Trade fraud sucks the lifeblood from Uganda’s already struggling economy

PUBLISHED ON March 13th, 2019

Trade fraud sucks the lifeblood from Uganda’s already struggling economy

As Uganda struggles to recover revenue lost in international trade, the Prosecutor’s Office reported about $6.6 billion was lost through trade misinvoicing between 2006 and 2015.

Losses tied to imports amounted to 10 per cent of total trade between 2006 and 2015 while losses pegged to exports were equivalent to eight per cent of total trade in the same period.

Under trade misinvoicing, agents in the trade value chain engage in tax evasion practices such as distortion of import and export values to conceal and transfer income overseas.

For example, an import order for industrial equipment may carry an invoice value of $1.5 million whereas the factory cost is $1 million.

The difference of $0.5 million is usually transferred to multiple places by interested parties to hide profits earned from a particular country. These are direct tax revenues that developing countries lose in the international trade system.

The monetary value of losses arising from potential over- and under-invoicing of Uganda imports stood at $4.9 billion during the nine years under review, a figure that translates to a loss of $544 million per year.

Losses driven by over- and under-invoicing of exports stood at $1.7 billion during the period, or $188.9 million per year.

Transfer pricing

In contrast, numerous tax audits of businesses suspected of under-declaring taxes generally yield less collections.

Routine audits carried out on selected taxpayers with a bias towards Value Added Tax and excise duty returns usually generate less than Ush20 billion ($5.4 million) from each taxpayer, according to Uganda Revenue Authority records.

Additional taxes collected against excessive management fees paid by local subsidiaries to foreign parent companies have also yielded less revenue in the past compared with money lost through trade misinvoicing.

A 2010 tax audit by URA on Bank of Baroda Uganda Ltd, a subsidiary of Bank of Baroda India, fetched Ush6 billion ($1.6 million) in income tax assessed against management fees while another foreign-controlled bank paid Ush35 billion ($9.4 million) in taxes during 2015 levied against its transfer pricing activities, URA sources said.

Infrastructure funding

Revenue losses tied to international trade have also denied Uganda cheaper funding for large infrastructure projects in energy and transport sectors.

Whereas most of the big infrastructure projects are being financed with expensive foreign loans, the value of revenue losses attributed to trade misinvoicing accounts for the lion’s share of total investment costs incurred on some projects.

For example, the 183-megawatt Isimba power dam scheduled for commissioning this year bears a project cost of $590 million.

In comparison, annual losses of $188.9 million caused by misinvoicing of exports would cater for 269.8 kilometres of tarmacked roads at an average unit cost of $700,000 per kilometre.

“Most of the illicit financial flows are channelled through digital financial platforms. The people behind these dubious financial flows are getting more sophisticated by the day and our enforcement systems are under pressure to catch up with them.

“As a result, detection and prevention of illicit financial flows through use of cyber tools is extremely hard to achieve in Uganda,” said Mike J Chibita, Uganda’s Director of Public Prosecutions.

Big revenue losses suffered through trade misinvoicing could also deprive Uganda of valuable cash needed to clear debt expenses incurred against public debt every year.

Total interest expenses recorded on government debt slightly fell from Ush2.59 trillion ($695.9 million) in 2017/18 to Ush2.55 trillion ($685 million) in 2018/19 compared to annual losses pegged to import misinvoicing.

National debt burden

Uganda’s debt-to-Gross Domestic Product ratio is projected to reach 49.5 per cent in June 2020, according to the International Monetary Fund; a figure deemed close to distress levels under regional economic convergence benchmarks.

Rising public debt is widely blamed on increased issuance of Treasury bills and bonds that have attracted double-digit interest rates for the last five years. This has escalated Uganda’s debt burden while benefiting large investors that frequently trade in government securities.

“Over taxation is the biggest cause of illicit financial flows in form of trade misinvoicing. The fairly small number of compliant taxpayers in Uganda has made life difficult for them, with URA choosing to squeeze more money out of them in order to beat higher revenue targets instead of going after non-compliant people. As a result, people are forced to seek new ways of ‘cutting corners’ to make ends meet,” argued Denis Kakembo, managing partner at Cristal Advocates, a Kampala-based law firm.

“The best way of out of this dilemma would be to offer some tax exemptions to traders in the informal sector with an annual turnover of Ush1 billion ($268,707) per year on condition that they remit corporation tax in full after every 12 months,” Mr Kakembo added.

“There is a need for a tax moratorium to encourage those engaging in trade misinvoicing to come clean on their dirty deals, pay their tax bills and move on.

“India, South Africa and the USA have done it and it seems to be working,” Oscar Ofumbi, a business owner in the transport and education sectors said.

“The biggest trigger factor behind trade misinvoicing is the high investment risk Africa poses to multinationals. Once any multinational figures out a new way of beating the tax system, others immediately follow suit and this directly escalates overall losses incurred through illicit financial flows,” Mr Ofumbi added.

The Directorate of Public Prosecutions, Inspectorate of Government and URA have handled 10 cases of illicit financial flows over the past two years, including one with a cash value of $4 million.

Other sources of illicit financial flows include trafficking in wildlife, drugs and guns.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of TradeMark Africa.