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corruption
(Image Courtesy: Transparency International)
 
 
The ages-old link between tax and corruption is hogging limelight on global platforms. Multilateral institutions are offering new strategies to break the complex nexus between secrecy, fiscal management, corruption and money laundering. 
G20 Summit, held recently in Germany, for instance, approved eight principles on countering corruption in Customs. This is in addition to four principles on combating corruption related to ‘Illegal Trade in Wildlife and Wildlife Products’. G20 leaders also approved 14 principles on the ‘Liability of Legal Persons for Corruption’. 
According to Lisa Marriott, Associate Professor of Taxation, Victoria University of Wellington, New Zealand, recent events such as the release of the ‘Panama Papers’ have increasingly focused the international community on the connection between tax systems and corruption.
Taking New Zealand as a case study, Marriott focuses on the tax treatment of facilitation payments made to overseas public officials and the tax treatment and disclosure requirements of foreign trusts. 
She says: “Facilitation payments made to overseas public officials are deductible for tax purposes in New Zealand. Current practice is showing no sign of change, despite perceptions that this practice denotes a permissive attitude towards corruption and is no longer tolerated in most other comparable tax jurisdictions”.
In a paper released during April 2017, Marriott pointed out that the tax treatment and disclosure requirements of foreign trusts, together with the tax-corruption link in New Zealand, came under gaze after release of the Panama Papers. This event generated international media interest with the suggestion that New Zealand was acting as a tax haven.
According to study authored by three experts from European University Institute, Florence, Italy, “Cross-country evidence highlights the importance of tax evasion and corruption in determining the size of fiscal multipliers. We introduce these two features in a New Keynesian model and revisit the effects of fiscal consolidations. VAR (vector autoregressive model) evidence for Italy suggests that spending cuts reduce tax evasion, while tax hikes increase it. In the model, spending cuts induce a reallocation of production towards the formal sector, thus reducing tax evasion. Tax hikes increase the incentives to produce in the less productive shadow sector, implying higher output and unemployment losses. Corruption further amplifies these losses by requiring larger hikes in taxes to reduce debt”. 
In their Study titled ‘Fiscal Consolidation with Tax Evasion and Corruption’ released in December 2014, three experts say: “We use the model to assess the recent fiscal consolidation plans in Greece, Italy, Portugal and Spain. Our results corroborate the evidence of increasing levels of tax evasion during these consolidations and point to significant output and welfare losses, which could be reduced substantially by combating tax evasion and corruption”.
The problem with G20 Summit is that it does not go into such country-specific cases and prefers to indulge in highfalutin statements.
G20 Summit thus declared: “We remain committed to fighting corruption, including through practical international cooperation and technical assistance, and will continue to fully implement the G20 Anti-Corruption Action Plan 2017-18”.
Before elaborating G20 initiatives, consider some more recent developments in this arena. In April this year, Asian Development Bank (ADB) organized a conference of top-level government functionaries at Sydney to discuss tax-corruption nexus.
The Conference focused on issues such as the impact of corruption on tax revenues, tax compliance, and economic development; the relationship between corruption and tax evasion; the relationship between corruption and fiscal decentralization; reforming tax administration to reduce corruption and drafting tax policy & law to mitigate opportunities for corruption.
There is now a lot of anecdotal evidence that indicates that corruption in the tax administrations and tax evasion and avoidance by taxpayers are facilitated by the complexity that characterizes tax systems and, to some extent, also tax administrations. Some tax systems have become so complex that few citizens can find their ways in the obscure jungle created by thousands of pages of tax laws and regulations” says Vito Tanzi, Honorary President of the International Institute of Public Finance.
In a paper titled ‘Corruption, Complexity and Tax Evasion’ presented at ADB conference, Mr. Tanzi observes: “The more objectives governments try to pursue and to promote, and the more they rely on tax systems to do that, the more complex the tax systems becomes, and the more corruption, tax evasion and high compliance and administrative costs result”.
According to International Monetary Fund (IMF), corruption affects core government functions. This in turn weakens the country’s capacity to tax, leading to lower revenue collection. Widespread corruption harms the culture of compliance, thereby increasing tax evasion. This is suggested by the negative association between corruption and the collection of tax revenues.
In a Staff Discussion Note (SDN) on ‘Corruption: Costs and Mitigating Strategies’ issued in May 2016, IMF points out that recent data compiled by it for 108 countries show that “there is a strong correlation between a low C-efficiency and high corruption”.
‘C-efficiency’ refers to revenue from the VAT divided by the product of the standard rate and aggregate private consumption.
SDN adds: “When tax exemptions are perceived to be the product of a bribe, the public becomes far less willing to comply with the tax laws, which are perceived as unfair. The Panama Papers bring into focus the scope of global financial secrecy and the potential it creates for tax evasion and other criminal activities. Tax evasion, like corruption, contributes to inequality and to perceptions of unfairness—undermining citizens’ trust in their governments”.
The buzzwords for weakening tax-corruption nexus are: – fiscal transparency, tax integrity, new mandatory disclosures by both tax payers and tax collectors, making taxes simple and reasonable, disallowing facilitation payment (de facto bribery) as business expenditure in tax returns and compliance with global taxation norms and enhanced global cooperation.
Grant Richardson from University of Adelaide shared interesting findings from a study on money laundering-tax avoidance at ADB conference. Using a sample of 41,486 U.S. firm-year observations over the 1995–2014 period, the study concluded that “money laundering is significantly positively related to tax avoidance”.
Coming back to G20’s High Level Principles on Countering Corruption in Customs annexed to G20 Leaders Declaration, the eight principles are: 1) Leading by example; 2) Implementing appropriate integrity standards; 3) Transparency; 4) Automation; 5) Reform and Modernization; 6) Human resources management; 7) Relationship with the Private Sector and 8) Audit and Reporting.
The Summit declared “Effectively preventing and combating corruption in customs is essential to an enabling business environment and investment climate. Corruption can be combated effectively only as part of a comprehensive strategy that is adapted to national and local contexts”.
The Heads of States agreed: “G20 Countries should periodically review their customs systems and procedures, aiming to streamline out-dated and burdensome practices and procedures, and increase transparency in decision-making with a view to minimize opportunities to engage in unethical, fraudulent or corrupt acts”.
As regards G20’s 14 High Level Principles on the Liability of Legal Persons for Corruption, the Summit observed: “There are several rationales for ensuring liability of corporations and other legal entities: today’s economy, both at the national and international level, is mainly driven by commercial entities, i.e. legal persons. Fighting corruption would fall short if only the natural persons involved were punished while the legal person was exempt from sanctions.”
The major principles are: 1) A robust legal framework should be in place for holding legal persons liable for corruption, including domestic and foreign bribery, and related offences; 2) Corporate liability legislation should capture all entities with legal rights and obligations; 3) Liability of legal persons should not be restricted to cases where the natural person or persons who perpetrated the offence are prosecuted or convicted; 4) Liability of legal persons should not be limited to cases where the offence was committed by a senior manager; 5) A legal person should not be able to avoid responsibility by using intermediaries, including other legal persons to commit a corruption offence on its behalf and 6) Companies should not be able to escape liability by altering their corporate identity.
The Organisation for Economic Cooperation and Development (OECD), IMF, ADB, Financial Action Task Force (FATF) and the World Bank are periodically updating their guidelines on these issues. FATF, for instance, last month issued Draft Guidance for Private Sector Information Sharing for public consultation. 
IMF has manual on fiscal transparency and prepares periodic country-specific fiscal transparency reports. Similarly, ADB has updated its Anticorruption Policy to address tax integrity issues.
In a consultation paper on ‘Anticorruption Policy: Enhancing the role of the Asian Development Bank in Relation to Tax Integrity’ issued in July 2016, the Bank notes: “A lack of tax integrity and a culture of low tax compliance at a country level increase the risk of corruption. Corruption, ML (money laundering) and FT (financing terrorism) damage financial sector institutions and, together with tax evasion and aggressive forms of tax planning,(a) distort competitive markets; (b) hinder efficient, accountable and transparent public administration; and (c) adversely impact the domestic resources of DMs (developing members)”.
It adds: “A lack of tax transparency at a project level increases the risk of tax evasion, corruption, ML and FT”.
ADB expects a reduction in trade-related corruption in Nepal due to implementation of a Policy-Based Loan. Approved earlier this month, the Loan is captioned ‘Nepal: South Asia Subregional Economic Cooperation Customs Reform and Modernization for Trade Facilitation Program’.
Amidst all these studies and strategies, one measure that stands out as surefire means to break tax-corruption nexus is transparency. It here apt to conclude with a quote from a recent working paper (WP) authored by four Australian academics.
WP says: “Secrecy and corruption are interdependent. As such, when secrecy is reduced via mandatory tax disclosures there is likely to be a consequential reduction in corruption”.
                                              
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