Information, Corruption, and Measures for the Promotion of Manufactured Exports

Information, Corruption, and Measures for the Promotion of Manufactured Exports Glenn P. Jenkins and Chun-Yan Kuo There has been a growing emphasis in many developing countries on exportled growth policies that attract both domestic and foreign investment into activities for the expansion of manufacturing exports. Often the actual outcome of the policies has been very different than the intention. Among the impediments, investors often face foreign exchange controls, tariffs on imported inputs, and a costly system for the exemption or refund of sales taxes and tariffs on inputs used to produce exports. These factors have frequently discouraged foreign investment, hindered export growth and bred corruption. This paper addresses two issues related to the design and the information requirements for the administration of some of the fiscal provisions that affect the competitiveness of a country in the production of manufactured exports. The first issue is how to design a system that allows exporters to sell their output free of domestic sales and excise taxes. Under a system of VAT taxation, in order for exports to be sold free of tax, they should be taxed at a zero rate and the exporters be given a refund by the government for any tax paid on input purchases. Usually in developing countries such refunds are either not paid in a timely fashion, or have been fraudulently overstated in the claims made by exporters. In short, the procedures seldom function, as they should. The second issue is how to relieve exporters from the burden of taxes levied on imported inputs used in the production of exports. The mechanisms to remove this export impediment include tax free zones, duty drawback systems, duty exemption systems, bonded warehouses, and duty free factory systems. All these systems have limitations and some provide fertile ground for administrative corruption, yet they are critical for the development of manufactured exports. Empirically, these indirect tax burden border adjustments are usually several times as important as income tax holidays and accelerated depreciation allowances for the promotion of industrial exports. In this paper, we report on some innovations that developed countries have devised when addressing these issues. Our goal is to identify the primary elements of information and incentives to efficiently eliminate the burden of sales taxes and import duties on inputs used to produce exports.