Customs menace: Tax dodgers have robbed SA of R550bn
Misinvoicing on imports and exports is a major contributor to poverty, inequality and insecurity, according to a global report
An international financial monitoring organisation has revealed how tax dodgers robbed the SA economy of an estimated $37bn (R550bn).
The Global Financial Integrity (GFI) organisation analysed the country’s bilateral trade statistics between 2010 and 2014 using information from United Nations trade statistics database and data from SA Revenue Service (SARS).
The GFI report, titled “South Africa: Potential Revenue Losses Associated with Trade Misinvoicing”, which was released last week, looks at the reported value of goods being imported and exported from SA and its trade partners.
The authors analysed the figures to see whether there were any discrepancies in the financial data between what SA was recording, importing and exporting, and the data from its trading partners.
The GFI is a think tank that researches illicit financial flows from countries.
The report says that from 2010 to 2014 the economy lost on average an estimated $7.4bn (R111bn) annually through misinvoicing, which is form a tax fraud.
Trade misinvoicing, according to the report, occurs through the under- and over-invoicing of imports and exports.
The report states that the average annual revenue lost due to misinvoicing of imports was nearly $4.8bn (R72bn). SA lost out on $2.1bn (R31bn) in uncollected VAT; $2.1bn (R31bn) in uncollected corporate income taxes; and $597m (R8,9bn) in uncollected customs duties.
Export misinvoicing cost the country a further $2.6bn (R39bn) on average every year, bringing the total to $7.4bn (R111bn).
“Lost revenue due to misinvoiced exports was R39bn on average each year, which is related to lower-than-expected corporate taxes,” the report says.
SA tax and transfer pricing experts say that, if true, the data raise serious concerns around SA’s capacity to stop these crimes which have a huge impact on development.
SA has the world’s most unequal society, according to a World Bank report released in March 2018. The World Bank’s study, commissioned in 2016, assessed inequality and poverty between 1993 and 2015. It showed that in 2015 more than 40% of citizens lived below the poverty line.
The GFI’s president, Raymond Baker, said trade misinvoicing had become normalised in many categories of international trade.
“It is a major contributor to poverty, inequality and insecurity in emerging-market and developing economies. The social cost attendant to trade misinvoicing undermines sustainable growth in living standards and exacerbates inequities and social divisions, issues which are critical in South Africa.”
In obtaining the data, GFI researchers looked at SARS data on 7.4 million trade transactions involving 8,200 commodities. The research revealed revenue loss through import under-invoicing was likely to occur with the import of vehicles, machinery and clothing.
Tax lawyer Ashwin Trikamjee said SARS had for years been battling to clamp down on misinvoicing, and in particular under-invoicing around imports, because of the difficulty in policing it.
“It requires SARS having support from other countries. When they do get the support that’s when we see the crackdowns happening.” SA Institute of Tax Professionals chief executive Keith Engel said that, if true, the figures were astounding and alarming.
When it came to imports, those behind misinvoicing wanted to undervalue their goods to pay lower taxes, he said.
“While there are losses here [import under-invoicing], the bigger money losses lie in income tax, especially corporate taxes, which see companies having to pay 28% of their profits to government. “Some [businesses] look at various ways of reducing their profits to lower their taxes, which they do through transfer pricing.”
He said that while SARS had transfer pricing units that investigate irregularities such as misinvoicing, it had lost a fair number of good people.
“Those still in the team are really good, but they have been immobilised through mismanagement.”
Graphene Economics transfer pricing expert Michael Hewson, while agreeing that misinvoicing and abusive transfer pricing occurred, questioned the figures.
“This is a highly complex matter and these figures point to a need for more research be done to fully understand the losses, and to get as accurate data as possible.
“The money lost would solve a lot of our country’s problems and this research shows importantly the need for sufficient capacity to properly deal with these crimes.”