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

1. 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

2. 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

3. 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).

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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?).

13. 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.

14. 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.

15. 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.

16. 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

17. 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.

18. VII. CONCLUSIONS • 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. • SUCCESSFUL ANTICORRUPTION STRATEGY WAS ONLY POSSIBLE AFETER A COMPREHENSIVE INSTITUTIONAL REFORM. • IMPROVEMENTS IN VAT REFUNDISN PROCEDURES IMPLIED INTENSIVE USE OF TECHNOLOGY WHEREBY HUMAN DISCRETIONARY ACTIVITIES WERE REPLACED BY A SYSTEM.