Tariff Evasion and Customs Corruption: Does Pre-Shipment Inspection Help?

2020

This paper presents a new methodology to detect collusion in customs and applies it to Madagascar’s main port. Manipulation of assignment of import declarations to inspectors is identified by detecting deviations from random assignment prescribed by official rules. Deviant declarations are more at risk of tax evasion, yet less likely to be deemed fraudulent by inspectors, who also clear them faster. An intervention in which inspector assignment was delegated to a third party validates our approach, but also triggered a novel manifestation of manipulation that perpetuated systemic corruption. Tax revenues for deviant declarations would have been 27% higher had their assignment not been tampered with.

Can governments improve bureaucratic performance by "hiring integrity" from the private sector? In the past two decades, a number of developing countries have hired private firms to conduct preshipment inspections of imports, generating independent data on the value and tariff classification of incoming shipments. I find that countries implementing such inspection programs subsequently experience large increases in import duty collections. By contrast, the growth rate of other tax revenues does not change appreciably. Additional evidence suggests that declines in falsification of import documentation are behind the import duty improvements: the programs also lead to declines in undervaluation and in misreporting of goods classifications. Historically, this hired integrity appears to have been cost-effective, with improvements in import duty collections in the first five years of a typical inspection program amounting to 2.6 times program costs.

Corruption is an endemic problem that is especially prevalent in developing countries. The impact of corruption on welfare has been a widely debated topic among economists: much has been said on the second-best option that bribery may present in the face of a rigid and inefficient bureaucracy.

Fiscal Frontier, 1998

This paper develops an economic model of evasion of customs duties. It assumes that an importer will try to maximize the 'net expected gain' from evasion, adjusted for bribe paid to the customs officer whose complicity is necessary. It considers penalty as a deterrent and probability of detection and reporting is factored in.

Global Trade and Customs Journal, 2021

Journal of Public Economics, 2008

We examine the effect of tariff policies on evasion of customs duties, in the context of the trade reform in India of the 1990s. By exploiting the variation in tariff rates across time and products, we identify a robust positive elasticity of evasion with respect to tariffs. A second contribution of the paper is to provide some evidence on the impact of enforcement. While we cannot identify the direct impact of enforcement on evasion, we can establish the extent to which enforcement-related factors, such as product characteristics that determine the ease of detection of evasion, affect the evasion elasticity. The results render support to the hypothesis that improvements in enforcement can reduce the responsiveness of evasion to tariffs.

We analyze the determinants of trade misinvoicing using data on 86 countries from 1980 to 2005. In a simple microeconomic framework we derive the determinants of four different types of trade misinvoicing taking into account that only the financial incentives determine whether and how much exports/imports to underinvoice or overinvoice, whereas the deterrents only affect the extent of misinvoicing. The hypothesized determinants are tested using data on discrepancies in bilateral trade with the U.S. We find that the black market premium and tariffs motivate illegal trading activities. Higher financial penalties effectively act as a deterrent to this crime.

2018

We provide new evidence on the prevalence and consequences of corruption in a developing country context. Based on rich administrative transaction-level data from Madagascar customs merged with data from the port authority and a partner institution, we construct novel measures to detect collusion between inspectors and brokers, resulting from deviations from the official rules in the allocation of import declarations to inspectors. We show that import declarations suspect of collusion are significantly riskier, as measured by risk scores, likelihood of being recommended for physical inspection and of being subject to reference value advice. Importantly, we show that declarations suspect of collusion have significantly higher ex-ante declared values, total taxation rates and undervaluation (measured by gaps relative to external reference values and prices) and hence embody higher potential tax revenue losses. Our estimates also document clear-cut evidence of a differential treatment ...

2010

Import tariff receipts represent an important share of government revenues in many developing countries and there has recently been a surge in empirical studies showing how evasion in this field is a pervasive phenomenon. In the case of import tariffs, the tax base is the product of quantity and unit value, both of which have to be reported and need to be assessed by the custom authority during an audit. I show that when the fiscal authority has an imperfect detection technology, there is an additional incentive for the taxpayer to underdeclare, as a greater declaration in one dimension actually increases the fine when evasion in the other dimension is detected, and a tax base presenting this feature is subject to more evasion compared to a tax base that can be assessed directly. Also, when enforcement capacity is low, voluntary compliance is higher when the importer is required to declare only the total value of imports.

2015

In this article I examine the relationships between (tariff and non-tariff) trade barriers and bribery among customs agents, taking into account the incentives of each of the agents involved: importers, customs officials, their supervisors, and the central government. This examination consists of three parts: (1) a game-theoretic analysis of the decisions of the agents, (2) a statistical method for measuring the "level of corruption " in customs, defined as the proportion of customs agents who accept bribes, and (3) an econometric model to estimate the effects of various factors on the monetary value of these bribes. Application of the model requires the use of data that are not in the public domain; it may be of interest to governmental agencies interested in this topic. The case of Mexican customs on the border with the United States is presented as an example of the effects of changes in tariffs and customs regulations on bribery.

SSRN Electronic Journal, 2022

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Economics & Politics, 2011

2016

This paper represents the first attempt to examine the influence that corruption exerts on the worldwide use of antidumping (AD) claims as a means to seek trade protection. Since the inception of the World Trade Organization and the concomitant dramatic fall in tariffs, AD duties have become one of the few permissible measures to provide temporary protection to foreign competition. Increased lobbying pressure in this area has gone hand in hand with the explosion of number of AD filings. We hypothesized that corruption gives the import competing sector the opportunity to more effectively lobby for trade protection and this can be expected to result in more attempts to use AD filings. Using crosscountry data on AD investigations, we provide support to this hypothesis.