Bolivia successfully adopted an open market economy model in 1985; however, economic growth and employment generation have been insufficient for the country to make headway in narrowing its sizable inequalities in incomes and standards of living. In an effort to address these issues, the Bolivian authorities pursued a comprehensive economic reform program that included modernization of the customs administration.
In 1985, Bolivia launched significant reforms in the area of international trade that included reducing tariffs and simplifying controls. Initially the authorities introduced a uniform tariff of 20 percent for capital and other goods, but the tariff schedule is no longer uniform, because in 1987, the authorities further reduced the tariff on capital goods to between zero and 5 percent and lowered the tariff on other goods to 10 percent.
In addition to customs duties, levies on imports include a value added tax of 14.9 percent and a selective consumption tax that ranges from 50 percent on cigarettes and other tobacco products to between 10 and 18 percent on automobiles. Other taxes include a specific tax of Bs 0.15 per liter applied to soft drinks, as well as a specific tax of Bs 0.3 to Bs 1.2 per liter applied to alcoholic beverages. Bolivia also levies a special tax on the import and domestic sale of hydrocarbons and their derivatives; for example, in 2002, the specific tax on diesel oil was Bs 0.66 per liter.
Import taxes account for a significant portion of total tax revenue. As figure 2.1 shows, customs revenue from taxes on international trade represents between 30 and 40 percent of the National Treasury's total tax revenue. Customs revenue as a share of total revenue peaked in 1997 and 1998 because of imports required for the construction of a gas pipeline between Bolivia and Brazil, as well as increases in foreign investment in privatized companies.
Among the contributions of the various taxes on international trade to total National Treasury revenue, the value added tax, which is levied on all final imports of goods and services, is the most important, representing about 21 percent of the total. Customs duties are the second most important source of tax revenue and account for about 8 percent of total tax revenue (figure 2.2).
Figure 2.3 shows the effective rates of import taxes as measured by the ratio of customs duty collection to the total value of imports. In 1999-2001,
FIGURE 2.1 Import Taxes as a Share of Overall Budget Revenue, 1994-2000
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FIGURE 2.2 Customs Revenue as a Share of Total Tax Revenue, 2000
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the effective rate of customs duties was about 5 percent, and the effective rate of all taxes collected by the customs service averaged more than 20 percent. The combined effective rate of all taxes on taxable imports actually amounts to 21.1 percent because not all imports are taxable. The relatively low effective customs rate for all imports is the result of exemptions from import duties included in regional trade agreements and trade agreements with neighboring countries.
Bolivia avoids the use of nontariff barriers and has never taken antidumping or safeguard measures.1 Moreover, in line with the central tenet of its policy of free trade in goods and services, Bolivia does not require prior permits or licenses for imports except in cases where they might endanger human, animal, or plant health; the security of the state; or the nation's cultural heritage.2
FIGURE 2.3 Evolution of Effective Customs Rates, 1994-2001
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Even though Bolivia has largely based its trade policy on unilateral liberalization, multilateral and regional initiatives have played an important supporting role. Since 1993, Bolivia has concluded new trade agreements with Chile, Cuba, Mexico, and the South American Common Market. Bolivia has also continued to participate in the Andean Community integration process. Given Bolivia's geographical location, most of these preferential initiatives have the potential of increasing trade and investment.
The effects of improvements in the trade regime introduced since 1986 were reduced by persistent administrative weaknesses and the resultant unequal application of laws and regulations affecting the administration of the customs service, the heavy reliance on processing imports, the application of intellectual property rights regulations, and the use of sanitary and phytosanitary controls. Difficulties also arose because of the size of the informal sector.
Excise and hydrocarbon tax rates have been changing constantly, the former because of revenue shortfalls and the latter because of the decision to keep domestic prices constant (the domestic price of gasoline has been fixed since 2000). Consequently, revenue improvements for these taxes have been negligible. Also during 1999-2003, total imports decreased by US$300 million, contracting the tax base for customs taxes. However, the progressive devaluations of the national currency have partly compensated for the negative impact on tax collections caused by the decrease in imports.
Before the reform, the general public perceived the National Customs of Bolivia (NCB) as one of the most corrupt institutions in the country because of its links to the political parties: the party in power would take charge and manage the institution however it pleased. Services provided to traders were directly related to the bribes offered, plus almost 40 percent of the total staff consisted of people who did not receive salaries from the NCB but simply kept a share of the taxes they collected for themselves and for whoever had procured the position for them. Overall tax collection was relatively efficient, because collections met the required quota, with the excess allocated to staff as efficiency rewards.
An NCB estimate of smuggling between 1997 and 1998 pointed to a tax evasion level that exceeded US$800 million per year, an amount larger than Bolivia's total foreign financial assistance. Subsequent analyses estimated the revenue losses at an average of US$500 million per year. In recent years, smuggling activity by the informal sector appears to have increased sharply (mainly from the port of Iquique in Chile) in response to the deterioration in economic conditions following adverse external and domestic shocks. Smuggling has a detrimental impact on the formal economy, as reflected by lower tax collection and unfair competition with the formal private sector.
The NCB had traditionally maintained an antiquated legal and normative structure. The applicable legislation dated back to 1929 and was extremely complex, consisting of 285 decrees, 321 ministerial resolutions, and 215 administrative resolutions. In addition, all goods had to be inspected, which made the process of merchandise clearance extremely time-consuming and increased opportunities for rent-seeking activities.
With a view to addressing these shortcomings, Bolivia implemented a second round of reform in 1997. This round followed the opening up of the economy in 1985 and was aimed at strengthening institutions, with priority given to the customs service and to the gradual integration of informal trade into formal trade channels. The consensus regarding the prevalence of corruption in customs activities led to general agreement on the need for overall reform. The reform aimed at a total reengineering of the customs organization, its staffing, and its processes and procedures. The objective was to make customs activities efficient and transparent so that customs officers could fulfill their proper role of facilitating trade and collecting revenue.
Before the second round of reform, the Customs Police Force was implementing a plan whereby personnel from the Special Unit for Assessing Internal Risk replaced customs staff. The objective was to restore institutional credibility, improve tax collection, and reduce the high levels of institutional corruption.
The government set up the National Customs Council during the preparation of the reform to support the reform process. The president chaired the council, which consisted of representatives from the Ministry of the Public Treasury, the Ministry of External Trade, and the private sector. The government dissolved the council following approval of the new Customs Law in 1999, which established the framework for the reform and initiated the reform process.
The vice president, Jorge Quiroga Ramírez, directed the leaders of the Institutional Reform Program during its initial stages (1997-2001), thereby giving it the necessary authority and visibility. The program's main achievement was customs reform. Under Ramírez's direction the cabinet-particularly Minister of the Presidency Alberto Leyton and Minister of Finance Herbert Muller-fully supported the reform.
A new NCB commissioner, Amparo Ballivián, spearheaded the implementation of customs reform, and her forceful management of the reform program was a major reason for its success. The International Monetary Fund (IMF) contributed significantly to the design of the reform by providing technical support to...