A new report by Global Financial Integrity (GFI), a Washington, DC-based research and advisory organization, reported that Nigeria in 2014 potentially lost approximately $2.2 billion of revenue trade misinvoicing.
According to the orgnaisation, when put in context the amount represents four percent of the country’s total annual government revenue as reported to the International Monetary Fund.
Put differently, the GFI reported that the estimated value gap of all imports and exports represented approximately 15 percent of the country’s total trade.
Commenting on the report findings on the huge revenue loss to Nigeria during the year in review, the GFI President, Raymond Baker, explained that “the practice of trade misinvoicing has become normalized 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 Nigeria today”, Baker added.
The report indicated further that the portion of revenue lost due to the misinvoicing of exports was $1.3 billion during the year which was related to a reduction in corporate income taxes while the portion of revenue lost due to the misinvoicing of imports was $880 million.
The organisation stated further that this amount comprises component parts which include uncollected VAT tax ($100 million), customs duties ($365 million), and corporate income tax ($415 million). Lost revenue due to misinvoiced exports was $1.3 billion for the year which is related to lower than expected corporate income and royalties.
According to the report,examination of the underlying commodity groups which comprise Nigeria’s global trade show that a large amount of lost revenue ($200 million) was related to import under-invoicing of just five product types.
The GFI listed the product types and the related estimated revenue losses as including vehicles ($100 million), iron and steel products ($40 million), electrical machinery ($20 million), ceramics ($20 million), and aluminum products ($20 million). Lost revenue due to mispriced exports ($1.3 billion) may be related to the mineral fuels trade given this category of goods makes up over 90 percent of all exports.
Expatiating further, the organization reported that total misinvoicing gaps related to imports can be broken down by under-invoicing ($2.4 billion) and over-invoicing ($1.9 billion), noting that these figures represent the estimated value of the gap between what was reported by Nigeria and its trading partners.
It stated: “The loss in government revenue is a subset of these amounts and is based on VAT tax rates (5 percent), customs duties (15.2 percent), corporate income taxes (22.4 percent), and royalties (.2 percent) which are then applied to the value gap.
“Export misinvoicing gaps were a massive $5.9 billion for export under-invoicing and $5.6 billion for export over-invoicing. Lost corporate income taxes and royalties are then applied to export under-invoicing amounts to calculate lost government revenue”, the GFI added.
As a remedial step, the organization identified three ways that Nigeria can curtail revenues losses due to trade misinvoicing. These are, legislative and regulatory measures that posit substantial disincentives for importers and exporters; detecting misinvoicing as transactions are occurring and taking corrective steps in real time; and clawing back lost revenues after misinvoicing is found through subsequent audits and reviews.
Trade misinvoicing occurs in four ways, namely under-invoicing of imports or exports, and over-invoicing of imports or exports. In the case of import under-invoicing fewer VAT taxes and customs duties are collected due to the lower valuation of goods.
When import over-invoicing occurs (i.e. when companies pay more than would normally be expected for a product), corporate revenues are lower and therefore less income tax is paid.
In export under-invoicing the exporting company collects less revenue than would be anticipated and therefore reports lower income. Thus, it pays less income tax. Corporate royalties are also lower.
