Revenue administration and corruption:

1. Definitions and forms

One battery of definitions

To choose a set of definitions of corruption is the conventional starting point of most corruption analyses. This may literally be done in an infinite number of ways (see chapter 2 in the report Corruption: A review of contemporary research - pdf ). However, the working definition used by the U4, the World Bank, Transparency International, and others is that corruption is the abuse of public power for private benefit. This definition implies that corruption is behaviour that deviates from the formal duties of a public role (elective or appointive) because of private-regarding (personal, close family, private clique) wealth, power or status gains

The literature suggests different ways of categorising corruption in the revenue administration, some of which are useful and others less so from a practical anti-corruption point of view.

A classification of corruption that has practical applications to the revenue administration's working environment is suggested in the Customs Modernisation Handbook, published by the World Bank in 2005

A slight modification of this classification, which also makes it applicable for other parts of the revenue administration, in addition to Customs, distinguishes between:

CONTENT ON THIS PAGE:

• Petty and grand corruption
  
• Bribery
• Misappropriation
• Embezzlement
• Extortion
• Patronage
• Table 1: Common forms of tax evasion and corruption in developing countries - mechanisms of integrity violations in revenue administrations
  

Petty and grand corruption

Corruption is often categorised into two broad types: petty corruption and grand corruption. Petty corruption is the everyday corruption that takes place at the implementation end of politics, where public officials meet the public. Sometimes it is referred to as 'routine' corruption, whereby - for instance - private importers of goods pay bribes to obtain a speedy completion of routine customs procedures, or whereby import goods with high customs duty and excise rates are classified as goods with lower rates. Petty corruption is also described as 'survival' corruption; a form of corruption which is pursued by junior or mid-level revenue officers who may be grossly underpaid and who depend on relatively small but illegal rents to feed and house their families and pay for their children's education.

Grand corruption, on the other hand, may take place when tax policy (or amendments to tax laws and regulations) is made. It usually involves more senior officials and significant amounts of money. One example is the granting of discretionary tax exemptions to large companies by senior civil servants and ministers. Accordingly, since petty corruption is perceived to be different from grand corruption, some observers argue that different strategies are required to deal with these two types of corruption. In practice, however, it is often hard to distinguish between these forms of corruption in the revenue administration. For instance, revenue officers at all levels often collude in corruption networks. Moreover, by referring to petty corruption as a 'survival' strategy, one risks legitimising some forms of corruption which are damaging for the society and state-citizen relationship. Finally, the active or passive role of taxpayers in defrauding the treasury is ignored in this type of categorisation.

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Bribery

Bribery in the revenue administration includes:

• Payments to alter or reduce duty or taxation liabilities,
• payments to ensure that revenue officers turn a blind eye to illegal activities (e.g. drugs and weapons imports),
• payments or 'kickbacks' to ensure that an individual or a firm is successful in obtaining a lucrative tax exemption from normal administrative formalities, and
• payments to secure or facilitate the issuance or processing of licenses and clearances.

In the first half of the 1990s the Revenue Department within the Ministry of Finance in Tanzania went under the nickname the 'Tax Exemption Department', due to the widespread granting of discretionary tax exemptions to business people willing to pay for this 'service'.

In the Philippines prior to the reforms of the late 1990s, customs officials seemed to consider that they had the right to obtain compensation for their services. Businesses had become accustomed to giving small bribes as part of their standard operating procedures. It was generally accepted that it was necessary to pay someone to 'facilitate' even fully legitimate transactions, and to have the services of someone personally friendly with customs officers in order to avoid harassment. In Tanzania, goods imported to religious and non-governmental organisations are exempted from taxation by law. This is, however, misused by businesses which - by bribing tax officers - register goods as if they were intended for these types of organisations. In some cases business people also collude directly with NGO officials.

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Misappropriation

Misappropriation includes a wide range of behaviours such as: falsification of records, misclassification of goods, and fraud (See Table 1). This form of corruption is a common factor in revenue administrations in developing countries where administrative controls or checks and balances are not always present and where supervision and audits of financial transactions are not well developed. For instance, a review in Tanzania a few years back concluded that at least 50% of all transit imports were unable to provide final documents proving that goods had arrived at their final destination. They most likely ended up on the domestic market, implying substantial revenue losses.

A common method to avoid pre-shipment inspection of goods before shipment from the export country is to split the goods into units which individually are worth less than the minimum required to trigger inspection. The goods are therefore exempted from pre-shipment inspection. Underreporting the value of goods is also common, for instance for second-hand cars.

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Embezzlement

Embezzlement is plain and simple theft whereby revenue officers steal money collected, leaving little or nothing behind for the treasury. For instance, in Tanzania in the mid-1990s a study conducted by one of the business associations reported that embezzlement of collected taxes by tax collectors and administrators - which did not implicate taxpayers - was widespread. It was caused by poor control routines in the tax administration. Sometimes embezzlement takes place with the collusion of bank employees and/or auditors within the revenue administration.

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Extortion

Extortion implies taking advantage of taxpayers' incomplete knowledge of tax legislation. Tax collectors may threaten taxpayers to pay more than they are obliged to, and often assume that taxpayers will not be financially able to press charges. This form of corruption is difficult to quantify. Nevertheless, in some countries small businesses - including hotels and restaurants - claim that this is a big problem.

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Patronage

Patronage and social obligations in the revenue administration can include such behaviours as the selection, transfer, or promotion of staff on the basis of kinship, tribal, and other social relationships regardless of merit. In some countries tax officers are seen by their family members and social networks as important potential patrons who have access to money, resources, and opportunities that they are morally obliged to share. A person in a position of power is expected to use that influence to help his or her kin and community of origin. Therefore, to accumulate, even in corrupt ways, is not necessarily perceived to be bad in itself. It is accumulation without distribution which is considered unethical. Only someone who accumulates can redistribute and be identified as 'a man of honor' or 'a big man'.

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