What you need to know:
- Smuggling distorts market prices as it deprives traders of free competition by creating undue competition with those who have paid taxes.
- Cigarettes, fuels, textiles, cooking oil and rice are some of the commonly out rightly smuggled goods.
Despite Uganda Revenue Authority’s (URA) battle against smuggling, the vice still gives the tax collector sleepless nights.
If there is anything that tax authority dreads is failing to meet its tax target which, in most cases, is a result of loopholes within the tax administration with smuggling being one of the conspicuous revenue leakages. This may result from smuggling and tax evasion or Illicit Financial Flows (IFFs).
According to the half year results for this financial year 2022/23, Uganda Revenue Authority (URA) has registered a revenue shortfall of Shs94.8 billion. And the tax authority hopes to collect another Shs13 trillion in the remaining four months to fulfill its target of Shs25 trillion target.
According to tax experts, curbing smuggling more often than not, requires complex operations considering what is at stake – important commodities, revenues involved and cases of personality engaged.
Smuggling involves the importation or exportation of goods with the objective of evading taxes.
The Global Financial Integrity, a non-profit, Washington, DC-based research entity explains smuggling as a form of IFFs, broadly known as the movements of money and value from one country to another, especially money and value that are illicitly earned, illicitly transferred and illicitly utilised.
Going by the Mbeki Report High Level Panel (HLP) on Illicit Financial Flows (IFF) from Africa, IFF out of Africa has become a matter of major concern because of the scale and negative impact of such flows on Africa’s development and governance agenda.
The HLP report estimates illicit flows from Africa could be as much as $50 billion per annum since 2000. Some current estimates indicate that illicit flows from Africa could be as much as $90 billion per annum. This is approximately double the Official Development Assistance (ODA) that Africa receives and, indeed, the estimate may well be short of reality as accurate data does not exist for all transactions and for all African countries.
The report estimates that Uganda loses between Shs2trillion and Shs6 trillion in illicit flows per year, an amount of money that could either fund the Trade Ministry’s full budget for ten years or simply clear the domestic debt in one go.
Analysis conducted by the United Nations Economic Commissions for Africa indicates that some of the effects of IFF outflows are the drainage of foreign exchange reserves which limit a country’s ability to import, negatively affect domestic resource, mobilisation by reducing the tax collection base, cancelling out of investment inflows and a worsening of poverty.
“Such outflows also undermine the rule of law, stifle trade and worsen countries’ macroeconomic conditions.
“They are facilitated by some 60 international tax havens and secrecy jurisdictions that enable the creation and operation of millions of disguised corporations, shell companies, anonymous trust accounts, and fake charitable foundations,” discloses the United Nations Economic Commission for Africa (UNECA) established report.
It further revealed other techniques used include money laundering and transfer pricing which is a wide method of smuggling deployed by especially the multinational companies, wealthy individuals, including corrupt politicians.
In an interview with the URA Assistant Commissioner, public and corporate affairs, Mr Ibrahim Bbosa, notes that the tax prefect is aware about the prevalent tax evasion manifesting in several forms, depriving the national coffers of the much needed revenue.
He identified cigarettes, fuels, textiles, cooking oil and rice as some of the commonly out rightly smuggled goods.
He says: “Illicit trade leads to loss of revenue depriving the government of revenue for public expenditure. It is also known to distort market prices as smuggling deprives traders of free competition by creating undue competition with those who have paid taxes.
When there is unfair competition in the market, compounded by the collapse of industries, the labour market (employment base) is eroded. Many professionals and skilled and unskilled personnel remain jobless.
Bbosa explains, “Smuggled goods do not pay tax and are sold cheaper than those that pay taxes. That has a huge cost to the country.”
According to the URA enforcement performance report between July and December 2022, Shs57.21 billion was recovered from 5,734 seizures. Of these seizures, 4,503 were from dutiable (taxable) goods and another 1,231 were from non-dutiable goods.
The tax performance report also indicates that most revenue - about 40.7 percent was recovered from under-declarations. This was followed by other crimes at 32.85 per cent and false documentation at 13.58 per cent. The rest was from undervaluation (4.04 percent), outright smuggling (5.98 percent), misclassification (1.55 per cent) and concealment at (1.30 per cent).
“We have been collecting more revenue even when we sometimes miss the targets, normally by a whisker. If we sort out the issue of smuggling and evasion of taxes or keep it at a bare minimum if not eradicated entirely, we shall not have revenue collection deficits,” Mr Bbosa told Prosper Magazine.
He continued: “If you look at enforcement that was done July to December last year, that is the half year financial year; we were able to collect Shs57 billion in enforcement activities. These are people who smuggle, conceal goods, people miss classifying goods, and basically in the tax evasion business, we were able to collect Shs57b.”
But some people will still remain outside the tax collection bracket because enforcement in terms of smuggling and evasion of taxes requires competent personnel, resources like fuel and vehicles because these are people who are always on the move.
“Our capacity to meet that sometimes also limits how much we can do. We believe the problem is much bigger and we can do better but probably that figure should show you that if you expound it, it would give you an indication of what the damage would be out there,” he added.
EAC heads on way forward
To tackle this challenge, Tax Investigation Commissioners met last week in Kampala to discuss and come up with seamless regional laws through which tax investigation can be conducted in the region.
The meeting was attended by the East African Revenue Authorities Commissioners for Tax Investigation (EARACTI) from Burundi Rwanda, South Sudan, Kenya, Tanzania and Uganda who annually come together to finds ways through which they can address the gaps and loopholes within the tax investigation department that makes the region lose billions of shillings due to tax evasions.
The meeting focused on sharing information to deal with practices of tax evasion like dumping. However, the new entrants into the regional tax system, South Sudan, are still a few steps behind the counterparts.
When these tax investigations heads from the East African Community met, the agenda was to deal with revenue leakages particularly through smuggling. A case in point is Uganda which might as well beat its revenue targets were it able to deal with smuggling.
Mr Denis Kugonza, URA Commissioner Tax Investigation Department said there is need for collaboration to address the tax and revenue leakages which can not be done by a single country.
“Joint efforts are needed to address tax evasion. There is a need for closer collaboration across the region. As URA alone, we cannot fight the vice of tax evasion but once we are together, we can join the fight,” Mr Kugonza said.
In addition, URA is investing in technology and in quality informers to help them, especially from the porous borders.
Jean Berchmans Niyonzima, Commissioners Tax Investigations and Intelligence, Burundian Revenue Authority concurs that joint efforts will lead to a fruitful deliberation in the fight against tax evasion.
“Any officer from the intelligence department of investigation is aware of the impact of under evaluation, absence of mandatory declaration which are all associated with the growth of the economy. These joint efforts will enable each EAC member to build their economies,” he said.
Rwanda Mr Emmanuel Bitegekimana, Director of investigations, Rwanda Revenue Authority (RRA) said the tax body recently intercepted smuggled goods worth (alcohol drinks) worth 4 billion Rwanda Francs(equivalent to Shs13.5 Billion) in a single case.
“If we had not intercepted it, it would have resulted into the country losing $3.6 million in taxes,” he said.
He added that as a way of fighting tax evasion, they have come up with three different departments to deal with the issue.
These include; surveillance and patrol, intelligence and other investigation of business and sectors.
The Commissioner Tax Investigations at the Kenya Revenue Authority (KRA) Dr Edward Karanja said that previously, the tax investigation was about the 3Ds - detecting, deterring and disrupting done through investigating, prosecuting and publicising.
“Today things have changed. The current administration wants us to get involved in administration which means that revenue officers have to mobilise revenue in whichever way they can to support revenue directly.
In addition, tax investigation commissioners must align with management, commissioner general, political leadership and boards because the tax that the tax evasion team touches is likely to turn them down with everything they do.
He further called for proper team work, support from the criminal justice system to ensure there are criminal sanctions.
Ms Joyce Wani, Acting Commissioner Internal Affairs in South Sudan, notes that they are familiarising themselves with the legal policy frameworks regarding the EARACTI.
Currently, Sudan has no capacity to carry out tax investigations but hopes to distinguish integrity and investigation. This, she believes, will enable them to adopt technology tools that will bridge the gaps in the system.