- TPL and APRIL, two major pulp and paper producers in Indonesia, may have deprived the country of $168 million in taxes from 2007-2018 by mislabeling a type of pulp that they exported to China, a new investigation alleges.
- The companies, affiliated with the Singapore-based Royal Golden Eagle (RGE) group, recorded their exports as paper-grade pulp, even though they were purchased by factories in China as higher-value dissolving pulp.
- Paper-grade pulp is used to make paper and packaging, while dissolving pulp is used to make viscose for clothing; Zara and H&M were among the reported buyers of the viscose made from the mislabeled pulp from Indonesia during that time. Both companies have since eliminated controversial sourcing from their supply chains.
- The NGOs behind the investigation say it emphasizes the importance of enforcing greater corporate transparency to prevent companies from using offshore tax havens and secrecy jurisdictions to minimize their domestic tax obligations.
JAKARTA — Two major pulp and paper producers associated with widespread deforestation and land conflicts in Indonesia may also have skimped on $168 million in taxes through a web of offshore tax havens, a new report suggests.
PT Toba Pulp Lestari (TPL), which operates a pulp and paper mill in North Sumatra, and Asia Pacific Resources International Holdings (APRIL), Indonesia’s second-biggest pulp producer, are both affiliated with Royal Golden Eagle (RGE), a conglomerate controlled by Indonesian billionaire Sukanto Tanoto. Though the companies operate in Indonesia, RGE is headquartered in nearby Singapore.
It’s this arrangement that the new report, published by a coalition of 25 NGOs, says has allowed RGE to engage in profit shifting — transferring profits made from a high-tax jurisdiction to a lower-tax one.
While this form of tax avoidance is not necessarily illegal, the NGOs estimate it deprived the Indonesian state of $168 million in potential tax revenue between 2007 and 2018. To arrive at this figure, the NGOs trawled through a treasure trove of offshore documents first revealed in February, known as “IndonesiaLeaks” and reported on in a series of news articles by a consortium of local media outlets.
“Based on our research, it turned out that TPL and APRIL have the same beneficial owner, but in order to find it, we had to collect documents that were scattered in tax haven countries like Seychelles, the British Virgin Islands and Macau,” said Ferdian Yazid, head of natural resource governance at Transparency International Indonesia (TII), one of the NGOs in the coalition.
The dissolving pulp that wasn’t
The alleged profit shifting centers on Indonesian exports to China of dissolving pulp, a specialized grade of wood pulp used to produce textiles. It requires more wood and processing than lower-value paper-grade pulp, the most common type of pulp produced in Indonesia, used to make paper, tissue, and packaging.
PT Toba Pulp Lestari was until 2016 the only company in Indonesia producing dissolving pulp; APRIL also began producing it that year. From 2007 to 2018, Chinese customs authorities reported 2 million tons of the product being imported from Indonesia. But Indonesian export records show only 400,000 tons of dissolving pulp going to China during that period.
In the case of TPL, the NGOs attribute this discrepancy to the company misclassifying its exports of dissolving pulp as paper-grade pulp. Records show that the pulp, instead of going directly to China, was first sold to a TPL-affiliated marketing company in Macau, a low-tax jurisdiction, called DP Marketing International Macao Commercial Offshore Limited, or DP Macao.
The Macau company then apparently re-invoiced the shipments as dissolving pulp and sold them at substantially higher prices to third-party buyers in China and subsidiaries and affiliates of China-based Sateri, another member of Tanoto’s RGE, which reportedly processed the cellulose into viscose fiber for clients that included clothing retailers Zara and H&M. Both Zara and H&M have since removed controversial sourcing from their supply chains.
By shipping via Macau and declaring its dissolving pulp as paper pulp, TPL understated its revenues by $426 million from 2007 to 2016, according to the NGOs. That allowed it to avoid paying an estimated $108 million in taxes during that period, said Herawati Sahnan, an economic researcher at coalition member The Prakarsa.
Financial records show TPL paid $15 million in taxes in Indonesia from 2007 to 2016, she added.
“It’s because of the indication of profit shifting which resulted in TPL booking lower net profit than what it should have been,” she said. In 2007, for instance, the company reported that its net profit was below the taxable threshold, and therefore it paid nothing in taxes that year, she said.
Mouna Wasef, a ten year veteran of Indonesia Corruption Watch (ICW) and now a researcher at Auriga, both members of the NGO coalition, said the price difference between dissolving pulp and paper-grade pulp allowed TPL to book the bulk of its revenue via DP Macao.
“TPL reported its paper-grade pulp at a price of around $400 [per ton], whereas DP Macao sold it to the final buyers [in China] at a maximum price of $1,600 per ton,” she said.
From 2007 to 2016, TPL recorded $45 million in net profit, compared to the $426 million gross profit booked by DP Macao, which in 2010 had an arrangement to sell the dissolving pulp it bought from TPL through SC International Macao, a wholly owned subsidiary of Sateri, for a fixed commission of 2% of sales value.
“That was 10 times the net profit booked by PT TPL, and way above the 2% commission normally received by the marketing agency,” Herawati said. “With TPL being affiliated with DP Macao, there’s an indication of profit shifting through transfer pricing in the export of dissolving pulp. So DP Macao’s gross profit of $426 million should have been booked by TPL.”
‘Manipulating export documents’
The news investigations based on the IndonesiaLeaks cache concluded that TPL had allegedly been “manipulating documents for wood pulp exports to China to transfer the company’s profit offshore.”
The company denies it mislabeled the more expensive dissolving pulp as cheaper paper-grade pulp as a ploy to avoid paying higher taxes. Instead, it said it did so because the product, which it called “Toba Cell Eucalyptus Pulp” from 2010 to 2017, didn’t meet the purity levels of dissolving pulp at the time of export. It added that “the selling price of the product has been in accordance with fair market prices.”
“In conclusion, the company is fully committed to complying with prevailing laws and regulations, and would strongly reject any suggestion that the company has understated its revenue,” TPL said in a statement on its website.
But the investigative coalition says this doesn’t explain how the “Toba Cell Eucalyptus Pulp” — deemed paper-grade when it left Indonesia — became dissolving-grade pulp upon arriving in Macau, where no further processing was done. It notes that TPL appears to have ended this practice in early 2017.
But just months earlier, in 2016, another RGE affiliate, APRIL, had allegedly begun using similar methods after it started producing dissolving pulp.
The APRIL experiment
According to the coalition, APRIL produced 830,000 tons of dissolving pulp from 2016 to 2018, exporting up to 90% of it to China. But none of this was recorded at Buatan Port in Riau province, Sumatra, from where APRIL typically ships out the pulp produced at its nearby Kerinci mill.
“This omission in the export data raises the question of whether APRIL also adopted the practice of reporting and apparently valuing dissolving pulp as paper-grade pulp,” the coalition said in its report.
It added that this may have allowed the company to understate its revenue during that period by $242 million and reduce its potential tax bill by an estimated $60 million, based on the difference between the prices of dissolving pulp and paper-grade pulp.
APRIL has denied the allegation, saying it can confirm that “all export activities and tax arrangements comply with national and international laws and regulations.” APRIL said its 2016-2018 pulp exports weren’t identified as dissolving pulp because, at the time, the company, through its operating arm PT Riau Andalan Pulp and Paper (RAPP), was still experimenting with the production of dissolving pulp made using a combination of acacia and eucalyptus.
“This two-year trial period is a standard practice for innovations of this kind, noting it is the first time anywhere in the world that viscose staple fiber has been produced using Acacia crassicarpa,” APRIL said in a statement to Mongabay. “This process is now registered and protected as intellectual property.”
And since the production of the new type of pulp was still in the trial development stage, the company continued to designate the product with the code for its paper-grade pulp product.
“Our export price reflected the fact that this was an experimental product and did not yet meet the full technical specifications of dissolving pulp,” APRIL said.
This lasted until 2018, when the specifications of the new pulp product were deemed to meet the standards expected by the buyers, the company said. From January 2019 onward, APRIL has apparently reported its exports of dissolving pulp under the appropriate product classification.
“We are fully committed to complying with the laws and regulations in all locations where we operate and would strongly reject any suggestion that APRIL has engaged in ‘profit shifting,’” the company said.
Calls for transparency
Profit shifting isn’t necessarily illegal, and there are legitimate business reasons for companies to practice it, according to the coalition of NGOs.
“However, as this report makes clear, it is important for government tax authorities to scrutinize such practices carefully to ensure they are in compliance with prevailing laws and regulations,” the coalition said.
Danang Widoyoko, director of Transparency International Indonesia, said the current situation of a pandemic compounded by an economic recession makes it even more urgent for the government to take action, given that profit shifting undermines the state’s ability to fund important health and economic programs.
According to a 2019 report by Washington, D.C.-based think tank Global Financial Integrity, the Indonesian government lost at least $6.5 billion in potential tax revenue in 2016 from trade misinvoicing, equivalent to 6% of the country’s overall tax collection that year.
The use of offshore tax havens by corporate actors has also contributed to Indonesia’s low tax collection rates. At 11.9%, Indonesia’s tax-to-GDP ratio is far below the average for the OECD average (34.3%) and for other countries in the region, including Malaysia, Thailand and the Philippines.
“Now, when our economy and workers are hurting so much, the companies making the most from Indonesia’s natural resource wealth should pay their fair share of tax and support our country,” TII’s Danang said in a press release.
Bona Tua, a program officer at the International NGO Forum on Indonesian Development (INFID), said increased tax revenue would give the government more room to negotiate the economic downturn without having to slash funding for a wide range of programs.
“In order to boost state revenue during a disaster like this [COVID-19 pandemic], it doesn’t have to be done by reining in the state budget,” he said. “We can enforce the law [on unruly companies] based on reports like this [to boost tax revenue].”
The NGO coalition has called on the government to strengthen existing measures to curb illicit outflows of money, tax evasion and corporate tax avoidance. Among these is the establishment of a registry of beneficial ownership, in which companies have been obliged since 2019 to disclose their true, or “beneficial,” owners to the state. This was supposed to root out companies hiding behind shell firms and secrecy jurisdictions, but most companies operating in Indonesia have not yet made the required disclosures.
As of last year, only 0.7% of registered companies had reported the identities of their beneficial owners, according to Edi Sutrisno, executive director of TuK Indonesia, another of the NGOs in the coalition.
This had made it difficult for civil society groups to investigate tax avoidance and instances of alleged profit shifting, as in the cases of TPL and APRIL, according to TII’s Ferdian Yazid.
“Under the spirit of transparency, we should have been able to get to name of Sukanto Tanoto immediately” upon checking the government’s beneficial ownership registry, he said. “But even though there has been an initiative for beneficial ownership transparency in Indonesia, we still had to scour through documents in tax haven countries.”
Edi said that, given such a low compliance rate, President Joko Widodo should take the lead in enforcing the beneficial ownership transparency initiative.
“This needs to be led directly by the president to push all companies in Indonesia to publish who their beneficial owners are,” he said. “Not just who their board members and shareholders are, but the bigger players.”
Banner image: Eucalyptus plantation in a land disputed by Sihaporas indigenous community and pulp and paper company PT Toba Pulp Lestari. Image by Ayat S. Karokaro/Mongabay-Indonesia.
Editor’s note: this story was updated on December 7, 2020 to reflect Zara and H&M eliminating purchases of MMCF from controversial suppliers.
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