are still far away from those of top-performing tax and customs administrations. • The MUISCA has not been implemented in all of DIAN’s processes. In those areas where it has not been implemented, serious irregularities have been found. • Several MUISCA services and processes must be modified and improved (e.g. RUT). • DIAN has to start using the information it collects in a more efficient manner.

24. Thank you!