A RECENT report by the UN Conference on Trade and Development (Unctad) claimed that five natural resource-rich developing countries had been swindled out of as much as 67% of their export earnings.
SA was identified as one of the victims, with gold, platinum and iron ore producers fingered as major perpetrators of export fraud and even gold "smuggling".
These sensational claims were based upon flawed methodology and have been thoroughly discredited. As commodities are such a significant part of our exports, it is important that South Africans are aware of this so that the accusations do not continue to carry false credibility.
Unctad researchers compared the value and destination of exports as reported in the trade statistics of the commodity-producing countries with the value and origin of imports reported by their trading partners. Reported imports were generally much more than reported exports. This, the authors conclude, suggests massive under-invoicing of sales by exporters, to disguise the true value of sales hidden offshore.
Huge discrepancies were noted for South African gold exports.
This, the authors allege, has robbed SA of a large proportion of its export earnings as well as depriving us of the tax earnings due on the "missing" exports. The sheer scale of the apparent differences should have alerted the authors to possible problems with their findings. A phone call to SA Customs and Excise would have identified their error.
Our official statistics capture most gold exports under the general category "unallocated". There is nothing sinister about this, it is a long established practice not to record these exports by destination because of gold’s previous monetary role. You need to look elsewhere for the value of gold exports, for instance in our balance of payments accounts.
Few companies are more transparent about production than commodity producers. Most report production quarterly. The daily prices of most commodities are also public knowledge and feature even in the national news. While there may be some differences between spot prices and actual prices received due to selling on long-term contracts or forward selling, total revenue is easily measured. It is simply impossible to report sales 67% lower than received without someone noticing.
Secondly, modern companies are not owned by individuals who can secretly syphon off company profits into offshore bank accounts. Firms are owned by shareholders to whom such funds would belong. The existence of surplus profits would have to be revealed in the companies’ accounts. Here they would attract the attention of the auditors, tax authorities and financial analysts who scrutinise companies’ performance. Fraud on the scale Unctad suggests, involving multiple producers and all their gold mines, would be quickly exposed.
South African gold mines are all locally owned, but the same controls would apply to foreign-owned mines. It is precisely to stop such activities that legislation exists to monitor transfer-pricing and enforce compliance. The ability to monitor such activities is much easier when the expected value of sales is so easily determined.
The authors of the report are now aware of their mistakes. Their response is to blame SA and commodity traders for publishing opaque trade statistics. Unctad has not withdrawn its report despite the revealed weaknesses in its methodology. Its website continues to suggest that misinvoicing could be responsible for some countries "losing as much as 67% of their exports".
It is unquestionable that there is an incentive for companies to use transfer pricing as a means to channel profits to lower tax regimes. For this reason, it is critical that tax authorities monitor compliance with the utmost vigour. This requirement is not assisted by sensationalist claims of massive cheating.
Far more value would be added by investigating the reasons SA’s annual gold output has more than halved since 2000 despite much higher gold prices. False claims that the earnings of that production were misreported are unhelpful in arresting the industry’s rapid decline.
• Keeton is with the economics department at Rhodes University
