The dishonesty - known as trade misinvoicing - accounts for nearly 80 percent of all the money that developing countries lose each year through illegal means. Trade misinvoicing occurs when companies charge too much (over-invoicing) or too little (under-invoicing) for imports or exports. Depending on the laws in place, this allows companies to pay less in taxes or receive more generous government assistance.
Though wide ranging in scope, GFI fingered Tanzania’s mining sector as a leading player in over-invoicing - which accounts for one slice of the estimated $1.87 billion the country loses each year. Much of this comes from importers cooking the books to charge too much for goods, like machines or fuel, to take adantage of generous government concessions and help push cash out of the country.
“Mining companies could be over-inflating their import costs to shift capital out of Tanzania illicitly with the added kick-back of lower taxable income due to artificially inflated inputs,” according to GFI.
The report estimates that the Tanzanian government misses out on about $248 million per year in tax revenue from mining companies as a result – a substantial amount for a country in need of funds for development.
Weak governance and companies seeking to reduce their taxes are not the only players in this game. GFI found that most of Tanzania’s misinvoiced trade is with Switzerland and Singapore - two reputed tax havens. Only six per cent of Tanzania’s imports come from Switzerland and Singapore, yet the micro States account for 67 per cent of Tanzania’s total import misinvoicing over ten years.
Tanzania is not alone. Before GFI’s report went public, the Zambian Treasury shared its “grave concerns” about “reports of financial mis-representation in the private sector and the mining industry in particular.”
Mining companies were in the firing line again when a report by UK-based Christian Aid revealed that Britain’s eight biggest mining companies are more secretive than any other industry.
“We had grand ambitions,” said Joseph Stead of Christian Aid, which wanted to learn more about the activities of some of Britain’s most familiar household names on the FTSE 100 index. But even with access to a costly corporate database, “the gaps turned out to be so huge we wouldn’t do anything we wanted to do”.
Christian Aid found that FTSE 100 companies have 29,891 subsidiaries, more than 90% of which are located in places that specialize in allowing companies and people to escape laws, rules and regulations. Mining, oil and gas, travel and leisure, banks and engineering are the top five most secretive sectors of the FTSE 100 index.
The FTSE 100’s eight mining companies have 1,488 subsidiaries of which 1,300 are not in the UK. The mining sector, following by oil and gas, also has the largest percentage (46%) of subsidiaries for which no information could be found on turnover, assets, employees or shareholder funds.
Not having access to information about a subsidiary makes it difficult to know what companies are doing and what they give back to countries whose natural wealth they dig up and ship out.
“They could be entirely innocent or they could be hiding corruption or tax evasion,” said Christian Aid’s Stead. “It’s impossible to go further and try to work out what’s going on.”
“If companies want to claim they are genuinely working to improve the situation of the country in which they operate, they have to think about all the ways they can do that,” including taxation, said Stead.