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Taxes are the primary source for government spending on public services, such as healthcare, police, unemployment benefits, education, etc, and will be very important in raising revenue to finance post-COVID-19 recovery. Taxes come in many shapes and forms – taxes on income, taxes on goods and services, taxes on imports, and so on. Unfortunately, some unscrupulous individuals/businesses do not always pay what they perhaps should. Some of them do business illegally (failing to declare income, falsifying records), some of them do it illicitly (using legal loopholes) and some unwittingly (people do make mistakes).

Tax avoidance across international borders has been explicitly set in the SDG framework as Target 16.4: “By 2030, significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organized crime”.

So how does international trade contribute to illicit financial flows? Among other ways, through trade misinvoicing. Here is a hypothetical example.

Suppose you want to shift some money from your country (country A-land) into a tax haven (country S-land). You can’t exactly go to a bank to simply wire the money to S-land because your country has stringent capital controls and you don’t want to have to explain where you got all that cash from. What to do? Well, you will go ahead and import some chocolates from S-land that cost $1 apiece. But instead of paying $1 apiece, you pay (to your partner in crime in S-land) $10 apiece. Your partner in crime in S-land sends you the chocolates but takes the difference ($9) and deposits them in your S-land’s bank account. You do get your chocolates eventually, maybe even sell them for $1.5 apiece, but after that and on paper you make $8.50 loss apiece. In the end, you shifted $9 per chocolate to your S-land bank account using international trade – in a nutshell, that’s how misinvoicing works.

The reasons behind misinvoicing are varied, some are specifically to shift money (like in the example above), some are to avoid income taxes, tariffs or sales taxes or even benefit from rebates: for example, in Singapore - on a smaller, illustrative scale - some outbound tourists were known to fraudulently claim back sales tax on luxury goods on behalf of local residents.

The governments keep track of export and import declarations. When they try to reconcile their own trade data together with trade partners, discrepancies emerge, in some cases very large ones. While there are other explanations for discrepancies, it is widely accepted that trade misinvoicing is a common occurrence, and some claim this has been the largest avenue of illicit financial flows. According to an analysis of export and import data in Asia and the Pacific, more than 6 per cent of total regional tax revenue was potentially lost due to trade misinvoicing – and this is likely to be a conservative estimate. That translates into nearly $200 billion a year. In comparison, the global net official development assistance and official aid in 2018 was just about $165 billion.

What then can governments do to address trade misinvoicing and raise much needed financing for development and COVID-19 recovery? Make trade transactions more transparent by having customs and tax offices exchange data and documents electronically together and across borders. At present, however, cross-border paperless trade measures remain the least implemented trade facilitation measures among most economies in the region.

Implementation of different groups of trade facilitation measures in Asia-Pacific, 2017 and 2019

Implementation of different groups of trade facilitation measures in Asia-Pacific, 2017 and 2019

Source: UN Global survey on Digital and Sustainable Grade Facilitation 2019, available at

To enhance such cross-border information exchange, countries may consider joining the Framework Agreement on Facilitation of Cross-border Paperless Trade in Asia and the Pacific. The Framework Agreement is the most recent UN treaty in the area of trade and development, adopted by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). The Framework Agreement is fully dedicated to the digitalization of trade processes and enabling the seamless electronic exchange and legal recognition of trade-related data and documents across borders, rather than only between stakeholders located in the same country. Implementation of the Agreement is expected to greatly reduce transaction time and costs as well as increase regulatory compliance. Implementation of the Agreement has the potential to also greatly reduce misinvoicing, thereby increasing countries’ import, income and expenditure tax revenues, and providing much needed financing to recover from the COVID-19 crisis and achieve sustainable development.

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Alexey Kravchenko
Economic Affairs Officer
Trade, Investment & Innovation +66 2 288-1234 [email protected]