How URA lost billions to cross-border fraud

An audit of registers for outbound goods at several border crossings across the country has revealed that a number of local manufacturing firms have been receiving Value Added Tax (VAT) refunds for goods that were never exported.

The Auditor General’s 2021/2022 report indicates that there are no records to confirm that the impugned goods had been re-exported.

“Taxpayers are suspected to have taken advantage of these system loopholes to commit fraud through fictitious exports which they use to claim VAT refunds, leading to revenue loss,” Auditor General John Muwanga revealed.

VAT registered taxpayers who export goods where duty was paid at the point of importation are eligible for VAT refunds once the said goods are re-exported. VAT refunds are also paid to taxpayers who buy goods on the open market before exporting them.

The Auditor General, however, revealed that the only records at the border crossings are entries made by Uganda Revenue Authority (URA) staff of registration numbers of the cargo trucks in the outbound or transit registers. Such mode of operations, Mr Muwanga further noted, leaves loopholes that could have been exploited by fraudulent taxpayers to file fictitious VAT refund claims.

Flawed re-exports system

Attempts by Saturday Monitor to get a comment from the taxman were unsuccessful by press time. Mr Ibrahim Bbosa, URA’s assistant commissioner for public and corporate affairs, had, however, earlier told this publication that the management has already made responses to the issues raised in the Auditor General’s report.

“The aspects in the Auditor General’s report have management responses to each of the findings and recommendations are duly captured for the authority to note and apply,” Mr Bbosa said.

The report has revealed that 121 out of the 143 companies that were paid billions in VAT refunds on re-exports were paid even when there was no evidence that they had re-exported any goods.

“One-twenty one (85 percent) out of the 143 Tested Re-Exports (Ex3) were not traced in the outbound registers at the border stations, implying that these never exited through the said stations,” the report notes.

Re-exports, as the name suggests, are typically imported goods that are exported without alteration.

Whereas it was not possible to establish the extent of the damage caused by flaws in the VAT refund claims’ system, the report pointed out that seven of the firms that filed returns had been lined up to receive Shs11 billion in refunds.

The refunds, according to the report, were made based on documents filed by the firms involved and not records in the electronic database of the taxman.

“To obtain evidence of re-exports that supported the VAT refunds, the refunds team was engaged and they informed [the] audit that they used to verify re-exports basing on taxpayer documents (customs entries which had exit stamps as proof of exit),” the report reads in part.

The report further notes that the re-exports system at the border is not automated. URA staff, therefore, it adds, have no right or ability to view the re-exports in the system. Consequently, the officers have to rely on physical documents presented by the exporters or their agents.

Transit goods

The same audit also revealed that whereas the government has been paying VAT refunds on goods that were said to have been in transit, there was no evidence that the said goods had left the country.

Sources at URA intimated to Saturday Monitor that an earlier internal investigation had revealed discrepancies between the records at either end of the border Uganda shares with the Democratic Republic of the Congo. The discrepancies are to do with the status of transit goods, including electronics, textiles and petroleum products.

“The numbers were discovered to have been captured in the exit registers, but the trucks never actually go there,” one source told us, adding, “The truck is simply photographed and the image is relayed back to Kampala, but when you cross over to the Congo side, there is no evidence that the truck crossed over.”

The Office of the Auditor General has directed attention to financial losses suffered by the government due to the failure by clearing agents—wittingly or unwittingly—to remit collections received on behalf of the taxman. The said clearing agents in question reportedly get the green light to operate from the taxman since they wear the hat of an Authorised Economic Operator (AEO).

Leakages

The audit further revealed that whereas transit documents indicated that goods with a tax value of Shs1.3 billion had been cleared at various points of entry between January 2020 and December 2021, proceeds from the clearance could not be traced.

Elsewhere, abuse of customs procedure and failure by the revenue intelligence unit to capture new tax rates for steel, general machinery and food supplements meant that Shs4.7 billion in taxes remained outstanding.

Finished goods that are considered raw materials in certain sectors follow a Customs Procedure Code (CPC) that distinguishes them from importers of finished products that are not considered raw materials for purposes of ensuring the former do not pay taxes.

The report further pointed out that revenue leakages were suffered as a result of failure by the taxman to capture details of imports that were seized on account of under declaration of taxes and held in warehouses pending verification.

Manifests for 593 consignments and the corresponding imports, the report says, could not be traced, adding that there was a disconnect between information that was provided and the few available manifests.

“Seizures were raised, but they were not connected to the entry. An extract from the seizure notice system showed that 59 seizures remained pending,” the report reveals.

More losses

Another Shs1.7b in taxes that had been assessed to agents between January 2020 and December 2021 was discovered not to have been paid. This, the Auditor General hastened to add, is contrary to customs procedures that require payment to have been made within 21 days of assessment.

“This was due to failure by the AEOs to honour their tax obligations. This would affect their AEO status. Delayed collection of duties leads to financial loss,” the report details before tasking the taxman to take appropriate measures to recover the said taxes.

The report further reveals that another Shs1.3b in insurance cover for imports that was collected by clearing agents was also discovered not to have been remitted. Documents related to the collections could not be traced.

Goods worth just under Shs1.1b that had been stored in self-managed bonds in the period between 2020 and December 2021 could not be accounted for, which led to loss of an unspecified amount in taxes.

The report accused URA of failure to act against three non-compliant warehouses. Noncompliant warehouses are ordinarily meant to be suspended.

Whereas the report indicates that the management team at URA had made commitments to rectify some of the issues raised in the report, it was not possible to establish what had been done to fix specific queries.

Mr Bbosa had initially advised Saturday Monitor to send him an email in case additional information was required, but he had by press time not responded to the said emails.

VAT refunds

VAT registered taxpayers who export goods where duty was paid at the point of importation are eligible for VAT refunds once the said goods are re-exported. VAT refunds are also paid to taxpayers who buy goods on the open market before exporting them.