Illicit Financial Flows (IFFs) still plague economies and Uganda is no exception. For instance, the United Nations High Level Panel on Illicit Financial Flows from Africa (2015) argued that Africa lost more than $50 billion annually from illicit financial outflows, a figure that exceeds levels of Official Development Assistance to the continent. This hampers the mobilisation of domestic resources for development.
A report by Global Financial Integrity (GFI) finds an estimated $1.6 trillion in potential trade mis-invoicing among 134 developing countries, of which $835 billion occurred between developing countries and 36 advanced economies, in 2018.
The report further notes that some of the 36 advanced economies in 2018 are China ($305.0 billion), Poland (US$62.3 billion), India ($38.9 billion), Russia ($32.6 billion) and Malaysia ($30.7 billion). On the other hand, some of the developing countries with the largest value gaps in trade with 36 advanced economies in 2018 as a percent of total trade are The Gambia (45.0%), Malawi (36.6%), Suriname (31.9%), Kyrgyzstan (30.6%) and Belize (29.2%).
In Uganda’s case, according to Advocates Coalition for Development and Environment (ACODE) and GFI, IFFs cause an estimated loss of Shs2 trillion annually.
While IFFs manifest in various ways such as cash smuggling, money laundering, trade mis-invoicing seems to take the lion’s share. The September 2018 GFI report shows that Uganda lost approximately 18 percent of total trade from 2006-2015 to trade mis-invoicing. Putting it in figures, over and under invoicing of imports cost the Ugandan economy about $4.9 billion and $1.7 billion in mis-invoicing of exports (2006-2015).
According to GFI, trade mis-invoicing is a way of moving money illegally across borders that involves the deliberate falsification of the value, volume, and/or type of commodity in an international commercial transaction of goods or services by at least one party to the transaction.
A case study on trade mis-invoicing (WCO, 2017) detailed how the international trade system has been exploited for IFFs in collusion with the importer, exporter and/or financial intermediaries. Simplified examples include over-invoiced imports to disguise capital flight as a form of trade payment, under-invoiced exports to conceal trade profit abroad (in a third-party country such as tax havens), and over-invoiced exports or under-invoiced imports to incorporate illicit proceeds into the domestic legal financial system.
Uganda Revenue Authority (URA), says import under-valuation was most evident for worn clothing, salt, stone and cement, chemical products and pharmaceuticals whereas import over-valuation was most significant for cereals, vehicles, electrical machinery, plastics, and iron and steel articles.
For export mis-invoicing, under-valuation was most critical for miscellaneous grains, seeds and fruits, cocoa, coffee, tea and spices, cereals and tobacco whereas over-valuation was mainly seen for iron and steel, fish crustaceans and related goods, iron and steel articles, and sugars.
URA commissioner customs, Abel Kagumire clarifies that the motives behind this trade mis-invoicing are; tax evasion, payment of bribes and kick-backs, avoidance of trade regulations, exploitation of trade incentives and evasion of capital controls.
To fight this vice, URA has also equipped the Customs department with the capacity to examine whether financial transactions between traders correspond to the declared value of traded goods.
There is also inter-agency cooperation among Customs authorities, Tax authorities, Financial Intelligence Units and other agencies availing of information-sharing, joint investigation teams, joint intelligence centres, secondments and co-location of personnel, and joint training programmes.
With these measures, URA’s revenue collection increased from Shs8,892,658 (2014) to Shs259,935,498,396 (December 2021) owing to Exchange of Information.
However, while URA wants to get the right amount of tax for each good jetting into the country, traders also look to get the best for the least, say paying $800 for a $2,000 vehicle.
Andrew Ddumba, a clearing agent at Raw Multilines, says that mileage affects the price, something the customs officials may not consider when valuing the car for taxes. With this, the client is in a dilemma.
“While invoices form part of the assessment, they are not considered because each item has a code from URA that clearing agents work with regardless of what the invoice says,” he says.
Abel Mwesigye, the executive director of Kacita Uganda, adds that what is regarded as mis-invoicing by URA is not the same term on the trading side which causes misunderstanding.
“URA believes a trader cannot be trusted. That has led them to get on to the market to gather information for executing their tax or administrative measures which is always biased because there are several factors they do not consider during a price search. For example, quality, quantity, and the relationship one has built with their supplier are crucial in pricing though not always considered in URA’s execution plan. Ultimately, URA disregards that of the traders regardless of having a genuine invoice.
Subsequently, traders are subjected to a valuation thus a wrong tax which then affects the trader’s final selling price,” he says.
“URA does not leave room to accommodate what they missed out. Moreover, on a fact finding mission, the market that URA will go to is not necessarily the same that my trader will go to,” Mwesigye says.
That creates further price variations. For instance, a retailer, wholesaler and manufacturer will have different prices. Additionally, middlemen also create price variation, something that URA may not put into consideration,” Mwesigye says.
While URA establishes prices, traders, regardless of the prevailing prices, have the negotiation power. Therefore, there is room for information disparity.
“That mismatch between traders and URA, who are not in the trading trenches, has greatly affected our businesses because they do not want to consider the situations we are going through,” he says.
While URA can get lots of information from foreign markets such as the international selling prices of goods, Kagumire says most of it is got from genuine declarations since the primary basis of customs valuation is the price actually paid or payable by importers for imported goods.
“The law allows for the actual price paid or payable to be the acceptable as basis for transaction value unless the price is influenced by a relationship as defined in the Fourth Schedule of East African Community Customs Management Act (EACCMA) 2004,” he says.
URA adds that bargains for lower prices may manifest through discounts, such as cash, quantity, trade and contingency.
“There is no specified amount of discount to be accepted, but rather it is guided by the price actually paid or payable and that the discount claimed has been earned. As long as sufficient evidence is presented to Customs to confirm that the bargain or discount claimed was earned, lower cost prices will be accepted. Otherwise they will be treated as undervaluation and the imported goods will be valued based on alternative methods of valuation other than the price actually paid or payable,” Kagumire says.
However, Ddumba says the process of auditing a trader’s invoice is lengthy and many traders opt to just pay the taxes and move on. When they consider how much more they must pay at the Internal Container Depot where each day of keeping your goods attracts a charge, the clients waiting for the goods as well as the interest on bank loans that must be paid, many choose not to go through the audit process.
“One may have to pay Shs150,000 per square metre per day yet the process may take days or weeks. So, a trader will give up on either auditing or arbitration,” he says.
However, Kagumire says the arbitration process can be a simpler, and less expensive than litigation. However, the process is not subject to the same rules of evidence and discovery as a court case. This can raise questions of fairness and transparency. When URA admits there is a misunderstanding, harmonising is a tug of war.
“URA will never allow to lose, even when they are in the wrong,” Mwesigye says.
URA should engage a few other private players to balance the execution. For instance, if someone buys goods from Dubai, let URA give those with genuine documents the benefit of doubt.
“Let the trail come from the supplier. We are ready to take URA officials to some of these people that give us these goods so research is unbiased and valuation is balanced,” he says.
Price variations are a constant element in trading and URA needs to understand this.
“If one shares a genuine invoice with a price that differs from that of URA and it is refuted, what other justification does the tax body need? Market prices always fluctuate and neither URA nor the trader has control over them,” he says.
Source: The Daily Monitor