A man working for a forex bureau displays some Ugandan shilling notes

Drivers and implications of tax evasion in Uganda


The evasion of import taxes constitutes a significant challenge to fiscally constrained governments in low-income countries. Empirical research can help inform auditing strategies and improve tax revenue collection through better risk management procedures.

Improving domestic revenue collection remains a pressing policy objective for Uganda. The need to improve tax revenues to finance essential expenditures in education, health, and public infrastructure remains high. Similar to other developing countries, Uganda’s tax-to-GDP ratio remains below the global average and significantly behind that of high-income economies. 

Combating the evasion of taxes on imports is an important tool for boosting revenue collection in Uganda. Carefully studying the evasion of already existing taxes may improve collection, especially for taxes on imports which remain substantial. To illustrate, in 2022-23, around 37% of net revenues collected by the Uganda Revenue Authority (URA) came from taxing international trade.

What strategies do importers employ to evade import taxes?

Combining administrative records provided by the URA with public sources of data, an IGC study sought to identify ways through which importers may evade import taxes and estimated the associated fiscal costs to the government.

This project focuses on two strategies that importers may use to reduce their import tax liability:

  1. under-reporting the value of their imported goods in customs declarations
  2. overclaiming the VAT they paid on imports when filing VAT returns

We assess each channel of potential import tax evasion using an approach of “gap measurement” between two reports that in theory should be identical. This approach follows the seminal contribution of Fisman and Wei (2004), who study the evasion of import tariffs in the context of bilateral trade between China and Hong Kong.

Under-reporting of imports

We compare reported exports to Uganda by the country’s trading partners as found in public data (UN-COMTRADE) with data from the URA’s own customs system. Figure 1 illustrates these ‘trade gaps’ for the case of an individual product from the category ‘organic surface active products’ that were imported to Uganda from the UK. Notably, ‘trade gaps’ are positive across most years. Exports reported by Uganda’s trading partners are higher than those reported by Ugandan importers, suggesting reports on the Ugandan side are under-reported. Further, following an increase of the product’s tariff rate in 2017, trade gaps increased.

Figure 1: Positive trade gaps suggest under-reporting of Ugandan imports

Positive trade gaps suggest under-reporting of Ugandan imports

Notes: The ‘trade gap’ measured in this way can be computed at the level of the Year/Origin-Country/HS6 product code level but not at more granular levels (such as individual transactions). This is because reports in UN-COMTRADE are only available at this more aggregated level. Calculation by the authors using UN-COMTRADE and URA customs data.

‘Missing’ import flows

Using the same method, we were also able to document cases where a product exported by an origin country does not appear in the Uganda’s reported imports at all. In the related literature such a case is sometimes called an “orphan import”, a special case of under-reporting behaviour. In the context of evasive behaviour, orphan imports may for example occur because the importer has an incentive to classify imported goods as a similar yet different product that is subject to a lower import tariff in an official schedule. For example, in the context of Uganda and the Common External Tariff of the East African Community between 2012 and 2017 “sacks and bags for the packaging of goods” were subject to “45% or US$ 0.45 per bag, whichever is higher” if made of jute or of other textile bast fibres, but 25% if made of other materials.

Over-reporting of VAT

We consider evasion through over-reporting the VAT that firms paid on imports when filing monthly VAT returns. As detailed above, at the border importers may have an incentive to under-report the value of their imports as this reduces the duty and VAT they owe. However, when filing VAT returns, evasive firms may have an incentive to over-report the VAT they previously paid on imports, since VAT paid on imports is subtracted from VAT from sales to calculate the net liability. As a result, the higher the VAT paid on imports reported by a firm in its VAT declaration, the lower its net VAT liability. Beyond trying to evade tax, there is no apparent reason for the VAT paid on imports to be systematically different from the value recorded in the customs data, making discrepancies suspicious. To detect evasion through this channel we compute a “VAT Gap” by subtracting VAT paid during importation as shown in the customs data from VAT submitted in a firm’s VAT declaration.

Adding up the different mechanisms through which importers may evade taxes, our work suggests that the fiscal losses from import tax evasion are sizable. For example, in 2018 the estimated losses from import tax evasion amounted to 9.6% of total net tax revenue (Figure 2).

Figure 2: Aggregate estimates for the fiscal losses from import tax evasion

Figure 2

Notes: The figure shows estimated fiscal losses from different methods of evasion, such as trade gaps (underreporting of imported values), orphan trade (missing import flows) and matched VAT gaps (overclaiming of VAT reported to be paid during importation) and for two major tax heads (duties and VAT). Across all years, estimated fiscal losses from the considered methods of evasion are sizable when expressed as percent of Uganda’s total net revenues.

What factors affect tax evasion?
  • In this project, we find that a one percentage point increase in the import tax rate is associated with a 0.8% increase in the trade gap.
  • Another factor that makes imports more expensive, and evasion potentially more attractive, is a depreciating Ugandan Shilling (UGX). We find a consistent relationship where 1% appreciation in UGX is associated with a 0.2% decline in trade gap. Comparably, we find that a 1% appreciation of the UGX is linked to a 0.1% decline in evasion for importers classified as “sensitive” as described above.

How could our analysis help the revenue authority’s risk targeting?

The aggregated trade gap analysis and measurement of VAT gaps would allow the revenue authority to have a systematic method to detect behaviour suggestive of evasion for major tax heads, such as customs duties and VAT on imports. We characterise this step-by-step.

Step 1: Consider the past several years of records. For example, for Uganda we observe a consistently high proportion of Year-Country-HS6 level trade gaps on the imported product “Other Footwear with Outer Soles and Uppers of Rubber or Plastics” (HS6 Code 64.0299) originating from China over the years 2010 to 2018. This product is subject to a rate of 25% in the Common External Tariff of the East African Community.

Table 1: Imports of "Other footwear of outer soles and uppers of rubber..." from China

Table 1

Step 2: Given these past records, the revenue authority could start focusing future resources available for tax enforcement to those Product-Country combinations with consistently large positive trade gaps. For instance, the revenue authority could have allocated more resources to HS6 Code 64.2099 originating from China from 2019 onwards after observing the consistent gaps over the previous years. Exploiting the method of trade gaps at the Product-Country pair, the revenue authority could focus on (i) products with large gaps and high tariff rates and (ii) consignments within Product-Country pairs that show high trade gaps which have a high import value, since these two features are factors that increase per-consignment revenue loss.

Step 3: Beyond targeted inquiry at the border based on overall trade gaps, the revenue authority could also implement risk detection across several import tax heads. For example, among the 2020 consignments concerning the aforementioned product “Other Footwear…” originating from China (CN), one of the consignments with a high import value also revealed a potential over-claiming of VAT in the order of 8% of imported value. This is in addition to potentially underreported import values that decrease the tax envelope at the border (duty and VAT).

Table 2: Over-claiming of VAT on imports from China (CN)

Table 2

Step 4: Finally, information on macroeconomic conditions, such as UGX to other currency exchange rate depreciation, could be used by the revenue authority to anticipate potential increases in evasive behaviour. For example, in 2022, the UGX depreciated 7% against the US Dollar between February and August. Observing this, the revenue authority could alert field officers on potential increases in evasive behaviours.

With the continued relevance of trade taxes, improving tax collection on imports through better risk management procedures and enforcement carries significant importance. Future work in this area may include (i) expanding methodology to other import taxes (such as excise tax), (ii) analysing systematic behaviours of customs clearance agents, (iii) linking different taxes more broadly to analyse firm-level risks, and (iv) looking into behavioural differences between Authorised Economics Operators (AEOs) and others. Finally, an important long-run objective would be to reduce the overall reliance on import taxes and instead improve the enforcement of taxes that are less distortive.

You can learn more about tax by revisiting the International Conference on Tax for Growth, or by visiting our Tax for Growth initiative.