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

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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 REFORMS
• VI. CONDENSING REFORM STRATEGIES THE CASE OF
  VAT REFUNDS IN BOLIVIA
• VII. CONCLUSIONS

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I. INTRODUCTION

• FIGHTING CORRUPTION lt-gt 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 gt EXPECTED COSTS -gtAGENT CORRUPT
  AND VICE VERSA

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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).

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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.

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II. THE ANATOMY OF CORRUPTION IN THE REVENUE
SERVICE

• 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.

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II. THE ANATOMY OF CORRUPTION IN THE REVENUE
SERVICE

• THE PAPER DESCRIBES THE MOST IMPORTANT FACTORS
  AFFECTING STAKEHOLDERSAND PATRIMONIAL
  NETWORKSBEHAVIOR 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.

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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.
  

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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.

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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.

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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.

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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.

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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?).

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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.

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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.

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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.
  

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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

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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 CWT ARE OVERCOME.

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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.