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Misinvoicing Leads to Significant Revenue Losses in Kenya – Report

Analysis of trade misinvoicing in Kenya in 2013 shows that the potential loss of revenue to the government was $907 million for the year, according to a new study by Global Financial Integrity (GFI).

To put this figure in context, this amount represents eight percent of total annual government revenue as reported to the International Monetary Fund. Put still another way, the estimated value gap of all imports and exports represents approximately 23 percent of the country’s total trade.

The report, titled Kenya: Potential Revenue Losses Associated with Trade Misinvoicing, analyzes Kenya’s bilateral trade statistics for 2013 (the most recent year for which sufficient data are available) which are published by the United Nations (Comtrade).

The detailed breakdown of bilateral Kenyan trade flows in Comtrade allowed for the computation of trade value gaps that are the basis for trade misinvoicing estimates. Import gaps represent the difference between the value of goods Kenya reports having imported from its partner countries and the corresponding export reports by Kenya’s trade partners.

Export gaps represent the difference in value between what Kenya reports as having exported and what its partners report as imported.
“The practice of trade misinvoicing has become normalized in many categories of international trade,” GFI President Raymond Baker said. “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 Kenya today.”

Revenue lost due to the misinvoicing of imports was $767 million. This amount can be further divided into its component parts: uncollected VAT tax ($324 million), customs duties ($229 million), and corporate income tax ($214 million). Lost revenue due to misinvoiced exports was $140 million for the year which is related to lower than expected corporate income and royalties.

According to the report, there are three ways that Kenya can curtail revenues losses due to trade misinvoicing. First is through legislative and regulatory measures that posit substantial disincentives for importers and exporters.

Second is detecting misinvoicing as transactions are occurring and taking corrective steps in real time. Third is clawing back lost revenues after misinvoicing is found through subsequent audits and reviews. Of these, by far the greater potential for gain is attendant to the first and second options. Clawing back lost revenues after the fact is a difficult exercise.

The central objective of the analysis is to identify commodity-trade partner combinations which appear to be more likely than others to present risk of revenue loss due to trade misinvoicing.

Toward this end, GFI presents a summary of the methods it used to estimate trade misinvoicing for imports and exports along with a more detailed presentation of potential revenue impacts of import under-invoicing for Kenya. The availability of Kenyan tariff data comparable in detail to the partner country and commodity detail available for Kenyan trade enable the more detailed estimates of revenue loss.
The first two subsections to follow reflect on all the misinvoicing estimates. In subsection A, the bilateral trade data used to estimate misinvoicing are summarized and are compared with other leading aggregate trade series for Kenya. That comparison is intended to shed light on the kinds of information the bilateral trade analysis can provide.

Next, in subsection B, GFI provides an overview of the numerous statistical treatments of the basic data that were necessary to enable robust measurements of trade gaps. Finally, in subsection C, details of the potential revenue losses (in import duties) stemming from under-invoiced imports in Kenya are presented.