Technical Corner: The tax scam vocabulary

In this edition we’re bringing you the information you need in advance of the Financing for Development conference in Addis 13-16 July. A lot of advocacy is concentrating on making the global tax system fairer, so that low-income African countries can raise revenues to spend on important priorities, like health.There are two concepts knocking about in the tax justice debate, which you might not be familiar with. One is “trade misinvoicing”. The point of this practice is to pay less income tax, VAT, customs duties, or tariffs by either under-invoicing or over-invoicing products that are sold overseas.As an example of under-invoicing, Company A wants to sell a product to Company B.  But instead of selling directly to Company B, it sells the product to a shell company located in a tax haven and owned by itself, Company A. Company A sells the product to its own shell company at a price under its real value. Then, the shell company sells the product at a price reflecting its real value to Company B, meaning the profits are located in the tax haven, where they cannot be taxed by the country where Country A was exporting from. Save the Children estimates that sub-Saharan Africa loses $15 billion or 1.25% of GDP every year due to this practice.Another key concept is “trade mispricing” or “abusive transfer pricing”. This practice involves multi-nationals under- or over-estimating the true price of transactions or assets across its subsidiaries in different countries in order to allocate value wherever taxes are less. While internal prices are meant to be set according to the “arms’ length principle” – i.e. as if the company was trading with a different company instead of itself – frequent abuses occur.Want to find out more? We learned all about these issues from a recent report by Save the Children, Making a Killing. We would also recommend the Money Talks briefing by Oxfam, and the High Level Panel Report on Illicit Financial Flows in Africa.