Revenue administration and corruption:
Definitions and forms
Table 1:
Common forms of tax evasion and corruption in revenue administrations
| Types | Mechanism of integrity violations |
1. 'Unadulterated' tax evasion (without the involvement of tax officers) |
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| Smuggling | Smuggling of goods (beer, spirits, soap, sugar, cooking oil, etc.). Border police is involved in some cases. |
| Taxable income/transactions are not reported or are underreported in accounts | Several ledgers are often used, including one for taxation purposes that may show a deficit. Common within many businesses. |
| Underreporting of turnover | Common within retail and wholesale sectors. |
| Overreporting of expenditures | An accounting trick to reduce tax burden. |
| Underreporting of the value of imports | A general problem in imports of goods. |
| Misclassification of goods | Import goods with high tax and duty rates are classified as goods with lower rates. One example is the classification of alcoholic beverages as mineral water. May involve customs officers (see below). |
| Goods in transit are sold on the domestic market | Could involve many types of commodities. In some African countries it is a particularly big problem with respect to oil and petroleum products. In some cases customs officers and other civil servants are directly involved. |
2. Collusion between revenue officers and taxpayers |
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| Tax exemptions | Involves the tax administration, the Ministry of Finance, and other public agencies, such as investment centres, which are in position to issue exemptions. In some cases, the taxpayer is not registered in the tax registers, but pays a lower tax 'privately' to tax collectors. |
| VAT fraud | Falsified claims for VAT refunds. Can occur with the help of collaborators within the tax administration. |
| Goods in transit | One way of evading tax is to report import goods as transit goods. Customs officers and importers work together occasionally. |
| False classification of goods | Customs officers may be involved (see above). |
| Underreporting value of goods | To avoid pre-shipment inspection of goods before shipment from the export country, a common method 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. |
3.Corruption without the direct involvement of taxpayers |
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| Extortion | By taking advantage of taxpayers' incomplete knowledge of tax legislation, revenue officers threaten taxpayers to pay above rates. |
| Embezzlement of collected revenue | Revenue officers steal money collected. May take place with the collusion of bank employees and/or auditors within the tax administration. |
| Fraud | Falsifying tax receipts is common. |
| Corrupt inspectors/auditors | Internal auditing may be inefficient and corrupt. Exacerbates the problems of corruption since it undermines the credibility of the monitoring policy. |
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Public Financial
Management and Procurement |
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Budget process |
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Revenue administration |
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Fiscal decentralisation |
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Direct budget support |
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Public Expenditure Tracking |
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Procurement |
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U4 welcomes any | CONTACT |
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Hannes Hechler
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| RECOMMENDED READING |
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“It is our money. Where is it gone?” is a short documentary, released by the International Budget Partnership, on an initiative, in Mombasa (Kenya) to involve communities directly in monitoring the Constituency Development Fund, a fund managed by Kenyan parliamentarians. Through social audits, communities monitored budgets and held their government accountable for managing the public’s money and meeting the needs of the poor.
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| RELATED U4 PUBLICATIONS |
This U4 Brief assesses how banks facilitate illicit capital flows from developing countries. The shortcomings of the existing regulatory frameworks are discussed, and recommendations are made for donor governments on what can be done to curb the flow of corrupt money out of the developing world. |
