Transcript A Global Price Matrix: The Determination of Optimal Audits
Seminar on Public Finances and Tax Evasion in Latin America ICEFI, Tax Justice Network and Poder Ciudadano Under the auspices and participation of the European Union, ITC-GTZ, SOMO, KEPA and Latindadd Antigua, 25-26 August 2010
A case study of abnormally priced trades between the U.S. and the LAC
Methodology, results, and their implications for Partner Countries Simon J. Pak Associate Professor of Finance The Pennsylvania State University School of Graduate Professional Studies Tel: (610)725-5343 email: [email protected]
Outline
Abnormally priced export and import
Guatemala’s export examples – Bananas and Coffee Guatemala’s import examples – Wheat and Light Crude Oil Causes and Effects of abnormal trade pricing
Detection methods of abnormal pricing
Arm’s length price (ALP) data Price filter matrix – a statistical approach
Estimates of capital flows through abnormal pricing: LAC countries vs. U.S.
Non-quantified trades Commodities with volatile price movements
Summary
Detection system – Price filter matrix & its limitation Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Low Priced Banana Export from Guatemala
Photo Source: http://freefoto.org/images/04/29/04_29_8_prev.jpg
In June 2009, Guatemala Exported Bananas to the U.S. 5,098 tons for
$1.018 million
Export price:
$0.20/Kg
Worth $4.338 mm at an Arm’s Length Price* of
$0.85/Kg
Underpriced by $3.32 mm $3.32 mm
wealth outflow
$3.32 mm
less taxable income
* IMF Primary Commodity Prices - Bananas, avg of Chiquita, Del Monte, Dole, US Gulf delivery http://www.imf.org/external/np/res/commod/index.asp
Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Price per KG
$1,00 $0,90 $0,80 $0,70 $0,60 $0,50 $0,40 $0,30 $0,20 $0,10 $0,00
2009 Guatemala Export to the U.S.
BANANAS, Fresh (HS code: 0803002020) 2009 Guatemala Export to the U.S.
Bananas, Fresh (HS code:0803002020)
IMF price data All Underpriced!
Total Bananas export in 2009: export value = $431 mm amount underpriced =
$514 MM
(= 120% of total export value) Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Bananas Export - Underpriced Amounts
Amount Underpriced Annually through Bananas Export from Guatemala to the U.S
.
$700 $600 $500 $400 $300 $200 $100 $0 10-year total: export amount $2.75 BN Underpriced amount: $3.3 BN (120% of exp amt) (Reference monthly prices from IMF Primary Commodity Prices) Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Guatemala Coffee Export – Abnormally Priced
2009 Guatemala Export to the U.S.
Coffee, Arabica, not roasted, not decaffeinated (HS10: 0901110010)
Month Apr Aug Mar Jun Quantity (Kg) 37,950 113,850 2,106,225 17,250 amount $55,770 $232,155 $7,562,483 $91,270 Price $1.47
$2.04
$3.59
$5.29
Ref price (IMF, cif) $2.97
$3.24
$2.82
$3.18
Price ratio 0.50
0.63
1.27
1.66
Amount Over priced $ 1,630,090 $ 36,332 Amount Under-priced $ 56,828 $ 136,480 Underpriced by $56,828 $56,828
wealth outflow
$56,828
less taxable income
Overpriced by $1.63 mm $1.63 mm
wealth inflow
$1.63 mm
more taxable income
Photo from http://t1.gstatic.com/images?q=tbn:ANd9GcRPJx5oD_V-khSV-Mud4ppc8NN3opoGeilZBOoW7bSg5tA64tc&t=1&usg=__bBNVm4pnnWKpUxWTtODqYp2TUus= Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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2009 Guatemala Export to the U.S.
COFFEE, ARABICA, NOT ROASTED, NOT DECAFFEINATED (HS code: 0901110010)
$6,00 $5,00 $4,00 $3,00 $2,00 $1,00 IMF Price for Coffee Total for 2009: exp value= $287 mm amount underpriced =
$5.4 MM (1.9% of exp amt)
amount overpriced =
$21 MM (7.3% of exp amt)
Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Coffee Export: under-, over- priced amounts
$50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0
Amount Under-, and Over-priced through Coffee Export from Guatemala to the U.S.
based on IMF price data Amount Over priced Amount Underpriced
10-year total amount
(Export value $1,897 mm)
:
$69 mm (underpriced, 3.6%) $278 mm (overpriced, 14.7%)
(Reference monthly prices from IMF Primary Commodity Prices) Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Guatemala Oil Import – Abnormally Priced
2008 Guatemala Import from the U.S.
Light Fuel Oil: API>25, Sulfur<500PPM (HS10: 2710191005) Month Jan Sept Quantity bbl amount Price 86,000 $3,864,840 $44.94
282,722 $38,167,470 $135.00
Ref price (EIA*) $100.91
$128.30
Price ratio 0.45
1.05
Amount Over Amount Under $ $ 1,894,237 $ 4,813,420 $ Underpriced by $4.81 mm $ 4.81 mm
wealth inflow
$ 4.81 mm
more taxable income
Overpriced by $1.89 mm $ $ 1.89 mm
wealth outflow
$ $ 1.89 mm
less taxable income
Photo from http://www.freefoto.com/images/13/07/13_07_10_prev.jpg
* EIA Ref Price: No.2 Fuel Oil, not Diesel, monthly max/min prices Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Price per BBL
$180 $160 $140 $120 $100 $80 $60 $40
2008 Guatemala Import from the U.S.
LIGHT FULE OILS 25 DEG API (HS code: 2710191005) 2008 Guatemala Import from the U.S.
LIGHT FUEL OILS 25 DEGREES API (HS code: 2710191005)
Maximum monthly spot price (DOE/EIA) Minimum monthly spot price (DOE/EIA) Total for 2008: exp value = $ 502 mm Overpriced amount = $6.0 MM (1.2%) --- negligible Underpriced amount = $11.7 MM (2.3%) --- negligible Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Light Fuel Oil Import: under-, over- priced amounts
Light Fuel Oil Import from the U.S.
based on EIA price data (HS code:2710191005) $14 $12 Amount Overpriced Amount Underpriced $10 $8 $6 $4 $2 $0 7-year total amount: import value = $769 mm underpriced = $24 mm (3.1%) overpriced = $11 mm (1.5%) (Reference monthly prices from IMF Primary Commodity Prices) Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Guatemala Wheat Import – Abnormally Priced
2009 Guatemala Import from the U.S.
Wheat (HS10: 1001902055) Month March March Quantity Ton 6,078 29,600 amount Price $1,084,202 $178.38
$8,998,889 $304.02
Ref price (IMF) $230.98
$230.98
Price ratio 0.77
1.32
Amount Over Amount Under $ $ 2,161,881 $ 319,694 $ Underpriced by $319,694 $ 319,694
wealth inflow
$ 319,694
more taxable income
Overpriced by $2.16 mm $ $ 2.16 mm
wealth outflow
$ $ 2.16 mm
less taxable income
Photo from http://www.freefoto.com/images/9905/07/9905_07_5_prev.jpg
Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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2009 Guatemala Import from the U.S.
Wheat (HS code: 1001902055, m. ton) Price per ton
$350
2009 Guatemala Import from the U.S.
Wheat (HS code:1001902055, USD/MTon)
$300 $250 $200 $150 IMF Price Data
Year.Mo
Total for 2009: Import value = $ 85.9 mm overpriced amount = $12.5 MM (14.6%)
Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Wheat Import: under-, over- priced amounts
$25 $20 $15 $10 $5 $0
Wheat Import from the U.S.
based on IMF price data (HS code: 1001902055) Amount Overpriced Amount Underpriced
10-year total amount: imp value = $675 mm underpriced = $7.6 mm (1.1%) overpriced = $63 mm (9.3%)
(Reference monthly prices from IMF Primary Commodity Prices) Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Effects of Abnormally Priced Trades
EXPORT
Exporter Government
Underpriced Export
Lower revenue Lower profit Capital outflow Lower income tax revenue • •
Overpriced Export
Higher revenue Higher profit Capital inflow Higher income tax revenue
IMPORT
Importer Government
Overpriced Import
Higher COGS Lower profit Higher duty Capital outflow Lower income tax revenue Higher duty revenue
Underpriced Import
Lower COGS Higher profit Lower duty Capital inflow Higher income tax revenue Lower duty revenue Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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What Causes Trade Abnormal Pricing?
May be related to
Capital flight Import duty fraud Income tax avoidance / Transfer pricing Money laundering
Other Explanations:
Clerical/Recording errors Product heterogeneity for a given HS10 code $25,000 fax machine from Japan – prototype industrial sample Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Outline
Abnormally priced export and import Guatemala’s export examples – Bananas and Coffee Guatemala’s import examples – Wheat and Light Crude Oil Causes and Effects of abnormal trade pricing
Detection methods of abnormal pricing
Arm’s length price (ALP) data Price filter matrix – a statistical approach Estimates of capital flows through abnormal pricing: LAC countries vs. U.S. (tax haven?) Non-quantified trades Commodities with volatile price movements Summary Detection system – Price filter matrix & its limitation Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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How to Detect Abnormal Pricing?
“Money Laundering and Income Tax Evasion: The Determination of Optimal Audits and Inspections to Detect Abnormal Prices in International Trade,”
Journal of Financial Crime
, Vol. 12, No. 2, 2004. (de Boyrie, M.E., Pak, S.J., and Zdanowicz, J. S.) Audits & Inspections Customs Agents Lack of benchmark pricing data (arm’s length price) - Difficult to determine abnormality Pre Shipment Inspection firms All specified inbound cargos inspected Challenges in Detection Over 70 million transactions annually in U.S. Exports and Imports Examination of trade documents Physical inspection of cargo Delays in the movement of goods Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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How to Detect Abnormal Pricing?
Alternative Approaches:
Computerized Filtering based on benchmark prices if available Low cost & efficient Accurate A statistical approach by estimating upper & lower bounds if benchmark prices not available Low cost and efficient Accuracy depends on the quality of the historical data in estimating the benchmark upper & lower bound prices Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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How to Detect Abnormal Pricing?
Statistical Approach
Estimate the benchmark upper and lower bounds of prices (Price filter matrix) Based on statistical Analysis of historical prices For each commodity category by country Transactions with prices outside the benchmark prices Higher probability of being abnormal than the population The narrower bounds of the benchmark prices, the more numerous the transactions with prices outside the benchmark prices Suspected trades with abnormal prices require inspections by Customs agents Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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DATA SOURCE
Import and Export data from U.S. Customs and Border Protection Most detailed import and export records Not publicly available U.S. Merchandise Trade Data from U.S. Census Bureau Publicly available Import and export records grouped by HS10, Partner country, customs district, and month 8,750 export HS10 codes and 16,703 import HS10 codes in 2009 233 countries in 2009 44 customs district codes Quantity & Dollar value Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Price Filter Matrix -
Criteria for Price Abnormality
Price Filter Matrix may be constructed from the U.S. Merchandise Trade data:
For each commodity code and each country The average price, the standard deviation, upper- and lower bound prices Upper bound = the mean + as Lower bound = the mean as or Upper Quartile Price or Lower Quartile Price Total Number of Cells in 2009: 5.86 million cells Export: (8,750 items)x (233 countries) = 2.04 mm cells Import: (16,703 items) x (229 countries) = 3.82 mm cells Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Price Filter Matrix - Bananas
U.S. Bananas import
US-World price filter: Upper and Lower quartile prices based on all U.S. import records from all countries US-Guatemala price filter: Upper and Lower quartile prices based on all U.S. import records from Guatemala Compare the results with IMF Bananas price Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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U.S.-World Quartile Prices
(Bananas 2009)
2009 Guatemala Export to the U.S.
Bananas, Fresh (HS code:0803002020) Price per KG
$0,90 $0,80 $0,70 $0,60 $0,50 $0,40 $0,30 $0,20 $0,10 $0,00 Upper Quartile Price US-World data Lower Quartile Price US-World data Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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U.S.- Guatemala Quartile
Prices (Bananas 2009)
Price per KG
$0,90 $0,80 $0,70 $0,60 $0,50 $0,40 $0,30 $0,20 $0,10 $0,00
2009 Guatemala Export to the U.S.
Bananas, Fresh (HS code:0803002020)
Upper Quartile Price US-Guatemala data Lower Quartile Price US-Guatemala data Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Price per KG
$1,00 $0,90 $0,80 $0,70 $0,60 $0,50 $0,40 $0,30 $0,20 $0,10 $0,00
Which Arm’s Length Price?
IMF, US-World, US-Guatemala
2009 Guatemala Export to the U.S.
Bananas, Fresh (HS code:0803002020)
IMF Price US-Guatemala prices US-World Prices Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Over/Under-priced Amounts, 2000-2009
Gutemala's Export of Bananas to the U.S.
Year Overpriced amount ($MM) Underpriced amount ($MM) US-Gua US-Wrld IMF US-Gua US-Wrld IMF $0.45
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
TOTAL
$10.06
$4.30
$3.83
$1.58
$1.30
$3.91
$2.26
$9.28
$8.81
$21.28
$66.62
$5.08
$2.78
$1.31
$0.52
$0.27
$0.13
$0.00
$0.16
$0.92
$12.51
$23.68
$0.05
$0.18
$0.01
$0.69
$5.31
$5.12
$10.72
$4.40
$3.01
$1.68
$1.09
$1.39
$17.41
$17.87
$67.99
$4.63
$3.30
$6.22
$2.22
$2.20
$3.18
$9.32
$7.88
$14.68
$41.13
$94.76
$105.47
$256.85
$239.32
$97.31
$278.28
$323.25
$375.40
$443.19
$649.41
$514.50
$3,282.98
Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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$6,00 $5,00 $4,00 $3,00 $2,00 $1,00
2009 Guatemala Export to the U.S.
COFFEE, ARABICA, NOT ROASTED, NOT DECAFFEINATED HS10 code: 0901110010
US-World quartiles IMF price US-Guatemala quartiles Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Over/Under-priced Amounts, 2000-2009
Gutemala's Export of Coffee (Arabica) to the U.S.
Year Overpriced amount ($MM) Underpriced amount ($MM) US-Gua US-Wrld IMF US-Gua US-Wrld IMF 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
TOTAL
$2.10
$2.13
$4.92
$1.96
$1.80
$1.58
$0.59
$2.23
$1.80
$1.93
$21.04
$3.89
$4.17
$16.92
$13.96
$10.81
$4.24
$2.16
$22.70
$13.45
$35.28
$42.94
$43.30
$15.70
$32.65
$8.83
$2.92
$1.67
$3.90
$4.92
$6.99
$12.44
$2.23
$2.74
$30.53
$20.76
$10.05
$14.78
$0.90
$20.99
$9.17
$62.00 $278.29 $75.67
$3.96
$2.39
$0.75
$2.22
$0.65
$1.06
$3.65
$4.22
$7.68
$0.96
$27.56
$1.23
$10.28
$5.37
$7.55
$5.03
$7.51
$6.75
$8.91
$11.01
$5.44
$69.08
Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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2009 US Import Prices (cif) from Guatemala COFFEE, ARABICA, NOT ROASTED, NOT DECAFFEINATED ( HS code: 0901110010)
$6,00 PRICE PUPQC PLOQC $5,00 $4,00 $3,00 $2,00 $1,00 Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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$4,00 $3,50 $3,00 $2,50 $2,00
2009 Coffee Prices (IMF vs. US Import Price Statistics,cif) IMF: Coffee, Other Milds, El Salvador and Guatemala, ex-dock New York US-Guatemala Price: Coffee, Arabica, not roasted, not decaff HS10: 0901110010
PUPQC PLOQC IMF Price Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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$4,00 $3,50 $3,00 $2,50 $2,00
2009 Coffee Prices (IMF vs. US Import Price Statistics, cif) IMF: Coffee, Other Milds, El Salvador and Guatemala, ex-dock New York US-World Prices: Coffee, Arabica, not roasted, not decaff HS10: 0901110010
PUPQW PLOQW IMF Price Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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2009 Guatemala Import Prices (f.o.b. US) from the U.S.
Wheat (HS: 1001902055, USD/MTon) Price per ton
$350
2009 Guatemala Import from the U.S.
Wheat (HS code:1001902055, USD/MTon)
$300 $250 $200 $150
Year.Mo
PRICE PUPQW PLOQW PUPQC PLOQC Wheat Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Over/Under-priced Amounts, 2000-2009
Gutemala's Import of Wheat from the U.S.
Year Overpriced amount ($MM) Underpriced amount ($MM) US-Gua US-Wrld IMF US-Gua US-Wrld IMF 2000 2001 2002 2003 $0 $271 $121 $1 $73 $413 $823 $3,299 $630 $1,843 $2,237 $6,490 $94 $307 $198 $44 2004 2005 2006 2007 2008 $533 $1,532 $5,133 $7,057 $23 $493 $4,046 $10,159 $3,277 $1,674 $3,356 $5,070 $5,240 $4,113 $24,238 $290 $228 $661 $72 $339 2009 $4,472 $1,320 $12,357 $140
TOTAL $29,279 $17,880 $63,134 $2,372
$109 $237 $56 $379 $374 $260 $283 $1,161 $759 $1,685
$5,303
$157 $282 $997 $825 $449 $275 $1,121 $1,649 $137 $1,717
$7,610
Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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2008 Guatemala Import Prices (fob US) from the U.S.
Light Fuel Oils, not Diesel, 25 DEGREES API (HS: 2710191005) Price per BBL
$180
2008 Guatemala Import from the U.S.
LIGHT FUEL OILS 25 DEGREES API (HS code: 2710191005)
Maximum monthly spot price (DOE/EIA) $160 $140 $120 $100 $80 $60 $40 Minimum monthly spot price (DOE/EIA) PRICE PUPQW PLOQW PUPQC PLOQC Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Over/Under-priced Amounts, 2000-2009
Gutemala's Import of Light Fuel Oils from the U.S.
Year Overpriced amount ($MM) Underpriced amount ($MM) US-Gua US-Wrld EIA US-Gua US-Wrld EIA 2002 2003 2004 2005 2006 2007 2008
TOTAL
$0.0
$0.1
$0.1
$0.0
$0.0
$3.1
$18.9
$22.2
$0.9
$0.2
$8.9
$0.7
$0.1
$0.0
$3.6
$14.4
$0.0
$1.3
$1.3
$0.0
$2.1
$0.5
$6.0
$11.2
$0.0
$0.2
$0.0
$0.0
$1.2
$0.0
$16.0
$17.4
$0.0
$1.4
$0.0
$0.0
$4.4
$25.0
$25.6
$56.4
$0.0
$0.6
$0.9
$0.0
$0.6
$10.2
$11.8
$24.0
Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Detection of Abnormal Pricing
Physical auditing/inspection
Too many to inspect – costly & delayed cargo flow Benchmark prices available for limited number of items
Computerized detection with benchmark prices
Low cost and accurate Benchmark prices available only for limited number of items
Computerized detection with statistically estimated Price
Filter Matrix
Less accurate than with benchmark prices Possible underestimation of abnormality Efficient and low cost detection of importers/exporters with frequent mispricing when combined with inspection/audit by Customs specialist Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Outline
Abnormally priced export and import Guatemala’s export examples – Bananas and Coffee Guatemala’s import examples – Wheat and Light Crude Oil Causes and Effects of abnormal trade pricing Detection methods of abnormal pricing Arm’s length price (ALP) data Price filter matrix – a statistical approach
Estimates of capital flows through abnormal pricing: LAC countries vs. U.S. (tax haven?)
Non-quantified trades Commodities with volatile price movements Summary Detection system – Price filter matrix & its limitation Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Estimates of Capital Flows using Price Filter Matrix
METHOD:
Estimate upper and lower quartile prices for:
Every commodity Every country
Calculate overpriced amount and underpriced amount for every trade with prices outside the interquartile range
Aggregate overpriced amounts and underpriced amounts for all trades
CAUTION:
The method can’t be applied to non -quantified trades The price filter method will not work for commodities with volatile benchmark prices such as crude oil in 2008 Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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2009 US Export to LAC - 1
2009 US Export to LAC Countries - Abnormally Priced Amount
*
Red
fonts: Top ten countries in each category
Country Name (tax haven* - bold) US Import Value 2009 US-Country Quartile Prices Amount Over % Amount Under Anguilla Antigua and Barbuda
Argentina
Aruba
$ 81.1
$ 182.6
$ 7,537.9
$ 680.4
$ $ $ $ 2.2
4.6
359.6
23.2
2.7% 2.5% 4.8% 3.4% $ $ $ 1.6
3.0
640.3
$ 30.2
Bahamas
Barbados
Belize Bermuda
Bolivia Brazil
British Virgin Islands
$ 2,760.4
$ 498.1
$ 353.0
$ $ $ $ 821.7
389.1
32,910.1
309.9
$ 123.0
$ 23.9
$ 7.7
$ $ $ 39.9
17.4
2,028.8
$ 6.9
4.5% 4.8% 2.2% 4.9% 4.5% 6.2% 2.2% $ 191.8
$ 16.6
$ 6.8
$ $ $ 18.6
17.9
2,435.6
$ 3.2
Cayman Islands Chile
Colombia
Costa Rica
Cuba
Dominica
Dominican Republic $ $ $ $ $ $ $ 745.8
12,093.5
11,438.8
5,681.8
717.9
105.4
6,599.1
$ $ $ $ $ 17.2
431.1
458.7
597.6
$ $ 7.7
1.6
218.3
2.3% 3.6% 4.0% 10.5% 1.1% 1.5% 3.3% $ $ $ $ $ $ $ 16.7
555.9
600.6
599.7
6.7
1.8
328.2
%
1.9% 1.6% 8.5% 4.4% 6.9% 3.3% 1.9% 2.3% 4.6% 7.4% 1.0% 2.2% 4.6% 5.3% 10.6% 0.9% 1.7% 5.0%
US-World Quartile Prices Amount Over % Amount Under
$ $ $ $ $ 752.2
132.1
$ $ 8.9
16.6
46.9
51.4
29.8
10.9% 9.1% 10.0% 6.9% 4.8% 10.3% 8.4% $ $ $ $ $ $ $ 17.9
31.0
893.2
87.9
376.7
92.7
38.2
$ $ $ 2,842.0
$ $ $ $ $ 896.8
845.8
939.2
$ $ 61.6
35.7
22.1
50.4
27.7
$ 8.6
370.2
7.5% 9.2% 8.6% 7.1% 6.8% 7.4% 7.4% 16.5% 3.9% 8.1% 5.6% $ 125.1
$ $ $ $ $ $ $ $ $ $ 43.4
3,365.2
50.0
75.9
1,010.2
1,021.3
553.1
18.1
15.1
775.8
%
22.1% 17.0% 11.8% 12.9% 13.6% 18.6% 10.8% 15.2% 11.1% 10.2% 16.1% 10.2% 8.4% 8.9% 9.7% 2.5% 14.3% 11.8% * Tax haven country list from OECD Progress Report 2April2009, http://www.oecd.org/tax/progressreport Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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2009 US Export to LAC - 2
2009 US Export to LAC Countries - Abnormally Priced Amount Country Name (tax haven* - bold)
Ecuador El Salvador Falkland Islands French Guiana
Grenada
Guadeloupe
Guatemala
Guyana Haiti Honduras Jamaica Martinique Mexico
Montserrat Netherlands Antilles
Nicaragua
Panama
Paraguay
US Import Value 2009
$ 3,450.2
$ 2,463.7
$ 0.8
$ 18.0
$ 84.4
$ 383.9
$ 4,721.0
$ 288.5
$ 944.5
$ 4,845.6
$ 2,644.3
$ 288.8
$ 151,538.6
$ 8.6
$ 2,951.4
$ 1,093.0
$ 4,913.3
$ 1,610.0
US-Country Quartile Prices Amount Over % Amount Under
$ 176.1
$ 87.0
$ $ $ $
$
0.0
0.2
1.9
3.4
155.1
5.1% 3.5% 0.6% 1.0% 2.2% 0.9%
3.3%
$ $
$
171.0
115.4
$ $ $ $ 0.0
0.1
1.9
5.9
151.5
$ $ $ $ 19.2
137.4
135.4
$ $ 5,799.9
$ $ $ $ 219.9
$ 7.1
4.9
0.0
57.9
32.3
28.8
2.5% 2.0% 2.8% 5.1% 1.7% 3.8% 0.6% 2.0% 3.0% 4.5% 1.8% $ $ $ $ $ $ $ $ $ $ $ 3.3
13.9
119.0
102.8
9.8
7,123.7
0.0
102.9
29.5
376.4
44.1
%
5.0% 4.7% 0.0% 0.8% 2.3% 1.5%
3.2%
1.1% 1.5% 2.5% 3.9% 3.4% 4.7% 0.1% 3.5% 2.7% 7.7% 2.7%
US-World Quartile Prices Amount Over % Amount Under
$ $
$
249.8
136.7
$ $ $ $ 0.1
1.2
9.1
28.0
268.8
7.2% 5.5% 10.1% 6.5% 10.8% 7.3%
5.7%
$ $
$
450.7
314.4
$ $ $ $ 0.1
1.1
9.9
11.7
447.6
$ $ $ $ $ $ 4,785.9
$ $ $ $ $ 19.1
44.2
180.0
192.6
16.6
1.4
161.9
69.5
287.7
40.5
6.6% 4.7% 3.7% 7.3% 5.8% 3.2% 16.4% 5.5% 6.4% 5.9% 2.5% $ $ $ $ $ $ $ $ $ $ 35.8
135.8
559.7
305.6
15.5
17,094.4
$ 0.7
269.3
125.2
547.8
174.0
%
13.1% 12.8% 6.5% 6.3% 11.7% 3.0%
9.5%
12.4% 14.4% 11.6% 11.6% 5.4% 11.3% 7.6% 9.1% 11.5% 11.2% 10.8% Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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2009 US Export to LAC - 3
2009 US Export to LAC Countries - Abnormally Priced Amount Country Name
Peru
St Kitts and Nevis St Lucia St Vincent and the Grenadines
Suriname Trinidad and Tobago
Turks and Caicos Islands Uruguay
Venezuela
US Import Value 2009
$ 6,184.1
$ 123.9
$ 241.0
$ 82.7
$ 406.3
$ 2,251.2
$ 434.4
$ 893.3
$ 12,611.1
US-Country Quartile Prices Amount Over % Amount Under
$ 282.6
4.6% $ 282.0
$ 4.8
$ 3.9
$ $ $ 2.5
8.7
118.1
3.8% 1.6% 3.0% 2.2% 5.2% $ 2.2
$ 4.8
$ $ $ 0.7
25.7
86.6
$ 10.0
$ 39.6
$ 630.2
2.3% 4.4% 5.0% $ 18.4
$ 43.4
$ 593.8
%
4.6% 1.8% 2.0% 0.8% 6.3% 3.8% 4.2% 4.9% 4.7%
US-World Quartile Prices Amount Over % Amount Under
$ 550.2
8.9% $ 546.5
$ 12.0
$ 16.8
$ $ $ 7.6
65.1
259.1
9.7% 7.0% 9.3% 16.0% 11.5% $ 14.3
$ 29.4
$ $ $ 11.2
59.2
295.0
$ 35.7
$ 87.1
$ 1,120.5
8.2% 9.7% 8.9% $ 50.8
$ 118.1
$ 1,159.2
%
8.8% 11.5% 12.2% 13.5% 14.6% 13.1% 11.7% 13.2% 9.2% Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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2009 US Import from LAC - 1
2009 US Import from LAC Countries - Abnormally Priced Amount
* Red fonts: Top ten countries in each category
Country Name (tax haven* - bold) US Import Value 2009 US-Country Quartile Prices Amount Over % Amount Under % ANGUILLA
$ 5.7
$ 0.2
3.9% $ 0.0
0.4%
ANTIGUA AND BARBUDA
ARGENTINA
ARUBA BAHAMAS
BARBADOS
BELIZE BERMUDA
BOLIVIA BRAZIL
BRITISH VIRGIN ISLANDS CAYMAN ISLANDS CHILE
COLOMBIA
COSTA RICA
CUBA
DOMINICA
DOMINICAN REPUBLIC $ 9.3
$ 3,889.8
$ 1,278.2
$ 819.6
$ 32.8
$ 100.4
$ 13.0
$ 504.5
$ 20,073.9
$ 6.0
$ 13.6
$ 5,950.4
$ 11,319.9
$ 5,601.4
$ 0.0
$ 2.8
$ 3,328.8
$ $ 116.1
$ 52.3
$ 25.5
$ 0.8
$ 1.2
$ 0.0
$ 8.9
$ 698.6
$ 0.1
$ 0.0
$ 171.3
$ 328.4
$ 51.1
$ $ 0.1
$ 92.2
0.0% 3.0% 4.1% 3.1% 2.5% 1.2% 0.1% 1.8% 3.5% 0.8% 0.3% 2.9% 2.9% 0.9% 0.0% 4.8% 2.8% $ $ 110.2
$ 10.2
$ 13.1
$ 0.9
$ 2.9
$ 0.2
$ 14.9
$ 1,096.2
$ $ 0.0
$ 204.0
$ 368.9
$ 484.1
$ $ 0.0
$ 97.7
0.0% 2.8% 0.8% 1.6% 2.8% 2.9% 1.9% 3.0% 5.5% 0.0% 0.2% 3.4% 3.3% 8.6% 0.0% 0.4% 2.9%
US-World Quartile Prices Amount Over % Amount Under
$ 2.8
48.7% $ 0.0
$ 0.3
$ 162.9
$ 5.1
$ 47.3
$ 1.4
$ 2.6
$ 0.6
$ 10.8
$ 1,039.4
$ 0.3
$ 0.9
$ 151.9
$ 443.3
$ 215.2
$ $ 0.4
$ 202.0
3.6% 4.2% 0.4% 5.8% 4.2% 2.6% 4.6% 2.1% 5.2% 4.8% 6.5% 2.6% 3.9% 3.8% 0.0% 13.5% 6.1% $ 0.1
$ 322.1
$ 60.4
$ 19.5
$ 80.1
$ 6.2
$ 1.3
$ 15.1
$ 2,240.0
$ 4.2
$ 1.0
$ 546.0
$ 321.7
$ 205.4
$ $ 0.2
$ 269.1
%
0.2% 0.9% 8.3% 4.7% 2.4% 244.6% 6.1% 10.1% 3.0% 11.2% 69.3% 7.7% 9.2% 2.8% 3.7% 0.0% 6.8% 8.1% * Tax haven country list from OECD Progress Report 2April2009, http://www.oecd.org/tax/progressreport Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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2009 US Import from LAC - 2
2009 US Import from LAC Countries - Abnormally Priced Amount Country Name
ECUADOR EL SALVADOR FALKLAND ISLANDS FRENCH GUIANA
GRENADA
GUADELOUPE
GUATEMALA
GUYANA HAITI HONDURAS JAMAICA MARTINIQUE MEXICO
MONTSERRAT NETHERLANDS ANTILLES
NICARAGUA
PANAMA
PARAGUAY $ 5,272.3
$ 1,822.0
$ 8.3
$ 0.1
$ 5.8
$ 1.8
$ 3,137.6
$ 168.9
$ 552.0
$ 3,324.0
$ 465.1
$ 5.0
$ 176,537.0
$ 0.9
$ 474.9
$ 1,611.3
$ 304.2
$ 56.4
US Import Value 2009 US-Country Quartile Prices Amount Over % Amount Under %
$ 102.8
$ 47.5
2.0% 2.6% $ 209.1
$ 61.0
4.0% 3.3% $ 0.0
$ $ 0.1
$ -
$ 95.4
$ 3.0
$ 12.7
$ 83.4
$ 11.3
$ 0.0
$ 4,857.8
$ 0.0
$ 10.9
$ 37.8
$ 3.7
$ 0.9
0.5% 0.0% 1.3% 0.0%
3.0%
1.8% 2.3% 2.5% 2.4% 0.1% 2.8% 0.0% 2.3% 2.3% 1.2% 1.5% $ 5.4
$ $ 0.0
$ -
$ 146.2
$ 1.4
$ 6.0
$ 100.9
$ 6.8
$ $ 9,278.3
$ $ 16.4
$ 55.3
$ 4.7
$ 16.6
65.3% 0.0% 0.3% 0.0%
4.7%
0.8% 1.1% 3.0% 1.5% 0.0% 5.3% 0.0% 3.5% 3.4% 1.5% 29.4%
US-World Quartile Prices Amount Over % Amount Under
$ 167.2
$ 53.3
3.2% 2.9% $ 266.3
$ 210.3
%
5.1% 11.5% $ 0.0
$ 0.0
$ 0.2
$ 0.2
$ 136.7
$ 7.7
$ 2.9
$ 86.5
$ 21.2
$ 0.1
$ 5,167.2
$ 0.1
$ 18.6
$ 25.6
$ 7.1
$ 1.3
0.3% 14.8% 3.1% 13.7%
4.4%
4.5% 0.5% 2.6% 4.6% 1.6% 2.9% 8.3% 3.9% 1.6% 2.3% 2.2% $ 5.6
$ $ 0.1
$ 0.2
$ 261.5
$ 30.8
$ 175.3
$ 327.9
$ 180.0
$ 0.8
$ 15,456.5
$ 0.5
$ 27.8
$ 218.4
$ 16.5
$ 24.3
67.8% 0.0% 1.0% 12.0%
8.3%
18.2% 31.8% 9.9% 38.7% 16.6% 8.8% 55.3% 5.9% 13.6% 5.4% 43.2% Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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2009 US Import from LAC - 3
2009 US Import from LAC Countries - Abnormally Priced Amount Country Name
PERU
ST KITTS AND NEVIS ST LUCIA ST VINCENT AND THE GRENADINES
SURINAME TRINIDAD AND TOBAGO
TURKS AND CAICOS ISLANDS URUGUAY
VENEZUELA
US Import Value 2009
$ 4,192.1
$ 48.4
$ 17.5
$ 1.2
$ 139.0
$ 5,223.4
$ 10.6
$ 239.2
$ 28,094.4
US-Country Quartile Prices Amount Over % Amount Under %
$ 131.5
3.1% $ 132.0
3.1% $ 0.3
$ 0.2
$ 0.0
$ 10.4
$ 153.5
$ 0.1
$ 4.2
$ 551.0
0.7% 1.2% 1.3% 7.5% 2.9% 0.6% 1.8% 2.0% $ 3.8
$ 1.8
$ $ 0.8
$ 143.1
$ 0.0
$ 8.1
$ 521.5
7.9% 10.2% 0.0% 0.5% 2.7% 0.4% 3.4% 1.9%
US-World Quartile Prices Amount Over % Amount Under
$ 258.6
6.2% $ 166.2
$ 4.3
$ 0.4
9.0% 2.2% $ 22.9
$ 0.8
%
4.0% 47.4% 4.5% $ 0.1
$ 2.2
$ 181.5
$ 0.1
$ 22.7
$ 581.1
6.4% 1.6% 3.5% 0.6% 9.5% 2.1% $ 0.2
$ 247.1
$ 775.5
$ 0.2
$ 34.5
$ 791.9
13.9% 177.8% 14.8% 1.6% 14.4% 2.8% Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Price Filter Application to a Court Case
Chen/Sunrider was accused of over-invoiced imports
Imported herbs at very high prices from China and Taiwan between 1989 and 1991 to evade U.S. income tax Two Court Cases IRS vs. Chen/Sunrider: IRS Section 482 violation The US vs. Chen/Sunrider: US Customs Document Fraud case (Simon Pak was the expert witness consultant for the U.S. Attorney’s office along with Dr. John Zdanowitz) Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
… 46
$120 $100 $80 $60 $40 $20 $0 Other mushrooms TSUSA: 0712302000(KG) CHINA(TAIWAN) Price I Price-rev Price II UpQ-country UpQ-world Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Chart 5-1: Proportion of Imports with Prices Higher Than U.S. - Country Upper Quartile Prices 95% 89% 100% 80% 60% 40% 20% 0% 53% 53% 82% 83% Period 1 - Orig Period 1 - Rev No. of Trans.
Period 2 - Orig $ Amount
Chart 5-2: Proportion of Imports with Prices Higher Than U.S.- World Upper Quartile Prices 97% 96% 100% 86% 92% 80% 60% 40% 61% 50% 20% 0% Period 1 - Orig Period 1 - Rev No. of Trans.
$ Amount Period 2 - Orig
Chen/Sunrider case - The Results
IRS vs. Chen/Sunrider
On the IRS Section 482 violation charge, Mr. Chen paid IRS over $48 million for tax and penalty (6 Transfer Pricing Report 842, 3/25/98) According to the Wall Street Journal (7/3/1997), Mr. Chen paid $93 million without admitting any wrongdoing.
The US vs. Chen/Sunrider
On the Customs Document Fraud charge, Mr. Chen Paid $4 million fine to US Customs and sentenced to a two-year jail term Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Limitations of Price Matrix Filter Approach
For highly heterogeneous HS10 categories
The price filter matrix may introduce biases Wider upper/lower quartile ranges mitigate the biase problem somewhat
Aggregated data
By HS10, Month, Country, and Customs District
No distinction between
Related party transactions v.s. unrelated party transactions
HS10 categories without quantity reported
No price filter matrix can be constructed Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Limitations of Price Matrix Filter Approach
Inter-quartile price range is somewhat arbitrary
Automatically classify top 25% and bottom 25% as abnormally priced But the U.S. IRS transfer pricing regulation (IRC 482) specifies that an inter-quartile range is an acceptable arm's length transaction range Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Why use Price Filter Matrix?
A good first-order approximation in estimating abnormality Detection of abnormality
The price filter approach based on the inter quartile range is an effective initial step in investigating and identifying truly abnormally priced trades Needs follow-up inspections Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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Proper Application of Price Filter Matrix
Examine the frequency of abnormally priced trades for a particular importer or exporter
The probability of a randomly selected transaction to be above upper-, or below lower-quartile range is 25%. The probability for a half or more of 100 transactions to be above upper-, or below lower quartile range is 1 in 47 million chances!
Therefore, the price filter approach based on the inter-quartile range can be an effective tool in detecting importers/exporters with frequent mispriced transactions.
Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
… 54
Other Factors in detecting Suspicious Cargo
• •
Easy computerized detection:
Suspiciously high/low shipping cost per unit weight Abnormal weight: a spark plug weighting 4 pounds?
Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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What about High Shipping Cost?
Why would Shipping Costs be higher than Customs Values?
For Exporters: Another way of moving capital/wealth through trade For Importers: Raise the cost of goods reducing taxable income Reduce customs duty Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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High Shipping Cost > Customs Value ?
2006 US Imports (freight/insurance charge)
Item Exporting Country Amount (Customs Value) QTY Unit Freq Shippin g Cost Weight (KG) Ship’g Cost/KG Ship’g Method Reference Average Shipping Cost /KG Mont h Customs Dist (entry)
MEN'S COTTON OTHER T-SHIRTS, KNITTED OR CROCHETED SACKS & BAGS OF OTHER PLASTICS THERMOSTATS, NESOI STATIC CONVERTERS FOR TELECOMMUNICATION APPARATUS BOOKS, BROCHURES, LEAFLETS AND SIMILAR PRINTED MATTER El Salvador Indonesia China Korea, South Egypt
$14,463 $4,200 $205,095 $4,200
482 DOZ 12 1,840 KG 106 NO
$228,100
52,100 NO 950 KG 1 1 3 1
$32,364 $23,552 $205,155 $229,640 $18,630
1,714 1,840 1,164 5,438 1,000
$18.88
$12.80
$176.25
$42.23
$18.63
Air Air Air Air Air $1.40 $3.40 $3.22 $3.04 $2.06 07 11 12 08 06 Cleveland Cleveland Minneapolis Dallas/Fort Worth Chicago GEMSTONES, CUT BUT NOT SET SUITABLE FOR USE IN JEWELRY BALL POINT PENS POLYSULFIDES, POLYSULFONES FIGURINES OF SEMIPRECIOUS STONE South Africa China Germany Congo Brazzaville
$7,500 $390,232 $175,401 $3,000
X 584,956 NO 8,000 KG X 1 79 1 1
$23,625 $409,199 $905,282 $6,545
15 16,358 8,616 313
$1,575.00
$25.02
$105.07
$20.91
Air Ocean Ocean Ocean $2.99 $0.20 $0.11 $0.01 02 05 03 12 Washington DC Los Angeles Norfolk Nogales Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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SUMMARY Abnormally high or low priced trades
May be due to:
Recording error Product heterogeneity in a given HS code Transfer pricing & tax avoidance Money laundering Capital flight Duty fraud
Impacts on the country
Reduced tax revenue Capital flight Distort balance of trade statistics Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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SUMMARY
Price Filter Matrix
Can be built for each HS code & country combination May be effective in identifying abnormally priced import and export transactions when combined with inspection by customs specialists Can be used for real-time inspection of cargo Seminar on Public Finances and Tax Evasion in Latin America, Aug 25-26, 2010
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