13 May 2014

Uganda: Nation Loses Shs 2.2 Trillion in Illicit Trade

Widespread smuggling and utter manipulation of customs rules are costing Uganda trillions of shillings, a new report points out. Titled, Hiding in plain sight; trade mis-invoicing and the impact of revenue loss 2002-2011, the survey looks at illicit financial flows in five countries - Uganda, Kenya, Ghana, Tanzania, Mozambique. Global Financial Integrity (GFI), an American-based research firm, carried out the survey released recently.

According to the report, "trade mis-invoicing 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 report noted that the average annual value of trade mis-invoicing during this period was $884 million, and that government might have missed out on $243m each year on average in tax revenue.

The study points out that when goods are brought into the country at highly inflated prices it leads to import overinvoicing. This practice is usually driven by a desire to manipulate foreign exchange controls, escape corporate income taxes, and accumulate money in tax havens abroad. The report places tax lost from trade mis-invoicing at 12.7 per cent of Uganda's total government revenue, the highest among the countries studied.

"Uganda has the smallest amount of trade, but the largest percentage thereof flowing out through trade mis-invoicing -18.2 per cent - on average over the full 10-year period [surveyed]," says the study.

It adds that "Illicit financial flows of this form are particularly insidious, as they deprive both the government of revenue and the economy of needed capital and suggest that Uganda faces a serious and pressing issue with trade mis-invoicing."

Illicit outflows from Uganda through import over-invoicing have been steadily increasing from $275m in 2002 to $1.75bn in 2012, the study says. This amount is almost equivalent to the money received from donors.

The study shows that while Uganda got $14.19bn in foreign aid between 2002 and 2011, about 70 per cent ($8.31bn) of this money went back in illicit flows. 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.

"Illicit outflows are significantly hindering development efforts in the country."

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.

Recently, Allen Kagina, the Commissioner General at Uganda Revenue Authority, said the country was losing hefty sums of money to corporate companies through such manipulations. She particularly singled out the fact that many companies were using subsidiaries or branches in countries like Uganda to dodge taxes.

"With the digital economy today, with the means that require no physical presence, multinational organizations can shift their profits to tax havens where they don't pay or pay 'little' taxes," Kagina said. "The oil and gas industry is entirely dominated by multinationals. It's critical to get information from where they are residents."

URA continues to train its staff on how to understand the mechanisms of transfer pricing in order to tax multinational companies that might have tendencies of evading tax.

Oil escalated fraud

GFI President Raymond Baker said: "the consequences are simply devastating. The capital-drained from trade mis-invoicing means that local businesses in Uganda and Tanzania have less money to grow their companies and hire more workers." The study observes that as Uganda moves ahead to develop its extractive industries, there might be increased manipulation of tax invoices and fraud.

"Laying effective, efficient groundwork now is necessary for a robust and efficient regulatory regime in the future," the study advised.

Kagina said that as the oil and gas industry attracts bigger companies, with huge amounts of money and experienced staff, they could operate with effortless sophistication. Consequently, the host country could lose more money in tax evasions.

Uganda has so far discovered 3.5 billion barrels of oil from just 40 per cent of the area expected to hold hydrocarbons. The government estimates that the value of Uganda's oil is $150bn, which is more than seven times the current size of the economy.

Uganda's tax-to-GDP ratio remains the lowest in the region - at just 12 per cent, compared to Kenya, which is at about 19 per cent, placing further pressure on the government to borrow more money or run to donors to beg for funds.

"It is deeply disconcerting that illicit financial flows are taking such a serious toll on the economies of Ghana, Kenya, Mozambique, Tanzania, and Uganda," noted Mogens

Jensen, Danish minister for Trade and Development Cooperation. The ministry of Foreign Affairs of Denmark funded the study.

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