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