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Shipping & Logistics

Kenya losing millions over wrong import, export prices

Cargo
Cargo at the port of Mombasa. FILE PHOTO | NMG 

Kenya is losing millions in revenues due to unscrupulous traders who deliberately price imports and exports wrongly, a new report shows.

The report, released this month, shows that the government potentially lost $907 million in revenue in 2013 due to misinvoicing and illicit financial flows.

“Trade misinvoincing is when imports or exports are misquoted at the port in order to avoid paying custom duties. It can occur when there is import under-invoicing, which would cause fewer VAT taxes and customs duties to be collected due to the lower valuation of goods,” said Abhishek Sharma, a logistics analyst at TradeMark East Africa, a not-for-profit limited company that supports the growth of trade, both regionally and internationally, in East Africa.

It could also be due to import over-invoicing, which leads to a company paying more for a product than the right price, thus leading to lower corporate revenues and income tax.

The report called Kenya: Potential Revenue Losses Associated with Trade Misinvoicing , shows that misinvoicing also happens due to under-invoicing of exports, where the exporting company collects less than expected revenue, resulting in lower income and hence reduced income tax.

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The report by the Global Financial Integrity (GFI), an organisation that works to curb illicit financial flows through research showed that revenue lost due to the misinvoicing of imports in 2013 was $767 million. Uncollected VAT tax accounted for $324 million, customs duties $229 million and corporate income tax $214 million. Lost revenue due to misinvoiced exports was $140 million during the period which is related to lower than expected corporate income and royalties.

Second–hand clothes and cereals at $21 million, lost the largest revenue due to import under-invoicing, vehicles lost $18 million, electrical machinery $17 million and mineral fuels $15 million. Lost revenue due to mispriced exports was related to coffee, tea and spice trade which accounted for $140 million.

“Trade misinvoicing has become common in many categories of international trade. It is a major cause of poverty, inequality, and insecurity in emerging markets and developing economies. It damages sustainable growth in living standards and worsens inequities and social divisions, issues which are critical in Kenya today,” said GFI President Raymond Baker in a statement.

A case study in 2015 on the impact on Nigeria’s trade misinvoicing conducted by Collins C Ngwakwe for the University of Limpopo, South Africa showed that between 2002 and 2012 the country’s illicit outflows were roughly 1.3 times the $789.4 billion in total financial direct investment. They were also 11.1 times the $89.7 billion in official development assistance.

This means the amount lost through trade misinvoicing in Nigeria exceeded the amount of external borrowing and was also more than the amount received as official development assistance.

Financial experts said the huge amount that Nigeria lost could have been used to enhance the “actualisation of sustainable development in the country” through infrastructure development and investment leading to reduced unemployment and poverty, as well as improve access to sanitation facilities.

Another negative impact of trade misinovicing is that once it is detected by the official authorities it leads to physical inspection of cargo at the port, therefore, slowing down operation processes and increasing costs of storage for traders.

In order to curb this malpractice, the Kenyan government with support from Trademark East Africa set up the Accredited Economic Operators (AEO) process. These are companies which have a track record of submitting the correct invoices, and after a while KRA will stop inspecting their containers. It has also helped in reducing storage cost for traders by 30 per cent.

“The containers will be released based on the paperwork and not on a physical inspection by the authorities. This dramatically increases the ports efficiency operation time and reduces costs as it is a system based on trust. However, periodically or on a surprise basis, there will be an inspection carried out,” said Mr Sharma.

- African Laughter

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