Michael Barney R. Almazar
Coming clean and the economics of bribery
With the recent promotion by the Paris-based Organization for Economic Cooperation and Development (OECD) of the Philippines
to its list of countries that have substantially implemented internationally agreed tax standards -- more commonly known as
the "white list" -- tax evaders now face greater scrutiny from revenue authorities.
It may be recalled that our country has been on the gray list -- consisting of those countries that have committed but
have not yet fully complied with internationally agreed tax standards -- since April 2009, following its removal from the
black list of uncooperative havens for suspected tax cheats.
Although the Philippines is not a member of the OECD, it is a signatory to the Anti-Corruption Action Plan for Asia and
the Pacific as well as the 2003 UN Convention Against Corruption which set the international benchmark for anti-bribery legislation.
Another anti-corruption mechanism in the international arena is the US Foreign Corrupt Practices Act (FCPA), which also
finds substantial application in the Philippines due to the presence of a number of American multinational companies. The
FCPA empowers the US authorities to prosecute US companies for paying bribes to foreign officials.
In US alone, as many as 120 companies have been investigated on suspicion of FCPA violations. In February 2009, an oil
services company and its subsidiary were fined a penalty of $579 million -- the largest fine ever paid in an FCPA case.
Supply and demand
So, let us examine the economics of bribery for better understanding.
A bribery transaction will always involve a supply side and a demand side. Companies that might otherwise be tempted to
bribe represent the supply side, while corrupt public officials occupy the demand side of the equation.
In a competitive market, the price of bribe will vary until it settles at a point where the quantity demanded by bribe
receivers will equal the quantity supplied by the bribers. Theoretically then, corruption has an equilibrium point, as illustrated
by the four basic laws of supply and demand:
- An increase in demand with supply remaining constant will result in higher equilibrium price and quantity;
- A decrease in demand with supply remaining constant will result in lower equilibrium price and quantity;
- An increase in supply with demand remaining constant will result in lower equilibrium price and higher quantity; and
- A decrease in supply with demand remaining constant will result in higher price and lower quantity.
Making corruption more costly will reduce the incidence of corruption but will at the same time make it more lucrative
for those who engage in high-level corrupt practices.
To prevent this situation, the shift to the left of the supply curve must at least be equaled by a corresponding left shift
in the demand curve.
Applying these principles to the area of corruption, the aggressive steps of the government together with multifaceted
support from international bodies as well as private companies themselves must combat both the supply and demand sides of
In the international arena, the OECD -- composed mostly of industrialized European countries -- imposes wide range of penalties
against their citizens and companies found violating the Convention.
Its OECD Council Recommendation on Improving Ethical Conduct in Public Service has been put into action to ensure well-functioning
institutions and systems for promoting ethical conduct in the public service.
US companies charged with FCPA offenses face the prospect of heavy fines, including disgorgement of the profits that they
make as a result of bribe payments.
On the national level here at home, with the new administration’s heightened political commitment to curb bribery,
government agencies are responding to development challenges posed by corruption by strengthening transparency and accountability
as well as reengineering the role of bureaucracy in economic activities.
For example, an online feedback system to the Department of Finance, called "Pera Ng Bayan" (www.perangbayan.com), can now be utilized by the public to report illicit activities by tax evaders, smugglers and erring officials. The system
also solicits commendations on exemplary service rendered by employees of the department.
Another agency -- the Bureau of Immigration -- is currently reviewing its operations to limit the activities immigration
officers control or regulate, thereby reducing opportunities for corruption.
Moreover, congressional investigations are being held to aid legislators in appraising proper salaries of civil servants,
their rewards for performance, security of tenure and other incentives to encourage them to serve the public rather than their
own personal ends.
The Bureau of Internal Revenue (BIR) should be credited for recently issuing Revenue Regulations (RR) 10-2010, which somehow
regulates and monitors the supply side of bribery.
The RR implementing Republic Act (RA) 10021 requires banks and other financial institutions to open the accounts of taxpayers
suspected of cheating on their tax payments.
RA 10021 mandates the BIR to provide foreign tax authorities with information they are seeking on bank deposits of high
risk taxpayers for the purpose of exchanging information pursuant to international tax treaty agreements.
Furthermore, the BIR -- with the support and initiative of the Tax Management Association of the Philippines, a tax professional
organization -- has launched the "Search for Exemplary Revenue Employee" program to encourage excellence, integrity and honesty
within the bureau.
Likewise, the BIR intensified its efforts in chasing high-profile taxpayers through the enhanced "Run After Tax Evaders"
Finally, at the private companies’ level, corporate citizens must do their part to strengthen anti-bribery actions
and promote integrity in business operations.
A good starting point is to address the practice internally by changing the corporate culture that enables furnishing and
solicitation of bribes.
The following OECD guidelines on internal controls, ethics, and compliance may be adopted:
- Institute a clear and visible anti-bribery policy that is strongly supported by senior management;
- Instill a sense of responsibility for compliance;
- Maintain regular communication and training on foreign bribery for all employees and business partners; and
- Encourage observance of anti-bribery compliance measures and disciplinary procedures to address their violations.
Every payment of bribe is a violation of shareholder trust and larceny of stockholder profits.
Companies must realize that keeping clean and putting into place the compliance measures needed to keep their operations
bribery-free will work to their self-interest and in the interest of economic efficiency and fairness.
An ounce of prevention is worth a pound of cure. The success of President Benigno Simeon C. Aquino III in promoting integrity
within the bureaucracy requires leadership support from the private sector and active citizen participation. Certainly, fostering
synergies among government, private sector and nongovernment organizations will nurture long-term economic growth, extending
the benefits of prosperity to every Filipino.
The author is a tax consultant at the Tax Services Department of Isla Lipana & Co., the Philippine
member firm of the PricewaterhouseCoopers global network. Readers may call 845-2728 or e-mail the author at email@example.com. com for questions or feedback.