Date: Mon, 12 May 2014 23:11:05 +0200
Trade Misinvoicing, or How to Steal from Africa
The little-understood practice of misinvoicing or re-invoicing relies on
legal grey areas and financial secrecy and costs the continent dearly.
12 May 2014 - 2:55pm |
By <http://www.thinkafricapress.com/author/brian-leblanc> Brian LeBlanc
Lately, the media has been replete with stories about how Africa is losing
billions of dollars a year through a process called "trade misinvoicing."
The concept of trade misinvoicing is simple: companies and their agents
deliberately alter the prices of their exports and imports in order to
justify moving money out of, or into, a country illicitly.
The practice is very common in Africa. To name just a couple instances, it
has allegedly been used to
<http://thinkafricapress.com/kenya/problem-import-smuggling-secrecy-tax-have
n-shell-company-mis-invoicing> avoid paying import duties on sugar in Kenya
and to shift taxable income
<http://www.theguardian.com/business/2011/apr/17/glencore-denies-copper-tax-
allegations> out of Zambia and into tax havens abroad.
The amount Africa loses to trade misinvoicing is astounding. Global
Financial Integrity (GFI), a Washington, DC-based think tank, estimates that
$286 billion worth of capital was extracted out of Africa using this process
over the past decade. Between 2002 and 2011, due to illicit financial flows,
sub-Saharan Africa lost
<http://iff.gfintegrity.org/iff2013/Illicit_Financial_Flows_from_Developing_
Countries_2002-2011-LowRes.pdf> 5.7% of it's GDP, a 20.2% increase. Of these
illicit financial flows, 62% were due to misinvoicing.
The good news is the issue of trade misinvoicing has found its way to the
forefront of development talks.
Former UN Secretary General
<http://africaprogresspanel.org/wp-content/uploads/2013/08/2013_APR_Equity_i
n_Extractives_25062013_ENG_HR.pdf> Kofi Annan, Nigerian Finance Minister
<http://thinkafricapress.com/nigeria/taxes-illicit-flows-how-can-effective-d
evelopment-co-operation-mobilise-domestic-resources> Ngozi Okonjo-Iweala,
and former South African President
<http://www.premiumtimesng.com/news/157783-africa-loses-60-billion-annually-
illicit-financial-flows-mbeki.html> Thabo Mbeki are just a few African
heavyweights who have been trying to urge the international community to
begin addressing the problem of illicit financial flows and trade
misinvoicing.
It's not just "poor governance"
Whereas the impact of trade misinvoicing is becoming-- well known, exactly
how it is done is not entirely understood. This is a problem, considering
the extremely technical nature of the issue. If public policy decisions are
going to be implemented to address trade misinvoicing, a firm understanding
of its mechanics is absolutely necessary.
To start, the biggest myth associated with trade misinvoicing is that it is
entirely explained by corruption and poor governance.
Not only is this a false narrative, but it has no readily implemented
solution. It also puts the onus entirely on the country being impacted, and
fails to acknowledge the role the West plays in facilitating such
transactions.
The truth behind trade misinvoicing is that it is a two-way street. The
global shadow financial system, propped up by tax havens and financial
secrecy, is equally responsible for the propagation of trade misinvoicing in
Africa. This system of offshore banks, anonymous accounts, and
<http://thinkafricapress.com/angola/biggest-threat-tax-haven-offshore-secrec
y> shell companies is largely created by developed countries in the West.
This isn't to say corruption doesn't play a role. Yes, it may be easy in
many African countries to pay a bribe to a customs official to get them to
look the other way when a company is attempting to misinvoice a trade
transaction; however, the advent of tax havens has made this largely
unnecessary.
Why get your hands dirty when there is an easier, less-obviously-criminal
means available? To quote Raymond Baker, the President of GFI and a member
of the UNECA High Level Panel on Illicit Flows: "on-the-dock trade
misinvoicing like this simply doesn't happen."
How it works
How do companies misinvoice trade then? One of the most widely used
processes is called "re-invoicing," which sidesteps quid pro quo bribery and
corruption and utilizes legal grey areas and financial secrecy to do all the
dirty work.
Instead of defining re-invoicing myself, here is a word-for-word definition
given by a company (operating out of a tax haven) which exists specifically
to assist companies who wish to misinvoice trade. In fact, a simple Google
search of "re-invoicing" produces hundreds of results of companies openly
advertising such practices. Here is just one
<https://www.offshore-protection.com/services/offshore-reinvoicing> example:
"Re-invoicing is the use of a tax haven corporation to act as an
intermediary between an onshore business and his customers outside his home
country. The profits of this intermediary corporation and the onshore
business allow the accumulation of some, or all, profits on transactions to
be accrued to the offshore company."
In other words, companies have sent the process of trade misinvoicing
offshore. By the time the goods reach the docks, the prices have already
been manipulated. No need to pay a bribe.
The process can be extremely lucrative for the actor doing the misinvoicing.
Although the price varies from jurisdiction to jurisdiction, many
re-invoicing companies often only charge a 2% commission fee on the profits
shifted in such a manner. Additionally, tax haven jurisdictions generally
have little-to-no corporate taxes, which makes the proceeds from
re-invoicing tax-free. Compare that to a 35% corporate tax rate in many
African countries and you can understand the appeal of shifting capital
through re-invoicing.
Let's assume the following scenario: imagine a hypothetical
<http://thinkafricapress.com/zambia/not-going-flow-iffs-tax-justice-copper>
Zambian exporter of copper arranges a deal with a buyer in the United States
worth $1,000,000. Now, let's assume that the Zambian company only wishes to
report $600,000 to government officials to circumvent paying mining
royalties and corporate income tax.
First, the Zambian exporter sets up a shell company in Switzerland which
(because of anonymity) cannot be traced back to him. By doing so, any
transaction the Zambian exporter conducts with the shell company will look
like trade with an unrelated party. Thus, even if the Zambian government
suspects some wrongdoing, it will be very difficult, or impossible, to tie
the Zambian exporter to the shell company in Switzerland.
Second, the exporter then uses the shell company to purchase the copper from
the exporter in Zambia for a value of $600,000, $400,000 less than the true
value of the copper. An invoice that shows receipt for the $600,000 copper
sale is then forwarded on to Zambia tax collectors.
Third, the shell company in Switzerland then re-sells the copper to the
ultimate buyer in the United States for the agreed-upon $1,000,000. The
importer is instructed to make a payment to the shell company, and the goods
are sent directly from Zambia to the United States without ever even passing
through Switzerland.
Thus, the Zambian exporter lowered its taxable revenue from $1,000,000 to
$600,000. The remaining $400,000 remains hidden in Switzerland where it is
untaxed and unutilized for development purposes. (See at the bottom
diagram):***
How to stop it
Under the international standard of the arm's-length principle, the price of
a good sold between two related parties must be comparable to what the price
the good would have been sold for had the two parties been unrelated. If
not, such as in the above example, tax and customs officials have the
authority to ignore the declared price and assess taxes and tariffs based
instead on the arm's-length price of the good. Zambia adopted the
arm's-length principle in 1999, but does that mean trade misinvoicing is a
thing of the past for the country?
Not in the slightest. Many of these transactions occur through anonymous
shell companies, hiding the fact that two companies may be related. Even if
a Zambian government official detects that a particular trade transaction is
misinvoiced, there is no way for that government official to see through a
shell company to identify its beneficial owner.
Therefore, there needs to be a multilateral effort to disclose the
beneficial owners of shell companies operating in tax haven jurisdictions.
Until then, companies will continue to hide behind them to misinvoicing
trade offshore.
Misinvoicing is not just a sharp business practice, but a way of spiriting
out of the continent billions of dollars that should be put to work in
social and economic investments. Until something is done about the network
of offshore jurisdictions and financial secrecy at a global level, Africa
will struggle far harder than it should have to in order to achieve social
and economic development.
***The following diagram helps explain the process visually:
How African Companies have "Offshored" Trade Misinvoicing
http://www.thinkafricapress.com/sites/default/files/styles/400xy/public/djib
outi-city_0.jpg
Walking through Djibouti City, capital of Djibouti. Photograph by Charles
Roffey.
(image/jpeg attachment: image005.jpg)
(image/jpeg attachment: image006.jpg)