Topic Guide: Tax Administration

Corruption can affect all processes conducted by a state’s tax administration, from the registration and removal of taxpayers from the national registry, the collection of tax dues, the identification of tax liabilities and the inspection and prosecution of alleged tax offences. Corruption in tax administration can be either collusive, where tax officials strike deals with taxpayers to allow the latter to underpay taxes in exchange for a share of the money “saved”, or abusive, where tax officials use their discretionary powers to extort bribes from honest taxpayers and can take various forms[1]:

Taxpayers can abuse the complexity of tax laws to evade taxes by, for example, under-reporting turnover or over-reporting expenditure, with or without the involvement of tax officials. Rich and well connected groups and individuals can also use political corruption to exercise undue influence on the tax regulations, lower and circumvent tax rates as they have both incentives and resources to buy influence, both legally and illegally.

Tax officials can abuse their position to issue tax exemptions, apply lower tax rates, un-register individuals from the tax registers in exchange for lower “private” tax, among others.

Tax officials can extort bribes from taxpayers by threatening them to pay above rates. They can also simply steal the tax revenues collected, sometimes with the complicity of bank officials or auditors. Internal auditing may also be inefficient or corrupt, reducing the likelihood of detection and punishment.

Corrupt officials often operate in informal networks of patronage composed of internal and external actors. This is particularly common in developing countries, where patronage networks based on ties of kinship or community often permeate the operations of tax administration. Politicians can also use taxes to either favour their constituencies or burden their opponents.

Tax fraud and evasion schemes often are built on legal loopholes providing for profits and assets being transferred to tax havens instead of being reported to domestic authorities. While such schemes make use of imperfect legislation in many cases, this implies a risk for corruption to influence law making and the judiciary to invent and utilise such legal loopholes and grey areas.