Trade misinvoicing costs South Africa $7.4bn in tax a year

While SARS is scrambling to meet collection targets, a new report estimates the country lost $37-billion in revenue to trade misinvoicing in five years. Trade misinvoicing is thought to be the largest component of illicit financial flows, draining developing countries of much-needed finances.

In a new report, Global Financial Integrity (GFI) estimates South Africa lost $37-billion – $7.4-billion a year – in potential government revenue due to trade misinvoicing between 2010 and 2014, denying the state resources to meet its developmental goals.

GFI has called illicit financial flows (IFFs) the most damaging economic condition facing developing countries. The Washington-based non-profit specialising in IFFs says trade misinvoicing accounts for the majority of IFFs.

It involves companies moving money illicitly across borders by misrepresenting the value of a transaction and the report, titled South Africa: Potential Revenue Losses Associated with Trade Misinvoicing, provides an estimate of the total value misrepresented and calculates the tax lost.

“The practice of trade misinvoicing has become normalised in many categories of international trade,” reads the report.

“GFI’s very conservatively estimated $37-billion in lost revenues over the last five years of available data represents resources that could have made an immense difference in housing, education, and health services and could have gone far in easing poverty and inequality and accompanying social strains,” it continued.

Trade misinvoicing occurs on both imports and exports. Companies can over-invoice imports to shift money abroad or under-invoice imports to avoid customs duties or VAT. They can under-invoice exports to shift money abroad and sometimes over-invoice exports to claim rebates.

The illicit practice, which essentially involves companies lying about the value of their imports and exports to avoid taxes, reduces government revenue, denying it custom duties, VAT, and other taxes, as well as taking income and wealth out of the country, reducing finances in the economy for domestic investment, consumption or savings.

GFI compared the latest available SARS data to information in the United Nations Comtrade Database to find differences in import and export statistics between 2010 and 2014.

The report says it conservatively estimates average annual import under-invoicing to be at $16.3-billion and over-invoicing at $9.8-billion. It estimates annual export under-invoicing at $11.6-billion and over-invoicing at $8.6-billion.

GFI then applied the relevant VAT, customs duties, company income taxes and royalties to those figures to estimate that the government is losing $7.4-billion in revenue a year due to trade misinvoicing.

The report looked specifically into export under-invoicing, where companies misrepresent the value of the goods they bring into the country to avoid taxes. Government is losing most on those taxes in the fields of machinery, knitted apparel, and electrical machinery, it found.

Issues of illicit financial flows have gained prominence recently as government spending is limited by the fiscally constrained environment as the economy remains weak and SARS fails to meet its collection targets.

There’s also been a push to hold corporates and high-income earners accountable.

“Failure to address all tax gaps in the absence of solid non-tax revenue indicates that it is workers who will carry [the] majority of the tax burden,” said the EFF on IFFs in response to the recent medium-term budget policy statement (MTBPS).

“This all while multinational companies enjoy the benefits of [a] low tax rate and still aggressively avoid tax and engage in profit shifting,” the party continued.

The EFF has tabled a Private Members’ Bill in Parliament to tackle IFFs, which see billions transferred out of the country every year through illicit means.

Finance Minister Tito Mboweni didn’t mention IFFs in his MTBPS, but delivering the national Budget in Febuary 2018 former finance minister Malusi Gigaba said Treasury, SARS, the Reserve Bank and Financial Intelligence Centre are collaborating and will receive more resources to hold companies accountable.

Gigaba said international recommendations on transfer pricing and base erosion are being implemented and that the global push for country-by-country company reporting, where different revenue authorities will be able to compare financial records in the various countries where countries operate, will help ensure corporates pay their taxes.

In May 2018, however, acting SARS Commissioner Mark Kingon admitted that not enough has been done to tackle IFFs. He said multi-agency teams were looking into nine cases involving more than R9-billion. The severe reduction of staff at SARS, however, has reportedly impacted on their investigations and without a more transparent global financial system, which country-by-country reporting will help introduce, it’s too hard.

GFI said South Africa can reduce revenue losses from trade misinvoicing by tightening legislative and regulatory measures, detecting misinvoicing while it happens and attempting to recover lost taxes through audits and reviews. DM