Tracking potential tax evaders on Instagram
The digital economy is booming in Medellín. So is digital tax evasion. To identify potential tax evaders, the local treasury department used to detect unregistered online stores manually. Since the use of social media for economic activities has grown exponentially, the agency has now developed a bot that automatically scrapes Instagram for such stores - and officers can use their time instead to work with store owners to formalize their businesses.
The digital economy has been a boon for Medellín, Colombia. The city is attracting capital and talent, and the digitization has helped it become one of the most innovative cities in the world. Yet for the local treasury department, online sales have become a challenge. Tax evasion, which is common offline, has increased online. The government took the first measure in 2017 and passed a new law on the digital economy that explicitly included e-commercial activities in the tax code. Still, many small businesses, whose online presence often is just a Facebook or Instagram page, do not pay the required Industry and Commerce Tax. In some cases, they are not aware that they should pay, in others they resist because of a sentiment that the government is already making enough money.
The small investigatory “Fiscal Intelligence” unit at the treasury department took up the challenge. To get a first impression, they began to manually search for stores on social media and check whether the owners had registered with them. According to their own estimates, they were able to identify six stores per hour and knew this was not a sustainable process.
They set out to find a new solution with the Government Innovation Lab of the city’s business and innovation center Ruta N. For two years in a row, the Innovation Lab has invited about a dozen public entities to participate in a facilitated process to address challenges that they felt stuck within an innovative way. In a number of workshops, public agents narrow down the challenges to specific questions they seek to address and then post an open call for solutions to NGOs, businesses, and universities in Medellín.
In this process, the treasury department decided to work with the local start-up Grupo Boötes, which had suggested to develop KBoot, an algorithm that scrapes Instagram profiles and matches data with those of local telephone operators to identify unregistered businesses. After the team at Ruta N selected this project as one out of three that would receive monetary support for a three-month pilot, they set out to test their idea in three phases.
In phase one, Grupo Boötes developed and ran KBoot, a software dedicated to identifying people and businesses who carry out online commerce on Instagram (Instagram was picked as the social medium to work with during the pilot phase due to its large user base in Medellín). The software was programmed to search Instagram for public profiles and publications in Medellín that use relevant hashtags, keywords, and names that are associated with online sales. It then downloaded relevant data, such as username, number of followers, number of publications and contact telephone numbers, to a database, only selecting profiles with regular activity after 2016. At the end of phase one, KBoot had identified 20,828 profiles associated with commercial activities, at a rate of 45 profiles per hour.
In phase two, the treasury department went to identify the individuals behind these profiles. To do so, it cross-checked the names with their own databases and compelled all telephone operators in Medellín to provide information on 9,080 users that had provided a telephone number on their profiles. Until early 2019, five out of eight operators - covering about 50% of the market - had responded to their request and in total, the office identified 2,683 individuals. Of those, only 453 were registered with the treasury department, and 107 of these said they were not operating at the moment. 2.230 individuals were not registered with the treasury department but had been identified as selling merchandise on Instagram.
The third phase, which is still ongoing, relates to the integration of these businesses into the regular economy. The treasury department early on decided not to begin by sending fines to these unregistered businesses, but to first include them in ongoing awareness-raising campaigns that it is carrying out with the local chamber of commerce. It also applied the new law on the digital economy, which allows it to grant special tariffs to new businesses. It does not want to scare away business owners, especially since “migrating” to a different municipality is simple online. The potential tax income is substantial, after all: 2.337 potential new accounts at a minimum tax rate of COP 30.000 per month makes COP 70.110.000 (or EUR 19.881,42) per month and 841.320.000 (or EUR 236.572,62) per year.
There is a downside to this approach using carrots yet no sticks: the sensibilization efforts have proven little successful. Out of 800 businesses that were contacted, only 30 took part in such efforts, and only 17 have registered business so far. Yet the treasury department remains undeterred and will now move to a different approach, in which they will contact all identified business owners via text messages and WhatsApp in a more personal manner. And if this really does not work, it can always resort to fines.
What Makes Your Project Innovative?
The key innovation is the introduction of a new technology that allows the treasury department to identify previously unregistered businesses and work with them to formalize their businesses. Without the software, employees of the treasury department identified such businesses at about six an hour. Towards the end of the pilot, KBoot identified 45 profiles per hour and is not restrained by regular working hours. This allows the employees to focus on the much more important work of attempting to legalize the businesses that the software identifies.
What is the current status of your innovation?
The “Fiscal Intelligence” unit has set out several priorities:
- Work with the existing data. Since only a few of the individuals that were identified in the process have actually registered their business with the city, it’s a priority to formalize more businesses.
- Obtain more data. With responses from the remaining three telephone operators, the number of identified and unregistered businesses could be doubled.
- Spread the word. The treasury department and Grupo Boöotes plans to work with surrounding municipalities in the metropolitan area to make the software available to them.
- Expand the project. With little time, the focus of the pilot was on Instagram, yet the same logic could be applied to Facebook, Pinterest or other sites.
- Build code. The idea is to create more software in-house in the future, in order to generate more knowledge within the treasury department and to reduce public spending on external advisors.
Collaborations & Partnerships
The pilot project was developed in close cooperation between Medellín’s treasury department and Grupo Boötes; the entire innovation process was facilitated by members of the Government Innovation Lab at Ruta N, Medellíns innovation and business center. Once the businesses were identified, the government made use of the chamber of commerce’s program “Growing is Possible” (Crecer es Posible) to integrate them into the regular economy.
Users, Stakeholders & Beneficiaries
If successful, the department will increase the tax base to the benefit of the local government and ultimately the citizens of Medellín. At the same time, these businesses could gain from legal certainty that comes with the status as an official company. At this point already, the public servants have saved a lot of work by employing the software, and Grupo Boötes was able to develop a product that it can also employ in other places and with other clients.
Results, Outcomes & Impacts
In the three months, KBoot identified a total of 20,828 businesses on Instagram, 9,080 out of which had provided a telephone number that allowed the government to identify the individuals behind each site. With responses from five out of eight telephones operate, the government identified 2,683 individuals. Of those, only 453 were registered with the treasury department, and 107 of these said they were not operating at the moment. The rest (2.230 individuals) were not registered with the treasury department. Al in all, KBoot identified 2.337 potential new taxpayers, with a potential minimum taxable income of COP 70.110.000 (or EUR 19.881,42) per month, and 841.320.000 (or EUR 236.572,62) per year. However, only 17 of these companies have until now made use of the program “Crecer es Posible” to register their business. The treasury department is now developing new methods to incentivize businesses to register.
Challenges and Failures
Once minor computational challenges, like the need for enough processing power, had been overcome, the software has helped in a great way in quickly identifying potential taxpayers. However, there remain challenges with regards to their integration into the regular economy. What is an effective way to reach out to small business owners without scaring them? How do you provide the necessary information on how to register, and how do you convince them to actually register? Finally, once the process left the agile environment provided by Ruta N, the subsequent implementation has been relatively slow due to bureaucratic processes and challenges due to the very nature of the public sector, and it remains to be seen whether other municipalities in the region adopt the same approach.
Conditions for Success
- Ruta N’s facilitation created the environment to think about the challenge constructively and brought together the treasury department and Grupo Boötes; its monetary support made the pilot possible.
- The treasury department created the Fiscal Intelligence unit to provide a space to think about new challenges innovatively.
- The 2017 law on the digital economy (Acuerdo 066 de 2017) created the necessary legal framework to tax commercial activity online.
- Regular communication and coordination between the Fiscal Intelligence unit and Grupo Boötes made it possible to run several iterations of the bot, provide feedback, and adapt it.
In general, the software could be applied in cities around the world that face similar challenges. For now, the involved actors have begun working with other municipalities in the metropolitan area of Medellín to make the process available to them. They also seek to replicate the process on other social media sites, like Facebook or Pinterest.
KBoot shows how public entities can adapt to new challenges and develop innovative solutions, even though some processes can take longer than in the private sector. Spaces such as the Government Innovation Lab allow the public and private sector to work together and build alliances to jointly deliver public goods. Especially in the public sector, such exchanges can foster an innovation culture that can lead to the optimization of services.
As a developer at Grupo Boötes mentioned, it keeps surprising him how much people are openly sharing on social media, how little many of them care for privacy online. This was of great help in this process, but one should never forget the ethical implications that come with working with large amounts of citizen data. At the same time, this project was only possible due to the treasury department’s authority to request information from private and public organizations, in this case the telephone operators, and the department is aware of the need to protect this information.