Global Financial Integrity

 
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Egypt: Potential Revenue Losses Associated with Trade Misinvoicing

In a comprehensive study on the level of trade misinvoicing in Egypt in 2016, GFI found that the estimated potential tax revenue losses to the Egyptian government that year is approximately US$1.6 billion, equivalent to 4.1 percent of the value of Egypt’s total government revenue collections in 2016. Trade misinvoicing is a method for moving money illicitly across borders which involves the deliberate falsification of the value, volume, and/or type of commodity in an international commercial transaction of goods or services by at least one party to the transaction and constitutes the largest component of illicit financial flows as measured by GFI.

Using a trade gap analysis, GFI was able to estimate potential revenue losses to the misinvoicing of Egypt’s imports and exports across all trading partners. GFI estimates that the value of the trade gap for misinvoiced goods equals US$8.5 billion, or 10.5 percent of the country’s total trade of US$80.6 billion in 2016.

Here are a few other notable findings:

  • Of the total estimated lost potential revenue of US$1.6 billion, approximately US$404 million was due to export misinvoicing and approximately US$1.2 billion was due to import misinvoicing.
  • The US$1.2 billion in import misinvoicing can be further broken down by uncollected VAT tax (US$410 million), uncollected customs duties (US$358 million), and uncollected corporate income tax (US$428 million).
  • The US$404 million in export misinvoicing can be further broken down by uncollected corporate income tax (US$181 million) and uncollected tax from royalty payments (US$223 million).In 2016, some of the Egyptian imports most at risk for high values of import under-invoicing were essential oils, vehicles, machinery and meats.
  • In 2016, some of the Egyptian imports most at risk for high values of import under-invoicing were from Ireland, China and Switzerland.
  • Looking simultaneously at both high-risk commodities and high-risk trade partners in 2016, GFI found that under-invoiced imports of essential oils from Ireland, Switzerland and the Netherlands, as well as nearly half of all imports from China, were highlighted as potential high-level risks for revenue losses.

While a great deal of attention has been placed on the issue of profit shifting and abusive transfer pricing by multinational corporations, GFI believes revenue losses from trade misinvoicing are likely equivalent to those attributed to tax evasion and profit shifting by multinational corporations.

GFI urges Egypt to strengthen the penalty for trade misinvoicing under Article 122, as the penalties at present are insufficient to deter criminals. GFI also recommends Egypt consider using GFI’s online tool GFTrade, designed to build the capacity of customs authorities to better detect misinvoicing as transactions are occurring and take corrective steps in real time.

GFI further recommends Egypt set a date for beginning automatic exchange of tax information and that Egypt should consider signing on to support the Addis Tax Initiative (ATI), a group of 55 countries committed to enhancing the mobilization and effective use of domestic revenues and to improving the fairness, transparency, efficiency and effectiveness of their tax systems.

To undertake a trade gap analysis, GFI uses data provided by the United Nations Comtrade (Comtrade) database, which each year collects reported data from most countries about their annual imports and exports. For this analysis, GFI used the Comtrade data for Egypt in 2016 to cross reference Egypt’s reports on its exports and imports against the corresponding reports submitted by all of Egypt’s trade partners around the world for 2016. In these data sets, we looked for gaps in export and import statistics that are suggestive of trade misinvoicing.

Egypt reported to UN Comtrade a total value of nearly US$58.1 billion in imports and US$22.5 billion in exports for a total value of trade of US$80.6 billion in 2016. After compiling Egypt’s trade data and that of its trade partners for 2016, we then eliminated three different sets of trade data from consideration. We first eliminated all cases of “orphaned” imports – meaning those records in the database for which Egypt reported a value for imports of a commodity or good from a particular country while that country reported no exports of that good to Egypt in that year. Next, we eliminated all cases of “lost” exports – meaning records of exports reported by Egypt’s trade partners as goods shipped to Egypt in a particular year, but which were not reported as imported by Egypt in that year.

After eliminating all cases of “orphaned” and “lost” records from the Comtrade data for Egypt in 2016, we then focused our analysis on the remaining “matched values” trade data sets, i.e., trades for which both Egypt and its trading partners reported values for that year. However, in order to be kept for consideration in the trade gap analysis, these “matched values” sets of trade flows must have three features to be considered useful for our analysis: 1) non-zero values for the trade must be reported by both the reporting country and its partner; 2) non-zero volumes (quantities) for the trade must be reported by both the reporting country and its partner; and 3) the volumes must be reported in the same physical units of measurement by both the reporting country and its partner. Any of the sets of matched values that did not comply with all three criteria were also eliminated as “others”. Eliminating the “others” therefore reduces the number of remaining “matched” trades with which to use our trade gap analysis.

After eliminating all cases of “orphaned”, “lost” and “others” records from the Comtrade data for Egypt in 2016 and applying other treatments to the data, we were left with the remaining sets of “matched” trades with which we used to conduct our trade gap analysis. In our trade gap analysis, we identified any gaps found in the reporting data when the reported values by both partners did not match. For example, if Egypt reported paying US$5 million for alarm clocks imported from China in 2016, but China only reported exporting US$3 million in alarm clocks to Egypt in 2016, this would represent a trade gap of US$2 million. With Egypt as our focus, this would reflect a case of import over-invoicing by Egypt.

For more information of GFI’s methodology and analysis, including limitations, please download the report and visit page 9.