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Trade Mis-invoicing
Trade contributes to one-third of India’s gross domestic product. Thus, the impact of fraudulent trade practices as a percentage of GDP is a matter of serious concern and should be paid close attention. Using disaggregated data for the period 2007–17, the existence of trade mis-invoicing in India is shown. The pattern varies by the product as well as the trading partner. For some products, the discrepancy did not seem too large upfront. However, in terms of percentages, the data presents a dismal picture.
The author gratefully acknowledges the anonymous reviewer for their insightful comments that helped in shaping the present version of the article.
Transfer pricing is a widely discussed issue in the area of international trade for several decades. It refers to the setting of prices for transactions between associated enterprises like different entities of a multinational corporation (MNC) engaging in the transfer of property or services (OECD 1979). MNCs manipulate the intra-firm trade prices to their advantage and shift profits to a low- or no-tax jurisdiction, eroding the base of high-tax countries which results in lowering their tax revenues. Transfer “mis-pricing” in such a manner is actually a part of the bigger problem of Base Erosion and Profit Shifting (BEPS), which is best understood as the strategies deployed to avoid taxes and to shift profits to a low- or no-tax jurisdiction (OECD 2018). Measures to address BEPS gained fresh impetus when the Organisation for Economic Co-operation and Development (OECD) and the Group of Twenty (G20) introduced the 15 action plans in 2015. A large body of literature looks at transfer pricing in intra-firm trade relations and finds evidence of tax evasion (Clausing 2003; Grubert and Mutti 1991; Mayne and Kimmis 2000).
Although transfer mispricing is an effective way of measuring BEPS, it does not capture the effect of trade practices between non-affiliates. This study provides an alternative way to measure BEPS by looking at the problem of trade mis-invoicing. When two countries engage in trade with each other, their reported values of imports and exports after adjusting for freight and insurance should match with each other. The reported value should only differ to the extent of cost of insurance and freight. However, it has been seen that more often than not, there is a mismatch in the reported values that cannot be explained by transportation and insurance costs (Baker et al 2014; UNCTAD 2016). This mismatch is known as trade mis-invoicing. While trade mis-invoicing can capture the fraudulent trade practices among unrelated parties, it might not be able to do so for related parties as they use the same fake invoicing (Hollingshead 2010).
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