Missing trader: How businesses, multinational firms steal taxes

Did you know that the tax you pay whenever you purchase a product or a service is likely to end up in a wrong kitty?

And did you also know that this tax scam whose magnitude, according to the country’s taxman, although prevalent, cannot be quantified because of the very nature of the tax fraud which found its way into the country from Europe nearly a decade ago. This was before intensifying in the last three to four years.

Missing Trader, currently the “freshest tax scam in town” is being perpetrated mainly by businesses in sectors such construction and real estate, trade, retail and wholesale and generally services industry.

Since 2012 when the Missing Trader fraud scheme was first detected in Uganda, it has been growing as the country’s revenue collection base remains stagnant. This fraud involves theft of Value Added Tax (VAT), which is a leading tax head in terms of generating indirect revenue to the national treasury. 

The drivers of this scam are organised fraudulent taxpayers, particularly multinational corporations, locally owned companies and wealthy individuals involved in several businesses who often and with the help of professional tax agents, exploit the way the consumption tax is treated within the country and/ or multi-jurisdictional trading.

Under the Missing Trader fraud scheme, taxpayers present invoices seeking to claim back VAT on purchases from traders who did not sell to them goods or services. This allows the fraudster to fictitiously reduce their VAT (taxes) that they ought to have paid to the taxman.

From between 2015 to 2019, even without proper capacity to deal with the VAT fraud, URA was able to recover about Shs60 billion from the tax scam, first detected in Europe in the early 2000. 

The amount recovered by URA then is just slightly more than the funds government made available in the form of Covid-19 Relief Fund (also known as the direct cash transfer programme) to about 500 poor and struggling households in the Kampala metropolitan areas, all cities, and municipalities in the wake of the second national lockdown instituted in June 18, 2020. 

How the scam works
For example, a business through its agent creates a Shell company, normally an enterprise without active business operations or significant assets. This is for the purpose of perpetuating the tax fraud while disguising business ownership from Uganda Revenue Authority (URA).

Shell companies are not all necessarily illegal, but are often times used illegitimately as for this purpose used to claim supply of goods to another firm that is in reality  non-existent — the missing trader.

As for multi-jurisdictional trading, the concept doesn’t differ much. For example, a business in one member state imports goods from a supplier (who is also part of the scheme) in another member state, where VAT on those goods is either zero or at very low rates. The business in the first member state then sells the goods in their country, where VAT rates are much higher, and charge very competitive prices for them, plus a high rate of VAT.

After it has finished making a nice profit out of the VAT on these sales, the business disappears without paying the VAT it owes to government. Usually, this missing trader business gives fake names and information, so there’s no way to track them.

According to URA’s report for the financial year 2020/21, economic sectors where the missing trader (stealing of VAT) is most rife are also the biggest revenue earners for Uganda. 

For example, about 71 per cent of the revenue generated in the half year revenue collection calendar of this financial year came from the wholesale and retail trade sector. In terms of value, this sector of the economy contributed slightly more than Shs5.7trilion in revenue – translating to 29 per cent of the entire economic sectoral contribution.

For Uganda’s case, traders in a particular industry working individually or as a group generate fake invoices, acknowledging that they have received goods worth millions or billions of shillings from a trading company which often times is an inaccessible Shell Company, depriving the treasury of revenue that should be remitted to national kitty.

Although VAT is charged on final consumers and not businesses, many companies, including multinational corporations find ways to either avoid or evade or do both activities irrespective of earning the money here – at the source. So, instead of remitting the money they collect from the final consumer, they keep it to themselves even after accruing their profits, thereby reducing their VAT obligations.

Also, Monitor investigations show that in an attempt to claim tax refunds—albeit fictitiously, businesses or the trader generate fictitious transactions to qualify for a VAT refund from URA, creating a double revenue loss.

In the course of the Daily Monitor’s investigation, it further emerged that legal entities can also be part of the fraudulent activities as some of them manipulate legitimately issued receipts and invoices to claim more than the necessary VAT they are entitled to.

Sector perpetrators
Uganda Revenue Authority investigations points to trade, wholesale and retail, real estate, electrical appliance dealers, printing services and generally service sectors such as transport services and players in electricity sector, as the most notorious ‘missing trader’ perpetrators, depriving the national treasury as well as bleeding the economy to near death before walking away scot-free.

In an exclusive interview, URA Assistant Commissioner Intelligence, Ms Agnes Nabwire Asobola, disclosed that so far, there is no exact percentage of what could be lost out of the missing trader scam, noting that conservative estimates could be in the range of Shs8 billion to Shs10 billion of VAT being lost annually as a result of the tax fraud.  

According to Ms Nabwire, URA rolled out a campaign known as the “Missing Trader VAT fraud scheme” in the financial year 2018/2019 to tackle the VAT fraud.  This initiative aimed at reducing the tax fraud, saw URA through its tax investigations department conclude investigations on 88 cases resulting into recoverable revenue worth Shs 62.51 billion. 

But before that, the Minister of Finance, Mr Matia Kasaija had noted that one of the major challenges undermining tax effort is tax evasion.  He said about 30 per cent of eligible VAT is not collected, translating into a loss of about 4 per cent of tax to Gross Domestic Product (GDP).  

This means if businesses, especially the multinational corporations were not engaging in illicit financial flows (IFF), currently estimated to be in the tune of between Shs4 trillion to Shs6 trillion according to a section of Civil Society Organisations whose computation is drawn from the High-Level Panel on Illicit Financial Flows from Africa report which indicates that Africa is estimated to be losing between $50 billion  to $90 billion to the same illegal activities every year.  

The amount lost to IFF every year is nearly an equivalent of the budget allocated to the Ministry of Works and Transport, a national budget guzzler. The same estimate can also clear domestic arrears without a balance for the next 8-10 financial years.

Further, the State of Tax Justice 2021 – published by the Tax Justice Network, the Global Alliance for Tax Justice and the global union federation Public Services International – reports that of the $483 billion in tax that countries lose a year to global tax abuse committed by multinational corporations and wealthy individuals, $312 billion is lost to cross-border corporate tax abuse and $171 billion is lost to offshore tax evasion by wealthy individuals.

If, according to President Museveni, Uganda can raise its tax-to- GDP ratio which is simply a reflection of how much of a country’s output goes to government in form of tax receipts, from currently 12 per cent to between 16 and 26 per cent which is the average sub-Saharan African performance, then Uganda can attain self-sufficiency.  

For this to happen, Mr Kasaija believes Value added tax (VAT) evasion, which involves the fraudulent use of non-existent transactions claiming input tax against purchases and expenses that were not incurred and issuance of invoices for business transactions for which there is no genuine supply/movement of goods and services, needs to be tackled head on.

Tax evasion      
Two years ago, according to data from Ministry of Finance, about 2,100 companies were identified for comprehensive review to determine their tax liabilities resulting from tax evasion and related tax abuses.

In the last two financial years, compliance actions including 142 domestic tax compliance audits and 282 customs post clearance audit, 7946 compliance advisories, 51 spot inventories, 2752 compliance visits, 42 self-health and 3,766 returns were examined to determine whether taxpayers correctly assessed, reported, paid their tax liability.  Shs151 billion was recovered in revenue as a result of the action.