via the United Nations platform COMTRADE. Notice that, in view of the time lag in uploads to COMTRADE, by the national institutes of statistics, a wait period of a few months should be observed before downloading the most recent annual bilateral trade data.<sup>3</sup> Due to this time lag, the mirror analysis cannot identify new trends in customs fraud in Madagascar.

Based on mirror gaps, we are then able to identify some sectors/products for which noncompliance seems common. Estimates suggest that undervaluation and misclassification<sup>4</sup> in 2014 accounted for a loss of revenue of US$53.7 and US$42.4 million, respectively.<sup>5</sup> Total estimated losses (96 million of US$ or MGA 232 billion) represented 30 percent of total non-oil revenues collected by customs. The analysis indicates that clothing (textile, footwear and leather goods) and high tech products (telephones, digital cameras) seemed to be substantially undervalued in 2014. Undervaluation of clothing products and telephones (and digital cameras) are, respectively, estimated at US$25.4 million and US$13.6 million.

Regarding misclassification, the paper highlights that, in Madagascar, some customs tariff headings not subject to duties and value-added tax (VAT) were probably used, in 2014, for tax evasion purposes. Considering that abnormal statistics (e.g. inconsistent unit values) are indicative of fraud, there is reasonable evidence that some high-taxed goods were declared as zero-taxed products, notably fertilizers and rice. The declared unit value of imports of rice and fertilizers (products exempt from duties and VAT) largely exceeded corresponding world prices. Based on discrepancies in trade statistics, we estimate losses in VAT revenues at US$12 million.<sup>6</sup> Despite the fact that rice imports were almost systematically physically inspected, _i.e.,_ directed through the red channel, very few infractions had been reported. This figure suggests that there were probably collusion agreements between some economic operators and some customs agents _._ As the number of reported cases of fraud sharply increased in 2015, such bad practices seem to have declined.

The remainder of the paper proceeds as follows. Following a brief overview of the context of Madagascar customs (section II), the third section presents the mirror analysis methodology. Estimates of loss of revenue are presented in section IV. Section V provides some suggestive evidence of fraud. Some high-risk operators are then identified.<sup>7</sup> Initial lessons learned are detailed in section VI.

> 3 Due to the fact that a large number of oil-exporting countries do not share their statistics with the UN Statistics Division, imports of oil products are excluded from the analysis (HS2 chapter: 27).

> 4 Misclassifying means that an economic operator declares product A to customs as product B. Committing a misclassification that is, declaring product A as product B, induces an increase in imports of product B. The bigger the fraud, the bigger the increase in imports.

> 5  Estimates are based on the main positive and negative gaps per chapter ( _i.e.,_ at the HS-2 digit level), Since a non-negligible part of import operations were, in 2014, not subject to the common law regime (9.2 per cent). we have decided to base our estimates on the rate of effective taxation on imports. This latter is smaller than the _de jure_ rate. Regarding the specific estimation of losses due to misclassification, notice that only VAT losses are considered as the real tariff are unknown. Our estimates therefore constitute a lower bound.

> 6 The “M-X” discrepancy is US$15 million for fertilizers and US$43 million for rice.

> 7 Importer names are anonymized.

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