Uganda, Kenya and Tanzania have been losing $926 million annually in the past 10 years in domestic tax and tariff revenue as a result of illicit outflows of capital through trade misinvoicing.

According to the latest Global Financial Integrity report, the misinvoicing of trade is hampering economic growth, undermining domestic resource mobilisation and resulting in tax revenue loss of 12.7 per cent of Uganda’s total government revenue, 8.3 per cent of Kenya’s and 7.4 per cent of Tanzania’s.

The report, which looks at trade misinvoicing and the revenue loss in five African countries over the past 10 years, shows that Kenya lost $435 million, Tanzania $248 million, and Uganda $243 million on average per year in potential tax and tariff revenue. Ghana and Mozambique lost $386 million and $187 million respectively.

Raymond Baker, GFI president and expert on financial crime, described trade misinvoicing as the most serious economic issue plaguing these countries.

“Trade misinvoicing is stymieing economic growth and likely decimating government revenues in these countries. The consequences are simply devastating. The capital drained from trade misinvoicing means that local businesses in Uganda and Tanzania have less money to grow their companies and hire workers. The potential revenue loss from trade misinvoicing means that Ghana has less money to spend on health care, while Kenya has less money to devote to education,” said Mr Baker.

READ: Tax evasion leaves Tanzania’s government coffers dry

Danish Minister for Trade and Development Co-operation Mogens Jensen noted that such illicit financial flows are taking a serious toll on the economies of these countries. 

The report Hiding in Plain Sight: Trade Misinvoicing and the Impact of Revenue Loss in Ghana, Kenya, Mozambique, Tanzania and Uganda: 2002-2011, says that smuggling and downright manipulation of Customs rules are costing the region billions of dollars.

The findings show that Tanzania experienced the greatest annual average gross illicit flows of $1.87 billion. Kenya was second with $1.51 billion in average gross flows, and Ghana’s figure of $1.44 billion was also significant. Uganda experienced gross average annual illicit flows of $884 million, and Mozambique, $585 million.

According to the report, insufficient data and limited processes for questioning mis-valued invoices are hampering the efforts of regional governments to curtail trade misinvoicing and reduce the reach of the illegal financial system.

Customs authorities in the five governments in this study are hampered by the lack of data on trade, tax and corporate transactions in their countries, and the lack of data on international trade.

The report notes that although the revenue authorities of the region have recently embarked on the establishment of electronic Customs systems and, in some cases, the creation of financial intelligence units, which are responsible for monitoring issues of financial crime and opacity, not much has been achieved.

For the region to fight this crime, civil service capacity will become even more important as information collection increases from stronger anti-money laundering laws, better or new tax information exchange agreements, and electronic Customs systems.

According to the report, the misinvoicing of imports is the primary method through which capital is illicitly transferred out of Uganda. Trade misinvoicing due to import over invoicing in Uganda increased significantly from 2002 to 2011 and could undermine the benefits of future oil sales if left unchecked.

The study, funded by Denmark’s Ministry of Foreign Affairs, points out that illicit outflows from Uganda through import over-invoicing have been steadily increasing from $275 million in 2002 to $1.75 billion in 2012. This amount is almost equivalent to the money received from donors.

The study shows that while Uganda got $14.19 billion in foreign aid between 2002 and 2011, about 70 per cent ($8.31 billion) went back in illicit outflows. The money that left Uganda, the study says, represents both a loss of capital that could have otherwise been used for development as well as a substantial loss in tax revenue.

Since Uganda is a landlocked country, smuggling across its borders remains the largest source of capital flight, rather than the misinvoicing of trade at ports as in the other countries, the report notes.

Kenya, which aspires to be the financial centre for East Africa, lost $9.64 billion in potential domestic investment from export under-invoicing and import over-invoicing during the 10-year period covered in the study, and it estimates that the government may have lost $3.92 billion in tax revenue resulting from these illicit outflows and from the $3.94 billion in illicit inflows.

It estimates that underinvoicing of exports was the primary method for shifting money illicitly out of Kenya.

The cumulative gross illicit flows from trade misinvoicing through Kenya amounted to $13.58 billion from 2002–2010, roughly $1.51 billion per year on average, representing 7.8 per cent of GDP. This, the report says could have had a detrimental impact on the average fiscal balance over this period.

What has aided this illicit activity in Kenya, it says, is corruption. Kenya maintains a large underground economy (approximately a third of GDP, according to the World Bank), factors that drive illicit financial flows through trade misinvoicing and other means. Kenya ranks second-lowest on Transparency International’s Corruption Perceptions Index (at 136th of 177) of the countries in this report.

Data for Kenya shows a clear pattern of tax evasion and avoidance through trade misinvoicing, which is enabled at least in part by Kenya’s close connections to the global financial system and by Kenya’s lax regulation and governance of financial activities within the country.

Tanzania lost more than $8 billion in domestic capital drained out of the economy illegally from 2002–2011, and government coffers may have missed out on an average of $248 million per year from trade-based tax evasion.

Illicit outflows came exclusively in the form of import over-invoicing, which raises questions about Tanzania’s reliance on import duties to finance the government budgets.

The estimates of trade misinvoicing show that the vast majority of the import over-invoicing transactions are fuel imports, which have an import duty exemption for mining companies.

The report notes that the vast majority of trade that is misinvoiced in Tanzania occurs with Switzerland and, to a lesser extent, with Singapore, which the IMF and the OECD consider to be tax havens.

Despite only accounting for six per cent of Tanzania’s total imports from advanced economies, Switzerland and Singapore represent over 67 pe cent of total import misinvoicing over the 10-year period of this study.

It further says over 25 per cent of the total import misinvoicing present in Tanzania since 2002 was specifically the misinvoicing of fuel imports from Switzerland alone.

Tanzania has the worst illicit flows to GDP ratio of the five countries and faces a significant challenge in curbing trade misinvoicing.

“The government seems to have the appropriate Customs systems in place, but some policy initiatives remain to strengthen its trade policy. Additionally, the country largely lacks the culture of transparency and accountability that is needed to drive sustainable business creation and economic development and security,” it says.

It recommends that governments should significantly boost their Customs enforcement, by equipping and training officers to better detect intentional misinvoicing of trade transactions

It also recommends that governments should actively participate in the worldwide movement towards automatic exchange of tax information, the “new global standard” as declared by the G20. 

Kenya and Uganda should follow the paths of Ghana, Mozambique, and Tanzania in complying with the EITI standard — the global transparency standard for improving governance of natural resources.

Uganda, which has confirmed its intention to join the initiative, has a large mineral and mining industry, and, while Kenya does not have significant oil or mining industries at present, exploration is proceeding apace, particularly for oil deposits off the Kenyan coast.