Corruption in the Tax Authorities. Methods of Addressing

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Corruption in tax authorities is an unpleasant topic. Few people want to discuss it, but the news regularly mentions the arrest of various employees for bribery. Recently, Kenyan President William Ruto directly accused the country’s tax administration of “cutting government revenue by engaging in corruption, colluding with tax evaders and taking bribes”.^[1]

The tax administration not only collects money from taxpayers but also refunds money to some of them when authorized by legislation. Some taxpayers want to underestimate their tax obligations and seek support within the tax administration. Criminal groups are also interested in accessing budget refunds, as they are relatively “easy money.”

What should the government do when there are signs of corruption within and around the tax administration? Show zero tolerance for corruption, identify, and punish both tax authority employees and taxpayers who engage in criminal activities with them. However, the forbidden fruit is so tempting that corruption cannot be stopped solely through such methods. Other approaches can help:

• Digitization of tax processes makes decisions of tax authorities transparent and enables analysis of corruption risks.
• Centralization of tax processes and information systems will allow the implementation of the principle of extraterritoriality and detach specific employees of tax authorities from interactions with taxpayers. The taxpayer will not know who makes the decisions, making settling more difficult.
• Analysis of situations where tax authority employees make decisions both in favor of taxpayers and vice versa. Decisions against taxpayers also create risks, as well as decisions in their favor, as the review or cancellation of previous decisions creates a potential for corruption. It is vital to replace employees’ ability to make judgments with automated solutions.
• Establishing unambiguous tax regulations to stop tax authority employees from freely interpreting regulatory acts.
• Automation and conducting digital audits without the physical presence of tax authority employees at the taxpayer’s location, which reduces the likelihood of corrupt situations.

Tax authorities should reassess the motivation of employees based on objective indicators, such as tax base growth, and propose incentives that make earning honestly more beneficial. Consider a collective approach to motivation, so that the actions of one dishonest tax authority employee affect their colleagues.

The above measures will allow fighting corruption from within with greater effectiveness than external measures such as prosecutions.

[1] Kenya president, facing cash crunch, accuses tax agency of graft. NAIROBI, May 26, 2023 (Reuters). URL: https://www.reuters.com/world/africa/kenya-president-facing-cash-crunch-accuses-tax-agency-graft-2023-05-26/