How KRA loses billions to falsified mitumba invoices

A mitumba trader at a Nyeri market on 26 August, 2023. [Kibata Kihu, Standard] Recent studies show that Kenya is now Africa's largest importer of second-hand clothes, commonly known as mitumba. This suggests that the government could have lost huge revenues due to misinvoicing - a deliberate falsification of the value or volume of an international commercial transaction to evade taxes. For second-hand clothes in Kenya, this often means under-invoicing to reduce import duties. Latest Data by the Massachusetts Institute of Technology (MIT) shows that Kenya imported used clothes and textiles valued at Sh38.5 billion ($298 million) in 2023, overtaking Nigeria. In the same period, Kenya had one of the largest trade deficits in second-hand trade. In 2023, the leading exporters of used clothing were the United States, $1.09 billion (Sh140.61 billion), China, $736 million (Sh94.94 billion), and Germany, $391 million (Sh46.92 billion). According to the Observatory for Economic Complexity, in the same year, Kenya ranked the fourth largest importer of used clothing globally, behind Pakistan $335 million (Sh43.23 billion), the United Arab Emirates $237 million (Sh30.57 billion), and Guatemala $211 million (Sh27.23 billion) while Kenya imported $183 million (Sh236.09). This huge import highlights Kenya's significant demand for affordable clothing, with used clothing ranking 17th among the country's most imported products in 2023. In a 2018 study by Global Financial Integrity, Kenya lost about $21 million (Sh2.73 trillion) in revenue due to under-invoicing of used clothing imports in 2013. This was part of the larger $907 million (Sh117 billion) loss from trade misinvoicing that year. In 2013, Kenya imported 110,000 tonnes of second-hand clothes valued at $140 million (Sh180.60 billion). Given this, misinvoicing is an issue and continues to affect government revenue and trade transparency, given Kenya's role as a major importer of second-hand clothes. The 2023 imports were valued at upwards of 12.45 per cent from 2022. The 2013 data indicates that under-invoicing was a significant issue, potentially used to evade the 35 per cent customs duty or $0.20 per kilogramme levy. Given the high volume of imports and the economic incentives for importers to reduce costs, this practice is likely to continue. With 2023 imports at Sh38.5 billion, the potential for misinvoicing could be even higher today. According to the US trade data, Kenya imported second-hand clothes valued at $19.4 million (Sh2.52 billion) from the United States in 2023. Overall, total US exports to Kenya stood at $484.7 million (Sh63 billion) in the review period. The economic survey 2024 by the Kenya National Bureau of Statistics recorded the value of imports to Kenya from the US as Sh112.7 billion ($807 million), showing a significant variation from the US trade data. This discrepancy is attributed to the cost of insurance and freight, which was estimated at $322.3 million (Sh41.86 billion)- a margin that appears high. It may only be plausible for significant imports such as petroleum products. Customs and Excise Lead at KPMG East Africa, Jossineter Syengo, said importers play with the values of goods, thereby increasing the likelihood of misinvoicing. "Importers just present invoices that are not going to attract high-value taxation. Invoices declared are always lower than the specific duty rate," said Ms Syengo, noting that when the invoice value is low, the country loses revenue on taxes like the two per cent Railway Development Levy (RDL). According to Ms Syengo, the valuation of secondhand clothes is a bit complex. "It is easy to value new goods, unlike used goods." She notes that the variation in value of goods reported to have been imported by the two countries could be as a result of the items being consigned from other countries, whose origin is the United States. To address the complexity of valuing second-hand clothes, the East African Community (EAC)opted for specific duty rates per kilogramme to neutralise the challenge of undervaluation of goods. The East African Community (EAC) has a maximum customs duty of 35 per cent on all imported goods, including secondhand clothes. Auditor General Nancy Gathungu wants countries that receive flows from Africa to scrutinise the money getting into their systems to ensure that they are not part of illicit financial flows (IFFs). "The weakest link has been the lack of sanctions not just on the entities and individuals taking the money out but also in the jurisdictions that the money goes," she said, adding that what is lost to IFFs could easily plug the budget deficits of many African countries and cut down reliance on debt to finance budgets. Africa loses $88.6 billion (Sh11.5 trillion every year to illicit financial flows. This is according to an audit report by the auditor generals from African countries. Imported secondhand clothes typically involve both ad valorem (customs duty) and specific (per kilogram) rates, with Kenya and Rwanda applying 35 per cent duty and a specific rate of $0.20 per kg and $0.40 per kg, respectively. Ms Syengo noted that the lack of communication between different jurisdictions encourages trade misinvoicing. For instance, when importing from Kenya to Uganda, "sometimes information available with the commissioner on the Kenyan side may not be the same information a commissioner on the Ugandan side has. So it is left purely to the importers to be truthful on the value of goods they are purchasing". Additionally, she has said the trend of two trading countries reporting different values for the same goods as imported and exported has been analysed to be very common. This, together with lost exports and orphan imports, has led to rampant cases of smuggling. The mitumba clothing business operates in a relatively informal way, which means the government loses revenue due to its inability to track its informal transactions. "Traders make a lot of money from the second-hand clothing business, but the government loses revenue in income tax because of the informal way that the mitumba business operates," said Syengo. A mitumba trader who sought anonymity said traders still import banned goods like innerwear. "Imported inner wears are still being sold because the demand for them is high, therefore, importers are forced to falsify the contents and have the Mitumba inner wear brought into the country." The trader stated that importers also manipulate the value of imports by falsifying the content. "If a bale of curtains is Sh5,000, and the inner wear is Sh30,000, the trader gets away with the Sh25,000 difference," the trader said, noting that this ultimately changes the tax element by almost a similar amount, robbing the exchequer, considerable amounts of revenue. "It is difficult for KRA to check what is inside the container at import. Sometimes, they try to open a whole container, but they can't check everything." Even as the importers enjoy the loopholes, the trader says that by so doing, importers are risking their businesses. Illegal goods He hints that sometimes, "Maybe the importers are working in cahoots with KRA. There is a huge likelihood of tampering with the manifesto, because the illegal goods are available in the market". He notes that this trend is not only in the mitumba sector, but in most of the other imports, including car imports. Auditor General Nancy Gathungu says transfer pricing has been identified as one of the key areas that are vulnerable to illicit financial flows. "Manipulative practices such as misinvoicing and other fraudulent schemes are major contributors to IFFs," said Gathungu. She notes that collaboration between government institutions was lacking, "in most if not all countries, hindering coordinated efforts to tackle illicit financial flows. Poor information exchange across borders has also allowed IFFs to flourish across borders in the continent". Additionally, she has noted that the deepening use of cryptocurrency is an emerging challenge relating to IFFs, as it has created an avenue for individuals to move funds across borders without detection. In the five years to 2023, imports of second-hand clothes grew marginally, driven by high demand for affordable clothing among low and middle-income earners, as mitumba is often cheaper than new clothes. Trade Policies such as the African Growth and Opportunity Act (AGOA) require allowing mitumba imports, especially from the US, which has also fueled Kenya's reliance on used clothing. According to data from the Kenya National Bureau of Statistics, in 2019, Kenya imported second hand clothes valued at Sh17.7 billion. In 2020, Kenya imported Sh12.2 billion worth of Mitumba, which was the lowest value in the five-year period (2017-2021) due to Covid-19 disruptions, which reduced global trade and demand. The Economic Survey 2023 further showed that the country imported used clothes worth Sh18.9 billion and Sh19.9 billion in 2021 and 2022, respectively. In the efforts to revive the local textile sector, Cabinet Secretary for Trade and Industry Lee Kinyanjui said Kenya cannot have a thriving textile Industry, while at the same time remaining a favourite export destination for second-hand clothes. "I want to confirm that much of the mitumba is made in Kenya and exported outside, after which it is sold back here as second-hand clothes," he said. Principal Secretary in the State Department for Industry, Juma Mukhwana, says most of the ginneries in the country have become obsolete due to the collapse of the textile industry. "Part of our stagnation is because of the import of used clothes. How do you grow a vibrant textile sector while importing used clothes in bales?" noted Mukhwana. At the time of publishing this story, our efforts to get a response and retrieve recent data on trade misinvoicing from the Kenya Revenue Authority had proven futile. "The project received support from the Thomson Reuters Foundation as part of its global work aiming to strengthen free, fair, and informed societies. Any financial assistance or support provided to the journalist has no editorial influence. The content of this article belongs solely to the author and is not endorsed by or associated with the Thomson Reuters Foundation, Thomson Reuters, Reuters, nor any other affiliates".

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