CORRUPTION IN THE REVENUE SERVICE: THE CASE OF VAT REFUNDS IN BOLIVIA

I. INTRODUCTION II. THE ANATOMY OF CORRUPTION IN THE REVENUE SERVICE III. THE POLICY ENVIRONMENT IV. THE “TECHNICAL BLACK BOX” OF THE MAIN

PROCESSES IN THE REVENUE SERVICE V. THE INSTITUTIONAL UNDERPINNING OF REFORMSVI. CONDENSING REFORM STRATEGIES: THE CASE OF VAT REFUNDS IN BOLIVIAVII. CONCLUSIONS

I. INTRODUCTION FIGHTING CORRUPTION <-> LINK WITH TAX COLLECTION.

AT LEAST 1/2 OF REVENUE LOST DUE TO CORRUPTION AND TAX EVASION (FJELSTAD, 2005).

CORRUPTION OCCURS WHEN AGENTS (TAX OFFICERS) ENJOY MONOPOLY POWER OVER CLIENTS (TAXPAYERS), HAVE DISCRETIONARY CONTROL OVER PROVISION OF SERVICES AND OPERATE UNDER LOW LEVELS OF ACCOUNTABILITY AND TRANSPARENCY (KLITGAARD, 1988).

EXPECTED GAINS > EXPECTED COSTS ->AGENT CORRUPT AND VICE VERSA

I. INTRODUCTION (CONT…)

PAPER ILLUSTRATES A SUCCESSFUL ANTI-CORRUPTION STRATEGY IN VAT REFUNDS BY THE NATIONAL REVENUE SERVICE OF BOLIVIA BEGGINNING 2003.

VAT REFUNDS RESULT FROM COMPLEX CHAIN OF CREDIT REGIMES GENERATED BY VAT IN WHICH DIFFERENT STAKEHOLDERS PARTICIPATE.

VAT REFUNDING SERIOUS PROBLEMS OF IMPLEMENTATION (OPPORTUNITIES FOR FRAUD AND CORRUPTION AND DENIAL OF REFUNDS BY GOVERNMENTS WITH CASH SHORTAGES).

I. INTRODUCTION (CONT…)CASE STUDY SHOWS :

(1) HOW TAX OFFICERS ALLOWED UNLAWFUL REFUNDS TO EXPORTERS IN EXCHANGE FOR MILLIONAIRE

BRIBES; D

(2) HOW THE INSTITUTIONAL REFORM OF THE BOLIVIAN REVENUE SERVICE , INCLUDING IMPROVED PROCESSES AND PROCEDURES LESS TAX REFUNDS TO EXPORTERS AND HENCE A DECREASED NET OUTFLOW OF PUBLIC FUNDS FROM THE TREASURY TO TRANSGRESSORS.

(3) THE USEFULNESS OF “EARLY WARNING INDICATORS” FOR BENCHMARKING AND MONITORING PROGRESS OF REFORMS, FOLLOWING A MAPPING OF VULNERABILITIES OF CORRUPTION CORRESPONDING TO EACH STAGE OF THE PROCESS FLOW AS WELL AS THE POSSIBLE REMEDIAL/REFORM MEASURES TO EACH OF THESE VULNERABILITIES IN REFUNDING VAT TO EXPORTERS.

TAX EVASION IS CONFINED TO TAXPAYERS, WHEREAS THE VARIOUS TYPES OF CORRUPTION ARE RELATED TO DIFFERENT COMBINATIONS OF STAKEHOLDERS (INCLUDING ALWAYS TAX OFFICERS AND SOMETIMES PATRIMONIAL NETWORKS).

IN ADDITION, TWO BROAD MANIFESTATIONS OF CORRUPTION ARE SHOWN: (I) COLLLUSION BETWEEN REVENUE OFFICERS AND TAXPAYERS; AND (II) CORRUPTION WITHOUT THE INVOLVEMENT OF TAXPAYERS BUT IN SOME CASES INCLUDING PATRIMONIAL NETWORKS.

POLITICIANS PARTICIPATE IN TWO TYPES OF CORRUPTION: TAX EXEMPTIONS AND EXTORTION.

II. THE ANATOMY OF CORRUPTION IN THE REVENUE SERVICE

II. THE ANATOMY OF CORRUPTION IN THE REVENUE SERVICE

THE PAPER DESCRIBES THE MOST IMPORTANT FACTORS AFFECTING STAKEHOLDERS´AND PATRIMONIAL NETWORKS´BEHAVIOR IN CORRUPTION.

PROBLEM IS COMPLEX AS REFLECTED BY VARIETY OF FACTORS AFFECTING THE DIFFERENT STAKEHOLDERS AND PATRIMONIAL NETWORKS AS WELL AS THE SEVERAL INTERACTIONS AMONG THEM.

III. THE POLICY ENVIRONMENT

COMPLEX TAX CODES + DISCRETIONARY POWER OF POLITICIANS AND TAX OFFICERS TO GRANT EXEMPTIONS CORRUPTION AMONG TAXPAYERS.

HIGH TAXES TAXPAYERS EVADE OR ENGAGE IN CORRUPTION.

COMPLEXITY OF TAX STRUCTURE AND LEGISLATIN DISCRETIONARY POWER OF TAX OFFICERS TO INTERPRET TAX LAWS AND ALLOW OR DISALLOW

EXPENSES OR CHARGES.CORRUPTION IS UPHELD VIA WEAK LEGAL SANCTIONS TO TAXPAYERS OR TAX COLLECTORS WHO INFRINGE THE LAW.

IV. THE “TECHNICAL BLACK BOX” OF THE MAIN PROCESSES IN THE REVENUE SERVICE

NEW METHODOLOGY PROPOSED IS APPLIED TO 3 CORE-BUSINESS PROCESSES CHARACTERIZING A MODERN TAX ADM: (1) TAXPAYER SERVICE AND VOLUNTARY COMPLIANCE;(2) REVENUE SERVICE CONTROL; AND(3) TAX REFUTATION, RECUPERATION

AND CHARGING.

IV. THE “TECHNICAL BLACK BOX” OF THE MAIN PROCESSES IN THE REVENUE SERVICE

MAIN CONCLUSION IS: (A) PROCESS (1) REQUIRES ORG.AND REGULATORY MEASURES RANGING FROM STREAMLINING OF PROCED. TO SIMPLIFYING SPECIFIC SUBPROCESSES VIA AUTOMATION MOTIVES (INCENTIVES) FOR CORRUPTION.

(B) PROCESS (2) REQUIRES REFORMS IN HHRR MGMT OPPORTUNITIES FOR CORRUPTION.

V. INSTITUTIONAL UNDERPINNING OF REFORMS

POLITICAL ECONOMY IS KEY TO UNDERSTAND INTRODUCTION AND IMPLEMENTATION OF REFORMS.

BROAD-BASED REFORMS ARE POSSIBLE UNDER A PERCEPTION OF CRISIS (KOROMZAY, 2004).

OTHER FACTORS INFLUENCING A REFORM TO COMBAT CORRUPTION ARE:

(1) RULE OF LAW TO SANCTION CORRUPT BEHAVIOR;

(2) MGMT AND HHRR SEMI-AUTONOMOUS REVENUE AUTHORITY (SARA);

(3) CAPACITY CONSTRAINTS: SKILLS AND LEADERSHIP + PROCESS RE-ENGINEERING; EFFECTIVE VIGILANCE

SYSTEMS; ORG. CHANGES AND ICT; AND

(4) OVERSIGHT OF SARA BY SOME SUPERIOR BODY.

VI. CONDENSING REFORM STRATEGIES: THE

CASE OF VAT REFUNDS IN BOLIVIA 1. THE NATIONAL INTEGRITY PLAN CONSISTED OF :

(A) JUDICIAL REFORM;

(B) STATE MODERNIZATION IRP;

(C) ANTI-CORRUPTION

2. THE INSTITUTIONAL REFORM OF THE NATIONAL TAX SERVICE WAS CARRIED

OUT THROUGH THE IRP.

VI. CONDENSING REFORM STRATEGIES: THE

CASE OF VAT REFUNDS IN BOLIVIA REFORM STRATEGY WAS FOCUSED ON :(A) HHRR DEVELOPMENT;

(B) STREAMLINING OF NORMS AND PROCEDURES; AND

(C) IMPROVEMENT OF INSPECTION AND CONTROL PROCESSES AND FISCAL INTELLIGENCE.

EXTRAORDINARY RESULTS OF REFORM AS REFLECTED BY COLLECTION OF ALL TAXES EXCEPT FOR COMPLEMENTARY REGIME OF VAT AND TRANSITORY PROGRAM (BAILOUT?).

VI. CONDENSING REFORM STRATEGIES: THE

CASE OF VAT REFUNDS IN BOLIVIA 3. THE RATIONALE FOR VAT REFUNDING: (A) FINAL LOCALITY OR DESTINATION TAXES APPLIED TO FINAL CONSUMERS;

(B) TAX NEUTRALITY AVOID DOUBLE TAXATION ON CAPITAL GOODS, INPUTS, SERVICES, ETC,MADE BY EXPORTERS; AND

(C) COMPETITIVENESS TAXES A COMPONENT OF COST OF MERCHANDISE

IN BOLIVIA, 3 TAXES ARE SUBJECT TO REFUNDS: VAT, SPECIFIC CONSUMPTION TAX AND CUSTOM DUTY.

VI. CONDENSING REFORM STRATEGIES: THE

CASE OF VAT REFUNDS IN BOLIVIA 4. INSPECTION/AUDITING AND CONTROL PROCESSES AND PROCEDURES BEFORE THE REFORM CHARACTERIZED BY :

(A) EXTREME COMPLEXITY;(B) RELIANCE ON PROGRAMMING MECHANISMS; AND (C) DISCRETIONARY METHODS OF VERIFICATION.

PRONE TO CORRUPTION AND DEPENDANT ON 2 LARGE PROCESSES AND 2 TAX OFFICERS: (1) REFUNDING; AND (2) INSPECTION.

BOTH ENJOYED ENORMOUS DEGREEE OF DISCRETION IN THEIR ACTIONS.

VI. CONDENSING REFORM STRATEGIES: THE

CASE OF VAT REFUNDS IN BOLIVIA 5. CORRUPTION CHAIN AND NEW INSPECTION/AUDITING

AND CONTROL PROCESSES AND PROCEDURES AFTER THE REFORM

(A) NORMATIVE FORCES EXPORTERS TO SUBMIT FISCAL INVOICES;

(B) INVOICES CAN BE: FALSE AND CLONED, AUTHORIZED FROM FICTITIOUS SUPPLIERS, AUTHORIZED FROM FALSE OR NON-EXISTENT SUPPLIERS, AND AUTHORIZED FROM REGISTERED SUPPLIERS.(C) THREE TYPES OF FRAUD AND CORRUPTION MATERIALIZED WITH THE ASSISTANCE OF UNSCRUPULOUS TAX OFFICERS THAT AUTHORIZE A FRAUDULENT TAX REFUND(D) NEW PROCEDURE HAS LESS VULNERABLE POINTS.

VI. CONDENSING REFORM STRATEGIES: THE

CASE OF VAT REFUNDS IN BOLIVIA 6. THE “TECHNICAL BOX” OF VAT REFUND

PROCESS

METHODODOLOGY DEVELOPED IN SECTION IV IS REPLICATED TO COME UP WITH SOME REMEDIAL MEASURES AND WARNING INDICATORS FOR THE RISK LEVELS (VULNERABILITIES) IDENTIFIED IN THE NEW PROCEDURE.

7. EXPORTS, TAX COLLECTION AND VAT REFUNDS

VAT REFUNDS AS % OF EXPORTS GROWTH OF VAT REFUNDS AS % OF EXPORTS PRESENT CLEAR DOWNWARD TREND

VI. CONDENSING REFORM STRATEGIES: THE

CASE OF VAT REFUNDS IN BOLIVIA 8. CONSTRAINTS, WEAKNESSES AND THREATS AS WELL AS SUSTAINABILITY OF THE ANTICORRUPTION STRATEGY

CONSTRAINTS: DEFICIENCIES OF EXISTING REGULATORY FRAMEWORK

WEAKNESSES: PRECARIOUS COORDINATION BETWEEN NTS AND CUSTOMS

THREATS: EVENTUAL REVERSAL OF REFORM IN THE FACE OF CHANGE OF GOVERNMENT

SUSTAINABILITY: ANTICORRUPTION STRATEGY WILL BE SUSTAINABLE IF C+W+T ARE OVERCOME.

VII. CONCLUSIONS 1. INSTITUTIONAL REFORM TOGETHER WITH

CHANGES IN INSPECTION/AUDITING AND CONTROL PROCESSES AND PROCEDURES REDUCED AMOUNTS OF VAT REFUNDS AND OUTFLOW OF FFRR FROM TREASURY TO TRANSGRESSORS.

2. SUCCESSFUL ANTICORRUPTION STRATEGY WAS ONLY POSSIBLE AFETER A COMPREHENSIVE INSTITUTIONAL REFORM.

3. IMPROVEMENTS IN VAT REFUNDISN PROCEDURES IMPLIED INTENSIVE USE OF TECHNOLOGY WHEREBY HUMAN DISCRETIONARY ACTIVITIES WERE REPLACED BY A SYSTEM.