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Multilateral Institutions Target Corruption in Fiscal Space
By Naresh Minocha
Apr 17, 2019

Naresh Minocha, a veteran journalist, specializes in governance, polity, macro-economic issues, telecom, energy, chemicals and agriculture. He has been working as Consulting Editor with since 2004. He writes and speaks with authority on any issue he picks up. In-depth research is his passion. In his over 37-years journalistic career, he has worked in different capacities for both Indian and foreign media organizations. He continues to enjoy endless, learning journey that he started during his university days in the seventies. He believes his quest to be a ‘Know-All' is boundless.

WHEN International Monetary Fund (IMF) splashes 'Curbing Corruption' on the cover page of its Fiscal Monitor (FM), analysts are bound to revisit bribery in the fiscal domain.

Breaking Fiscal-Corruption nexus has lately become top priority for other international/multilateral institutions too. These include Asian Development Bank (ADB), World Bank and Organisation for Economic Co-operation and Development (OECD).

They perceive corruption prevention as the surefire way to accelerate global growth & generating more funds for public welfare.

"The fiscal costs of corruption can be substantial for economies at all levels of development. For example, comparing countries at similar income levels, the least corrupt governments collect 4 percent of GDP more in tax revenues than their peers with the highest levels of corruption", says FM.

It continues: "Based on such cross-country comparisons, if all countries today were to reduce corruption by a similar extent, on average, as those that reduced it over the past two decades, global tax revenues could be higher by $1 trillion, or 1¼ percent of global GDP; the gains would likely be greater considering that lower corruption would increase economic growth, further boosting revenues".

FM has noted that tax revenue as percentage of gross domestic product (GDP) rises in countries that reduce corruption significantly. Georgia, for instance, recorded 13% jump in tax receipts from 12 percent of GDP in 2003 to 25 percent of GDP in 2008.

Corruption works in a seamless fashion right from the preparation of the annual budget to tax collection & settlement of tax disputes in almost all countries. As fiscal opacity is rampant in many nations, corporate lobbying facilitates more allocation of funds to certain sectors. Wheeler-dealers walk away with lion's share of tax expenditures & other incentives including interest subsidy on loans.

The draft budget showing allocation of funds, direct and indirect incentives and schemes that benefit particular industries is not made public for discussion. The Budget is thus thrust on public as fait accompli.

The Budget is actually a corruption-steeped sweet-sour fruit.

Consider IMF's Fiscal Affairs Director, Vitor Gaspar, perspective on the budget. At a press conference on FM held on 10th April, Gaspar stated: "You can think of the government budget as a complicated plumbing system. Corruption corrodes the pipes in the fiscal house. Precious financial resources leak out. Curbing corruption requires enduring political will and sustained reform to institutions and practices".

Higher allocation of funds to projects prone to discretion and corruption thus sustain annual bribery culture. Complex tax rules and procedures, coupled with frequent changes, facilitate corruption in revenue administration. This leads to tax evasion & revenue collection that is far lower than the potential.

Complexity also leads to more tax litigation, which is often settled with bribes.

Tax reforms might move at snail's pace or are messed-up as is the case in India. Direct tax code has remained a mirage for many years. Goods & Services Tax (GST) has been clothed in complex compliance framework, leaving many stakeholders bewildered. In such situation, tax evasion thrives & bribes are aplenty.

Corruption & resulting revenue leakages might be higher at State or Local Government levels.

India's Gujarat State, which Prime Minister Narendra Modi marketed as shining growth model, does not necessarily have a non-corrupt revenue administration.

As put by Gujarat Chief Minister Vijay Rupani during December 2018, "Revenue department is infamous for being the most corrupt department in the state while police department comes second. It is a challenge to find a way to deal with it".

The aggregation of corruption at different tiers of governance transforms into a global mountain of bribes.

"The recent count of the IMF for this year is that corruption is costing one trillion dollars for the world economy, and, of course, a good part of the resources has been deviated into fiscal paradise. I will not say any particular country," stated Governor of the Central Reserve Bank of Peru, Mr. Julio Velarde.

He was replying to a question on corruption at a press conference held on 12th April after the G20-IMF meeting in Washington.

Director, IMF's Legal Department, Rhoda Weeks-Brown, has, however, given a higher estimate of corruption.

Speaking at 35th International Conference on the Foreign Corrupt Practices Act held during November 2018, she observed: "The annual global cost of bribery alone is estimated at around $1.5 to $2 trillion dollars a year! This amount is massive in terms of the global growth we seek to achieve, amounting to roughly 2 percent of 2016 global GDP".

She pointed out that corruption impeded both foreign and domestic investment. Corruption raises compliance costs, regulatory uncertainty and increased country risk. These are a "form of tax on investment".

'Corruption' cropped up at other press conferences too at the same location where the World Bank-IMF Spring meeting was held.

IMF Managing Director Christine Lagarde thus pitched for fighting bribery at both supply and demand sides through enhanced business competition.

At a press conference held on 11th April, she said: "Tackle issues which have high potential to boost not only revenue but also growth and inclusion. Such issues include reforming international corporate taxation, strengthening competition frameworks, and-above all-fighting corruption".

The word 'Corruption' also resonated in the communiqué issued after different events revolving around WB-IMF Spring meetings.

Communiqué of the Thirty-Ninth Meeting of the International Monetary and Financial Committee (IMFC), for instance, resolved: "We commit to strong governance, including by tackling corruption. We will implement policies that foster innovation and fair market competition".

IMFC appreciated IMF's enhanced engagement on governance, including corruption, in line with the new governance framework.

After October 2018, IMF studied how improved governance in fiscal frameworks and institutions can reduce corruption vulnerabilities and improve policy outcomes.

"Our analysis highlights the core elements of an effective fiscal governance framework and presents good practices to help fight corruption and improve policy outcomes", says Lagarde in her Global Policy Agenda presenting at the Spring meeting.

Like IMF, ADB has also revised its anti-corruption approach in the fiscal domain. In December 2018, ADB stated that it now discloses integrity issues to its Board of Directors in an appendix to the report and recommendation of the President for non-sovereign operations. The appendix shows whether tax integrity due diligence (IDD) has been conducted and, if so, what is its outcome. In December 2016, ADB amended its Anticorruption Policy in Relation to tax integrity.

According to ADB's Office of Anticorruption and Integrity (OAI) annual report for 2018, OAI builds the capacity of developing member countries (DMCs) with its focus on fighting corruption, tax integrity and anti-money laundering initiatives.

As regards collection of taxes, OECD is unraveling the link between corruption-tainted image of a revenue administration and the morale of its staff.

In a discussion paper 'What drives tax morale?' released on 10th April, OECD has referred to three regional surveys, especially the one from Africa. The Paper sees a possible relationship between tax morale and the perception of corruption.

It says: "There is some evidence to suggest that tax evasion is associated with perceptions of corruption in public institutions, particularly amongst tax officials".

It adds: "Higher levels of tax morale are reported when corruption is (perceived to be) under control. This finding helps to clarify the link between corruption and tax morale - an area with no consistent findings in the literature to date. This reinforces the importance of making transparency a priority. If tax reforms and public expenditures are accompanied by increased transparency, tax morale and compliance may be enhanced".

In a separate move, OECD is seeking public views on review of its 2009 anti-bribery recommendations. The consultations process would close on 30 th April 2019.

One of the 2009 recommendations relates to tax deduction of bribes. Signatories to OECD Anti-Bribery Convention are required to accept and implement the 2009 Tax Recommendation that introduced requirements in three areas.

These are - (i) statutory ban on tax deductibility of bribes; (ii) legal framework for reporting by tax authorities of suspicions of foreign bribery to domestic law enforcement authorities; and (iii) information sharing on foreign bribes under bilateral tax treaties.

The World Bank Group considers corruption a major challenge to its twin goals of ending extreme poverty by 2030 and boosting shared prosperity for the poorest 40 percent of people in developing countries. In addition, reducing corruption is at the heart of the Sustainable Development Goals and achieving the ambitious targets set for Financing for Development.

G20, which has drawn flak for lip-service to anti-corruption, has also joined the bandwagon against corruption-tax nexus. Under G20 Anti-Corruption Action Plan 2019-2021, its Anti-Corruption Working Group (ACWG) would identify and address corruption risks in public procurement, budget processes and tax & revenue administration.

All initiatives against corruption in fiscal domain would transform into a drop in the ocean as long as Governments resist fiscal transparency.

To achieve credible results, each tier of the Government must make its draft budget public for scrutiny. The draft should be based on zero-based budgeting. At the national & state level, an independent fiscal council should assess implementation of budget proposals. FC should have statutory powers to recommend suspected irregularities in fiscal domain to Supreme Auditor for investigation.

More such steps are required to force political executive to walk the talk on corruption.

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