The decisive impact of tax administration practices on firms’ corruption Experience and Perceptions: Evidence from Europe and Central Asia

ABSTRACT

Two competing conceptualizations of corruption in the literature view it either as efficient or burdensome from firms’ perspective. Using data on the prevalence and the nature of firms’ interactions with tax authorities in twenty-eight Eastern European and Central Asian (ECA) countries, this paper contributes to evaluation of competing ideas in the literature about firms’ experience of corruption in tax administration. Special emphasis is given to examination of taxation-related determinants of corruption prevalence (frequency and magnitude of bribery), as well as the effect of the interaction with tax authorities on perception of tax and overall corruption. Regardless of country context, it appears that perceived corruption in tax administration and actual experiences with bribery during interactions with tax officials more than anything else affect the overall perceptions of corruption, thereby supporting the conceptualization of corruption in tax administration as burdensome, rather than efficient.

KEYWORDS:

• Tax administration
• corruption
• bribes

Notes

1. The BEEPS includes all, but one (Turkmenistan), countries of Eastern Europe and Central Asia (ECA) region, as defined by the World Bank.

2. Ten out of 28 East European and Central Asian (ECA) countries in the BEEPS sample used for this article are in the low- and low-middle-income categories.

3. The BEEPS is a joint initiative of the EBRD and the World Bank. The BEEPS was carried out in five rounds: in 1999, 2002, 2005, 2008, and 2012/13, and covers virtually all former Eastern Bloc countries of Central and Eastern Europe and the former Soviet Union (except Turkmenistan), as well as Turkey. The latest BEEPS in Russian Federation was conducted in 2011/12.

4. Analysis of the determinants of perceptions of tax rates and tax administration as obstacles at the firm level supports this supposition (outputs not shown). Being tax-inspected predictably reduces the likelihood that firms will agree that tax rates and tax administration are not an obstacle. However, the intensity of tax scrutiny (e.g., number of tax inspections) and also paying a bribe in the context of a tax inspection have no effect on perceptions of tax rates as an obstacle, but increase the probability of companies perceiving tax administration as an obstacle. This suggests a distinction between the incidence (whether a firm was inspected) and intensity (how many times a firm was inspected) of tax scrutiny (see firm-level analysis in the next section).