Wildly overpriced or ridiculously underpriced goods have cost the United States an estimated $3.1 trillion in lost taxable income over the last 14 years in a global scheme that helps criminals, drug kingpins, corrupt politicos and tax evaders move their illicit proceeds out of this country – nearly undetected.
Those are just some of the findings from an in-depth computer analysis of customs data by Florida International University (FIU) College of Business professor John Zdanowicz, a longtime trade irregularity guru who has again highlighted one of the country’s most gaping financial crime investigations and compliance vulnerabilities – and that’s just a snapshot of a more widespread global problem.
“Gold wrist watches exported to China for $33.01 each seems like a bargain; while vitamin E imported from Ireland for $30,334.36 per kilogram is steep pricing,” he wrote in a statement related to his latest research findings.
“In fact, both are examples of abnormally priced goods both imported and exported by U.S. companies that illustrate complex tax avoidance strategies,” called “false invoicing” currently being used by a wide variety of illicit groups to the tune of a multi-trillion dollar tally.
Here’s how trade mis-pricing works in practice:
A U.S. company imports products from a subsidiary at extremely high prices, increasing its cost of goods sold, thus decreasing its taxable income and tax obligation, while the money itself moves offshore undetected.
Working from the other end of the transaction, a U.S. company can also shift taxable income out of the U.S. by exporting products to a subsidiary at extremely low prices, which under reports revenues. Other examples Zdanowicz cites include:
- Unworked diamonds imported from South Africa for $452,380.95 per carat
- Mexican imports of camshafts for $7,707.53 each and smart cards for $160.00 each
- Laser printers imported from Japan for $57,531.50 each
- Prepared explosives exported to Mexico for $.50 per kilogram
- Human blood plasma exported to the United Kingdom for $1.00 per kilogram
Moreover, the practice is not shrinking in the face of stronger global AML laws and a focus on eradicating offshore secrecy havens offering anonymous corporate ownership structures as a service.
Truth be told, the practice moving illicit funds through trade is growing. Through a 15-year examination of computer records Zdanowicz found that money moved out of the United States through abnormal pricing in international trade grew from $168.31 billion in 2003 to $249.07 billion in 2017, a nearly 50 percent increase.
The study comes just as the United States is trying to make it harder for companies to move their legal headquarters to low-tax countries in an effort to decrease their tax bills, known as income tax inversions.
The U.S. Treasury recently enacted new rules in an attempt to make it harder for companies to employ this maneuver.
In a tale of the tape, China tops the list of countries with the highest amount of estimated U.S. tax losses due to abnormal trade pricing in 2017. Trade with other countries that resulted in large U.S. tax losses include Mexico, Canada, Germany and Japan.