This is part 3 of a five-part series, drawn from Political Economy Research Institute (PERI) working paper No. 361, “Strategies for Addressing Capital Flight,” by James K. Boyce and Léonce Ndikumana, available here. The paper is forthcoming in Capital Flight from Africa: Causes, Effects and Policy Issues, S.I. Ajayi, and Leonce Ndikumana, eds. (Oxford University Press, 2014), accessible here.
Curbing trade misinvoicing and transfer pricing
A substantial amount of capital flight from African countries occurs through the underinvoicing of exports and the overinvoicing of imports (Ndikumana et al., 2014). When a firm understates the price and/or quantity of exports on invoices submitted to the African authorities, it can retain abroad the difference between the true value and the declared value, rather than surrendering the full amount of its foreign exchange earnings to the central bank in return for local currency. When a firm overstates the true value of its imports, it can obtain extra foreign exchange to send abroad, and again retain the difference in foreign accounts.
Strategies to curb trade misinvoicing must include interventions on both sides of trade transactions; that is, both in Africa and in trading partner countries. African governments need to strengthen trade regulation and exchange control mechanisms to better track international trade. The governments of Africa’s trading partners need to cooperate in enforcing transparency in international trade and combating corporate sector corruption. The automatic sharing of invoice data submitted to trading partners’ customs authorities would make it possible to identify discrepancies in the prices and quantities recorded on both sides of trade transactions. In addition, the African trader who files a falsified invoice often has a cooperating partner overseas who may corroborate inaccurate information and remit the hidden funds to designated accounts. Africa’s trading partners can assist the continent by establishing and enforcing regulations and laws that make such complicity costly.
Transfer pricing poses a different set of challenges, since it cannot be detected by the comparisons of invoices submitted to the customs authorities of the originating and receiving countries. Instead, the same fictive price is recorded at both ends of the transaction, so as to relocate profits to low-tax or no-tax jurisdictions, thereby lowering the firm’s overall global payments of taxes.