East and Southern Africa countries are grappling with misinvoicing by unscrupulous importers, exporters and multinationals evading custom duties denying tax bodies the much needed domestic revenue to finance their development agenda.

This comes at a time when tax bodies in the region are under pressure to increase domestic resources amid declining donor aid.

While definite figures for Rwanda are not available, Rwanda Revenue  Authority says it has been a victim of  the illegal practice. 

However, tax bodies are betting on exchanging information globally on the actual values of goods imported from the manufacturing countries to address the challenge. 

For Rwanda, it has overhauled its income taxation law which aims to cut tax subsidies, widen the tax base, bring tax evaders under the net and align tax laws to East African Community policies.

The law requires that related businesses show documentary evidence how they have been trading and prove the transactions with related companies was at arm’s length—without due influence.

Substantial impact

“I don’t have numbers to qualify the impact of the misinvoicing in Rwanda but it is quite substantial,” said Richard Tusabe Commissioner General Rwanda Revenue Authority (RRA).

Tusabe was speaking to The EastAfrican at the sidelines of 24 member countries World Customs Orgnisation East and Southern WCO (ESA) conference hosted by RRA.

WCO ESA is the regional organization responsible for providing leadership in the Eastern and Southern Africa Region in the areas of sustainable customs capacity building and change management.

“The second type of misinvoicing is through related parties. A company established in Asia which has subsidiary in Rwanda will dump its costs in Rwanda,” said Tusabe.

The region also faces cash smuggling as financial sector regulatory environment becomes tough to check money laundering.

A report: Illicit Financial Flows to and from Developing Countries 2005-2014 published in April 2017 shows that combined, the five East African countries lost $1.726 billion through trade misinvoicing 2004-2013.

The report published by Global Financial Integrity (GFI), a non-profit, Washington, DC-based research and advisory organization on illicit financial flows names Uganda as the worst hit economy in East African Community by misinvoicing.

Uganda lost $715 million from 2004-2013, Tanzania followed with $482 million, Rwanda $359 million, Burundi $87 million while Kenya $83 million to misinvoicing during the period under review.

Tusabe says dumping costs in the region through transfer pricing by some of the multinationals is also contributing to huge financing outflows from Africa.

This usually happens when some multinationals overpricing their services and goods supplied in to the region, in order to reduce margins of subsidiaries to pay less taxes or enjoy subsidies.

Good news

“One of the ways they take that money out is through international tax planning. Of which misinvoicing and transfer pricing is a key ingredient of that process,” said Tusabe.

“The good news is that globally all the governing structure are aware of what is happening. For example on the international taxation side there is base erosion and profit shifting ingredient of that process,” said Tusabe.

Addressing the WCO ESA conference, Rwanda's Prime Minister, Eduard Ngirente said role of WCO in deepening African integration process and boosting economic development cannot be underestimated.

“Africa we want and deserve, is an Africa that is: developed, strong, united, trade with each other, resilient and influential on global affairs. To realise this, we must deepen our regional integration and boost economical abilities. Customs organisations will play a key role,” he said.

WCO ESA member states include Angola, Botswana, Burundi, Comoros, Djibouti, Eritrea, Ethiopia, Kenya, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, Rwanda, Seychelles, Somalia, South Africa, South Sudan, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe.

Kunio Mikuriya World Customs (WCO) Secretary General told The EastAfrican that WCO is coming out with strategies of addressing misinvoicing and cross border money smuggling in the region.

The global customs body is helping the region boost tax collections through trainings, infrastructure development and shifting to electronic operations.