Trade, tax and superhero number crunchers

For the bean-counters shall inherit the earth, as I’m sure somebody once said.

Accountants have a clever trick – the unscrupulous ones – to keep the rest of us fooled. By making something sound as uninteresting as possible, we have a hard time paying attention long enough to understand what they’re saying. So we miss the point.

Take misinvoicing, for example. Could anything possibly sound less interesting than that?

Well, let me see if I can get your attention: between 2002 and 2011, Tanzania lost an average of $248m per year in tax revenues through misinvoicing. It’s illegal, and it’s on the rise.

We know this because, fortunately, there are some superhero number crunchers around who have done the hard work of staying awake while reading UN trade statistics, so you and I don’t have to. I’m talking about Global Financial Integrity, a US-based research and advocacy organisation, who have just published a new report on misinvoicing in five African countries.

I’ve turned some of their numbers into a chart:

Superhero bean counters hoyee!

It’s a huge amount of money: USD $6bn in 2011 was around 25% of Tanzania’s GDP and 40% of all Tanzania’s trade in commodities in 2011.

Now that you can see why it matters, allow me just one paragraph to try to explain what misinvoicing is, and why it is growing so fast in Tanzania*. Here we go:

Some companies import goods into the country, others export goods out. Often this trade is between different branches of the same multinational company. By deliberately mis-stating the cost of the goods being traded, they can avoid certain taxes, or gain relief from others. In Tanzania, for example, a lot of imports appear to be over-invoiced, which means companies can reduce their year-end taxable income. Those who get tax relief for certain types of imports, such as mining firms importing fuel or investors in Export Processing Zones (EPZs), have a strong incentive to do this – they benefit first by reducing their tax bill and second by getting their profits out of the country quickly and quietly.

Perhaps that explains the recent rise in misinvoicing in Tanzania since 2008, when EPZs were established. And why two-thirds of import misinvoicing relates to imports from Switzerland and Singapore, both recognised tax havens. Over 25% of import misinvoicing in Tanzania was found to be oil imports from Switzerland – they produce a lot of oil in Switzerland, do they?

Well done the GFI bean counters for finding this all out. Now, we need a different kind of superhero to see if they can put a stop to it.

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* If you need a more detailed explanation of misinvoicing, GFI have a nice explanation on their website.