Luke Holland ■ Indonesia launches investigation following ‘Macao Money Machine’ report
The Government of Indonesia has launched an investigation on pricing and customs reporting practices of a pulp mill owned by one of Indonesia’s wealthiest moguls. The investigation follows the launch of the Macao Money Machine report published by Indonesia’s Tax Justice Forum and other civil society groups including Tax Justice Network.
The report documents pricing practices of two pulp mills with common beneficial ownership exporting to China between 2007 and 2018. The pulp exports from Indonesia were sold at below-market prices to affiliated companies in Macao and Singapore apparently by mis-labeling the product as a lesser-grade of pulp that commands substantially lower market prices. The affiliated companies in Macao and Singapore then sold the same pulp at significantly higher prices that reflected the market values of the actual product, and thereby realizing a lot of the profit outside the grasp of Indonesia’s tax authorities.
Across a dozen years between 2007 and 2018, these pricing practices resulted in potential tax losses exceeding $150 million from an estimated $668 million in understated revenue.
The Macao Money Machine case, documented with transaction-level data and audited financial reports from publicly-held companies, is one of only a handful of specific examples that Indonesia can point to in a broader transfer pricing problem in the natural resources sector that it said is responsible for $15.6 billion in losses in 2016 alone. One of the other prominent cases involves an oil palm producer owned by the same tycoon who owns the pulp mills, and which became Indonesia’s largest case of tax evasion.
Fortunately, Indonesia’s financial governance reform efforts, led by Finance Minister Sri Mulyani, a former Deputy Director of the World Bank, have included policies that address the ‘ABC of tax transparency’: automatic, multilateral exchange of tax information with numerous countries; beneficial ownership disclosure requirements; and, critically, the requirement of country-by-country reporting by multinational companies.
Implementation challenges abound for this ambitious tax transparency reform policy. Information exchange relationships need to be operationalized. There’s been limited compliance with the beneficial ownership disclosure requirements: less than 20% of corporations (PT) have made a declaration and those that have are yet to face a credible verification mechanism. And the country-by-country reporting requirements are not made public.
But the fact that the Government of Indonesia is working through these implementation challenges sets the country on a promising trajectory. The Macao Money Machine case represents an opportunity for the Government to take action in a way that nets substantial government revenue, showing both that the tools work and that they can generate government benefits to ease a strained fiscal situation.
Indonesian civil society groups are urging the government to follow through with its investigation into one of the pulp mills, PT Toba Pulp Lestari, and to open an investigation into the larger of two pulp mills, PT Riau Andalan Pulp & Paper, for which pricing practices were documented between 2016 and 2018.