Trade Mis-invoicing Through Transfer Cost Is Hurting Liberia


-Revise Concession Agreements

By Paul Columbus Collins

In my previous article, I argued that transfer pricing and prevailing global/international market prices were a key component of illicit financial flows, and justify renegotiation and revision of concession agreements in Liberia.  That article focused on the revenue side of the financial statements of concessionaires.  This article focuses on the expenditure side of the financial statements and unveils what transfer cost and trade mis-invoicing are, and how those transactions are hurting Liberia.  This too is another component of illicit financial flows that Global Financial Integrity reports is costing Liberia around US$900 million a year.  This series of publication are extracts of arguments proffered in my LLM (Master of Law degree) in International Commercial Law dissertation, that I believe is relevant for the current revision of concession agreements going on in Liberia.

Trade misinvoicing is a method for moving money illicitly across borders which involves the deliberate falsification of the value or volume of an international commercial transaction of goods or services by at least one party to the transaction. Trade misinvoicing is the largest component of illicit financial outflows measured by Global Financial Integrity.  Transfer cost is the total opportunity cost of moving an item from one place to another, including transport costs, loading and unloading costs, and administrative costs.  So when a concessionaire brings heavy mining equipment from one of its related companies to the Liberian company, and places a monetary value on the equipment, we are faced with transfer cost.  The transfer cost becomes a trade misinvoice when the price or value attached to that equipment is not fair to the Liberian company.

Concessionaires always boast of investing hundreds of millions if not billions of dollars in Liberia every time they measure the cost of their investments, as if these sums are monies that come to Liberia, for which Liberia would derive benefits, and therefore owes these investors an obligation for their ‘huge’ investments.  Between 2006 and 2011 Liberia signed concession agreements worth at least US$16 billion according to the US Government.  This amounts to an average US$3.2 billion a year during this period.  During the same period, Liberia’s real GDP was less than a billion dollars.  Clearly, we have a case of missing billions!  How are we losing these huge sums of money?

Here’s a simple, practical but real life example: ArcelorMittal transfers a used and refurbished mining equipment from its mines in Tanzania to its mines in Liberia.  When the equipment was first bought brand new, it was fully depreciated in Tanzania, and ArcelorMittal received full capital allowances for the equipment.  This means the cost of the equipment has already been charged to the profit and loss in Tanzania.  Following full charging of this equipment, because the equipment is still good for mining operations, ArcelorMittal continues to use the equipment, and therefore revalues the equipment to reflect the useful economic life that the equipment still possesses.  The depreciation charges will continue as required by generally accepted accounting standards.  The tax authorities in Tanzania however, will not normally grant tax deductible capital allowances for that same machine anymore because the revalued cost is simply an accounting cost, not a financial cost.  So there is no tax benefit for ArcelorMittal to continue using that equipment in Tanzania.  That is why it makes sense for ArcelorMittal to transfer that equipment to their operations in Liberia.

When the equipment comes to Liberia, it comes with the revalued cost, which is usually very high.  This cost will be the global prevailing market value of a similar machine, plus the cost of shipment and other administrative cost associated with that equipment.  This is transfer costing.  The trade misinvoicing part is the notional cost of the equipment as a result of the revaluation, shipping and administrative costs attached to the equipment that the new invoice now carries. Yes, the related company from which the equipment is transferred invoices the Liberian company for the equipment as if there is real trade between the two companies.  The Liberian company counts the value of this invoice as an investment in Liberia!

And here is how Liberia loses on this intercompany transaction:  first, a high value invoice on imports is supposed to give Liberia increased revenue from custom duties and other import levies.  However, these concessionaires all have duty free privileges that exempt them from paying duties on their investments in Liberia, as an investment incentive.  So Liberia gets zero!  Were there not duty and import levy exemptions, ArcelorMittal would not want to overvalue the equipment in the first place, because of the high custom duties that would have applied.

The second way Liberia loses is through capital allowances that are tax deductible.  The invoiced value of the equipment is deducted as expenses to reduce profit.  Accounting profit is therefore reduced by the high value equipment, which most often results into losses being reported, while at the same time taxable profits are also reduced by the deductible capital allowances of the equipment.  ArcelorMittal Liberia therefore reports losses and pays no taxes.

In addition to equipment and other goods transferred from related companies, services are also transferred and (mis)invoiced to the Liberian company for the services of experts and skilled workers brought to provide services to the Liberian company as consultants.  These consultants do not pay taxes on their invoices to the Liberian government, even though ArcelorMittal Liberia deducts the invoices from their profits.  Liberia therefore loses out on both the lost tax revenue on the consultants income and the reduced profits on the Liberian company’s profit and loss statement.

Concession agreements therefore need to be revised to give zero exemptions on all imports, and used or secondhand equipment should be disallowed for tax deductions in the computation of taxable profits.  Transfer cost and trade misinvoicing must be curtailed if we are to stop illicit financial flows and derive just and fair compensation for our natural resources.

The author is a Liberian and the CEO/Senior Partner of Gedei & Associates.  He holds an MSc and a PhD in Economics, is a Liberian CPA and a Fellow of the ACCA-UK, a Certified Internal Auditor, and now a candidate for the LLM in International Commercial Law. He can be contacted at [email protected] and Cell (+231) 776641184 / 886641187


  1. Good work. My hope is that policy makers in Liberia will absorb these valuable decision support information you have so clearly articulated. More importantly bring people like you into their circles of experts.


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