​Gupta dealings are small change

Last month, the news broke that the department of mineral resources withheld information about the transfer of R1.5-billion from a trust account for the rehabilitation of Optimum Coal Mine, owned by the Gupta family, to India’s Bank of Baroda. It was further revealed that an additional R6.8-billion in transfers by Gupta-owned businesses were flagged as “suspicious” by banks, which referred these transactions to the Financial Intelligence Centre.

Only a few weeks later, the State of Capture report by then public protector Thuli Madonsela detailed suspicious, fraudulent and corrupt activities between state-owned enterprises, such as Eskom, Denel, Transnet and SAA, and the Guptas, President Jacob Zuma and his son, Duduzane.

Although many of these cases require further investigation, they point to activities known internationally as “illicit financial flows” — money illegally earned, transferred or used.

Global Financial Integrity has estimated that emerging economies lost $7.8-trillion to these activities between 2004 and 2013. It also found that the bulk of this money is not gained through straightforward criminal activities. Rather, about 83% of it is because of complicated forms of commercial tax evasion.

Tax evasion is theft and a criminal offence, tantamount to money laundering. It usually takes the form of abusive transfer pricing or trade mispricing.

About 70% of global trade is conducted by multinationals, half of which is between subsidiaries of a parent company. The transaction prices for this intra-firm trade are referred to as transfer prices. Transfer pricing itself is not illegal, but it becomes illegal when legitimate accounting rules are misused to evade tax. Companies might manipulate prices by over- or underinvoicing for goods and services, creating fictitious and phantom invoices, or reinvoicing to commit VAT fraud.

Generally, the idea is to hide revenues, profits or investment returns from authorities by transferring them across borders into lower tax destinations or tax havens.

For example, Lonmin mines in South Africa paid R2-billion to its subsidiaries in Bermuda and management fees to the United Kingdom Lonmin company from 2007 to 2012, which the Alternative Information and Development Centre allege was done to avoid paying tax in South Africa. This took place before Lonmin denied mineworkers a wage increase, which it deemed unaffordable.

Over- or underinvoicing of traded goods and services can also take place between apparently unrelated companies. When this happens it is called trade mispricing.

Although commercial tax evasion is often left to the rather boring specialists in grey suits, its effect on developing countries is immense. It steals revenues meant for socioeconomic growth and development, such as schools, health facilities, roads and other strategic infrastructure. It also encourages a culture of corruption and undermines the legitimacy of governments.

All evidence points to this problem increasing. Because governments have cracked down on money laundering through banks, trade is being used to move value across borders or evade tax. Only 2% of consignments globally are checked, making it easy to avoid detection. As John Zdanowicz, an international expert in this area, has said: “The front door of money laundering is the banking system … the government has done a pretty good job of closing the front door, but the back door — international trade — is wide open.”

Everyone agrees Africa is losing large amounts from illicit financial flows. But estimating an amount is difficult since, by its very nature, tax evasion is clandestine and it may even look lawful on the surface. In addition, different international databases contain contradictory or even incomplete information.

One example of this was a United Nations Conference on Trade and Development report earlier this year, which estimated R1.6-trillion of South Africa’s gold was exported between 2000 and 2014 without being recorded. In other words, almost all of South Africa’s gold is smuggled out the country. This is an improbable conclusion, vehemently contested by the South African Revenue Service, the statistician general and the Chamber of Mines. There does seem to be an error in the figures — in other words, South Africa is failing to report its gold and platinum exports correctly.

Although a large proportion of the error can be attributed to this omission, the UN report cannot be completely discounted. Illicit financial flows are rife in Africa’s extractives sector, with gold, platinum and diamonds being prime targets in South Africa.

Generally speaking, tax evasion figures are probably underestimates of illegal activities, because estimations only look at goods, not services. They also miss out on intra-country transactions. And, finally, there has been an assumption that trade mispricing flows from developing countries to developed countries. For South Africa and other countries on the continent, this underestimates trade mispricing with developing countries like China, South Africa’s largest trading partner.

New research by Global Economic Governance Africa, using data fromthe UN Commodity Trade Statistics Database has, for the first time, analysed trade mispricing for five African countries: South Africa, Nigeria, Zambia, Egypt and Morocco. The results run to billions of dollars, and indicate that developing countries are stealing large amounts from one another.

Although useful, these numbers need to be interpreted with care. This analysis is the absolute value of inflows and outflows added together, which would largely cancel each other out in the real world. Also, it is not clear who is the perpetrating culprit: If there is trade mispricing between South Africa and China of $35-billion, for example, who is to blame?

This aside, the figures do point to a pervasive problem, which clearly warrants action. The UN’s sustainable development goals aim by 2030 to “significantly reduce illicit financial and arms flows”. The G20 has also mandated the World Customs Organisation to investigate trade mispricing.

South Africa should begin by reporting its gold and platinum trade more accurately to the UN. Until that happens, it is impossible to conclude the extent of the trade mispricing problem. Corruption is the largest enabler of illicit flows, and the recent Gupta scandals represent only the tip of the iceberg.

As the sole African representative at the G20, South Africa needs to take the lead, addressing the interests of African countries that are bleeding from commercial tax evasion.

Kathy Nicolaou writes for the Global Economic Governance Africa project.

Examples of trade mispricing

MTN, Africa’s largest cellphone company, has sent vast sums offshore in “management fees” as a way of aggressively avoiding taxes, which has caught the attention of African authorities.

For example, $6.5-million was moved from Uganda to Mauritius in 2009, $276-million went from Ghana to Dubai between 2008 and 2013, and $38-million was moved from Côte d’Ivoire to Mauritius from 2012–2013. (Source: Mail & Guardian/AmaBhungane 2015 investigation).

Tegeta transferred rehabilitation funds into the Bank of Boroda in India. The funds are consistently moved around between accounts and other branches so that no interest is earned.

The funds are not reinvested for capital growth and it seems that the interest serves as a direct benefit to the bank and not the owner of the invested funds as would be the case for a normal capital investment.

According to the State of Capture report, Tegeta is contravening section 37A of the Income Tax Act, which could result in an inclusion of R560-million for the monies moved from the Koomfontien Rehabilitation Trust Fund and R2.938-billion from the Optimum Mine Rehabilitation Fund. (Source: State of Capture report). — Kathy Nicolaou

Examples of transfer mispricing

Transfer mispricing of diamonds from Angola and the Democratic Republic of Congo, amounting to $3.5-billion, was conducted using intra-company valuations, shell companies and tax havens in Dubai and Switzerland. (Source: World Policy Journal, Sharife and Grobler, 2013).

The Mopani Copper Mine (MCM) in Zambia made payments that were found to be very low when compared with similar mines. Investigations suggested that copper was exported to a sister company in Switzerland at low prices (that is underinvoicing of exports) with excessive “freight” charges. The report identified that 100% of the mine’s sales were to related parties, resulting in zero profit and corporate tax. Source: Eurodad, 2011 — Kathy Nicolaou

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