The World Bank OCTOBER NUMBER 33 PREM notes SET An anticorruption strategy for revenue administration A recent review of World Bank loans for tax and customs reforms reveals the potential of such projects for anticorruption efforts. The Bank defines corruption as the abuse ing efficiency. Competitive base pay and of public office for private gain. Corrupt transparent and nonarbitrary reward pro- Any anticorruption actions include the unilateral theft of pub- cedures are also widely recommended. But lic property by its steward and multiparty little analysis has been done to determine the strategy must limit transactions in which beneficiaries bribe offi- size of the salary increases needed to reduce cials. Corruption can existatall levels of pub- corruption. Moreover, such increases can the motives and lic administration-from the highest impose a considerable burden on the bud- officeholder to the lowest functionary. gets of developing countries, opportunities for Because tax and customs administrations Additionally, positive incentives for revenue often figure among the corrupt government officials, if unchecked, may lead to overzeal- public officeholders agencies in developing countries, Bank pro- ous harassment of taxpayers, which is also a jects that reform these administrations form of corruption. For this reason, and to to abuse their should include anticorruption efforts. penalize other conrupt actions, negative incen- Any strategy to combat corruption must tives should complement positive incentives, positions limit the motives and opportunities for pub- (Using negative incentives alone, however, lic officeholders to abuse their positions. This could deter notjust corruption but also the should be done directly for unilateral cor- will of revenue officials to work.) Finally, inde- ruption, while for multiparty corruption it can pendent taxpayer surveys can help identifyy ele- also be done indirectly by focusing on the sup- ments of the organization, or even indiidual ply side of bribes. Although we do not know tax offices, that harbor severe corruption. enough to identify optimal anticorruption strategies for different country situations, there is no one-size-fits-~all strategy. Various elements Box 1 ADDRESSING MOTIVE from the menu of possibilities must be inte- grated into a coherent package. The Bank's Basic motivation Negative incentives approach b one thisrea,coutlined below, is in Ml Mission and vision statements M9 Effective sanctions for corruption aproach igemnt thisharea, fteItra M2 Elite ethos and esprit de corps MIlO Stronger taxpayer voice through bruoad agrleeme with multhparty cofrptheionitena- pendenttaxpayersurveyscant independent surveys tional Monetarey Fund (IMF). Positive incentives Ml I Citizen review and oversight M3 Organizational autonomy Motives for corruption M4 Transparent budget procedures Supply-side elements Potential reforms for discouraging corrup- and performance-inked budgets MI 2 Effective sanctions for bribe tion among revenue officilsM5 Performance-linked compensation payers tion amongdrevenue officials are listed in box M6 Intra- and interagency competition M1 3 Independent institutions to pro- 1. A few deserve elaboration. Sufficient orga- M7 Competitive base pay tect taxpayers from harassment nizational autonomy of the revenue admin- M8 Transparent and nonarbitrary re- and extortion istration, combined with performance-linked ward procedures M14 Publicity for penalties budgets, is often advocated as a way of achiev- FROM THE DEVELOPMENT ECONOMICS VICE PRESIDENCY AND POVERTY REDUCTION AND ECONOMIC MANAGEMENT NETWORK Opportunities for corruption ernment agencies (such as independent An anticorruption strategy must do more external audits), and taxpayer associations than address incentives, however. Oppor- that strengthen citizens' voice. tunities for corruption also need to be Excessive contact between taxpayers and curbed (box 2). Tax simplification is per- tax officials should be avoided. Important haps the most important method of limit- instruments in this regard include relying ing opportunity, and can also increase on withholding taxes, increasing the use economic efficiency for other reasons. Tax of third-party data for tax assessment, and reforms in many countries and Bank-IMF privatizing selected functions of tax admin- advice generally focus on lowering tax rates, istration. Effective automation of procedures Anticorruption broadening the tax base, and eliminating also facilitates reduced contactandincreases special exemptions. Such reforms tend to administrative efficiency. strategies need make tax obligations transparent and reduce the compliance cost of honest taxpayers. Incorporating strategies to focus on Presumptive taxation of small businesses, in reform projects which may not keep extensive books and An examination of 43 Bank loans in the a few crucial records, can also reduce the discretionary 1990s with major revenue modernization power of tax inspectors and make tax cal- componentsrevealedthatmostprojects that elements rooted culations simpler and clearer. explicitly targeted administrative corrup- Organizational and management reforms tion occurred after 1997. Earlier operations in the specific that can form part of an anticorruption strat- rarely incorporated paralleljudicial reform egy include clearly dividing responsibili- (absentin 95 percent ofprojects examined), characteristics of ties along functional lines and relying on budgetdetermination and transparentbud- transparent, written procedures. Effective getary procedures (90 percent), presump- each cou ntry implementation of such standards depends tive taxes (88 percent), external and internal onthestateofdevelopmentofthetaxadmin- audits (80 percent), and elements for istration and the economy. strengthening taxpayer voice or introduc- Perhaps more important is a system of ing other external oversightinstitutions ('78 internal and external checks. Internal audit percent). Several projects focused mainly divisions and anticorruption units are the on automation and computers, recognizing most important anticorruption bodies within their potential to facilitate standardized, revenue administrations. Important insti- arm's-length procedures. tutional safeguards outside the revenue Given the limited capacity to absorb change administration include an independent and in most developing countries, anticorruption effective judiciary, external reviews by gov- strategies need to focus on a few crucial e]e- ments rooted in the specific characteristics of BOX 2 AD D R ES S I N G O P PO R TU N ITY each country. A variety of designs have been suggested in technical reports and incorpo- Tax structure reforms 08 Transparent human resource, rated in ongoing projects. 01 Low and few rates and limited procurement, and budgetary exemptions procedures Current country approaches 02 Withholding and presumptive 09 Computerization and automation Strategies in Latvia Guatemala and Tan- taxes 010 Privatization of selected SrtgeinLva, Gutml,adTn 03 Nondiscretionary penalties functions zania are representative of anticorruption efforts in recent Bank technical assistance Organization and management Internal and external checks (table 1). Latvia is a small, highly urbanized 04 Functional organization O11 Independent internal and exter- country with GNP per capita of $2,400. 05 Increased use of third-party data nal audits Guatemala is much less urbanized-60 per- 06 Limited contactwith taxpayers and 012 Effective management supervision . . . supir prcdue cent of itS citizens live in p oor rural areas- suppliers procedures 07 Arm'slength, transparent, and non- 013 Citizen review and oversight and has more than five times as many people discretionarybusiness procedures 014 Internal anticorruption units as Latvia, with GNP per capita of $1,500. _ At 31 million, Tanzania's population is nearly PREMNOTE 33 OCTOBER 1999 three times Guatemala's, and its GNP per TABLE 1 ANTICORRUPTION COMPONENTS OF BANK OPERATIONS capita is $210. Latvia Guatemala Tanzania Tax revenues as a share of GDP are low State Revenue Tax Administration Tax in Guatemala and Tanzania. In Guatemala SeniceModernization TechnicalAssistance Administration in 1996 they had declined to 8 percent, one Project Loan Project of the lowest levels in the world. Tanzania's Addressing motive tax revenue was quite low for its region, at Basic motivation MI, M2 MI, M2 12 percent. In contrast, Latvia's was a healthy Positive incentives M5 M3, M5, M7 31 percent during 1995-97 but was below Neti inti Mg, M10 M10 M9 spending levels. All three countries benefited Negative incents M13 M12 from a public and government consensus about the need to reform their tax agen- Addressing opportunity cies, as well as the need to combat corrup- Tax structure reforms 02, 03 01-03 01-03 tion through direct action. Organization and management 04-06,08,09 04-06,08-010 04,05,09 Latvia's anticorruption strategy for rev- Internal and external checks 011, 014 011 014 enue administration was part of a broad Nlote: See boxes I and 2 for definitions of the codes in the table. national strategy guided by a Vigilance Unit. International experience had shown that in objectivity were critical, as there was wide- transition economies revenue administra- spread public distrust and a perception of tion is severely tested by corrupt taxpayers pervasive corruption in the previous tax and and officials, high volumes of cash and cross- customs agencies. In addition, an integrated border transactions, high evasion and financial management system, piloted in the arrears, and growth of the informal econ- Ministry of Finance, is being deployed in the omy. The organizational structure of the new tax agency, and procedures have been State Revenue Service was improved to inte- streamlined in tandem with process reengi- grate tax, customs, and social security col- neering. Finally, a public information cam- lections and to create strong internal control paign is being undertaken to publicize the and anticorruption functions. The Vigilance agency's progress in improving customer Unit, operating independently of the finan- service and meeting revenue targets. cial police, was to: Tanzania took a tough stance against cor- Monitor and educate staffbased on a code ruption by forming the Tax Revenue Admin- of ethics. istration in 1996. From its inception the * Investigate cases of illicit enrichment. administration had a reputation for being * Conduct disciplinary proceedings. tough on corruption. A national report on * Develop guidelines for managers dealing corruption led to an action plan to com- with corruption. bat it monitored by the administration's * Redesign business processes to reduce board, where an Oversight Committee on discretion and, where discretion must be Integrity was established. In a parallel effort, retained, establish systems to monitor an internal investigation unit was set up in its exercise. the Internal Audit Department. Finally, a * Develop incentives to foster integrity and media campaign was mounted, supported good conduct. by telephone hotlines and provisions for * Monitor declarations of income and assets paying informants reporting tax evasion. by parliamentarians, ministers, and pub- lic servants. Learning from experience Guatemala decided to merge its tax and Given the emerging knowledge about customs agencies into one autonomous designing and implementing anticorrup- agency. All agency staff.were replaced or had tion strategies, it is vital to elicit lessons from to reapply for their positions, a process that operations like those described above. To was contracted to private recruitment firms facilitate this, the Latvia, Guatemala, and and a local university. Transparency and Tanzania loans have carefully specified PREMNOTE 33 OCTOBER 1999 performance indicators for use in interim Administrations." International Mone- and post-project assessments. Lessons for tary Fund, Fiscal Affairs Department, which there is already evidence include Washington, D.C. the importance of high-level political com- Gray, Cheryl W., and Daniel Kaufmann. mitment, good pre-project diagnostic work, 1998. "Corruption and Development" participatory project design, and strong data PREMnote 4. World Bank, Washington, recording ability. There is also evidence D.C. on the effectiveness of computerization com- Kaufmann, Daniel, Sanjay Pradhan, and bined with personnel, organizational, and Randi Ryterman. 1998. "New Frontiers managerial reform, and the ineffectiveness in Diagnosing and Combating Corrup- of computerization without institutional tion." PREMnote 7. World Bank, Wash- Several lessons strengthening. ington, D.C. Important questions from current oper- Mookherjee, Dilip. 1998. "Incentive Reforms have emerged ations include: in Developing Country Bureaucracies: * How important is it to embed anticor- Lessons from Tax Administrations." In on what works, ruption programs for revenue adminis- Boris Pleskovic andjoseph E. Stiglitz, eds., tration within larger national programs? Annual World Bank Conference on Develop - but more work . Dotaxstructuresimplificationandreform ment Economics 1997. Washington, D.C.: have a measurable effect on corruption? World Bank. is needed . How effective is voice at curbing cor- Vito, Tanzi. 1998."Corruption around the ruption in revenue administration? World: Causes, Consequences, Scope and * Which measures to curb corruption Cures." IMF Working Paper 98/63. Inter- increase administrative efficiency, and national Monetary Fund, Washingtoni, which reduce it? D.C. - Can a revenue administration in which World Bank. 1997. "Helping Countries corruption is entrenched be profession- Combat Corruption: The Role of the alized without replacing existing staff World Bank." Poverty Reduction and * Do projects with explicit anticorruption Economic Management Network, Wash- components do better than those with an ington, D.C. implicit focus on corruption-for exam- ple, in business process reengineering? This note was written by Arindam Das-Gupta (former Coordinator, Tax Policy and Adminis- Further reading tration Thematic Group, PREM Network), Barbone, Luca, Luc De Wulf, Arindam Das- Michael Engelschalk (Head, Non-Member Coun- Gupta, and Anna Hansson. 1999. "World try Unit Fiscal Affairs, Organisation for Eco- Bank Projects in the 1990s with Tax or nomic Co-operation and Development), and Customs Administration Reform Com- William Mayville (Consultant, PREM Network). ponents: A Review." World Bank, Tax Pol- If you are interested in similar topics, consider icy and Administration Thematic Group, joining the Tax Policy and Administration The- Washington, D.C. matic Group. Contact Luca Barbone, x32556, Crotty, John. 1998. "Measures to Address orAnna Hansson, x38485, or click on Thematic Corruption Problems in Tax and Customs Groups on PREMnet. This note series is intended to summarize good practice and key policy find- I ings on PREM-related topics. The views expressed in these notes are those of the authors and do not necessarily reflect the views of the World Bank. PREM- p it' ,, notes are distributed widely to Bank staff and are also available on the PREM website (http://prem). If you are interested in writing a PREMnote, email your idea to Sarah Nedolast. For additional copies of this PREMnote please con- b0Rd.mEaWceMnu9 tact the PREM Advisory Service at x87736. Prepared for World Bank staff