Uganda currency notes. Revenue losses tied to international trade have
denied Uganda cheaper funding for large infrastructure projects in
energy and transport sectors. PHOTO FILE | NMG
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.
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