Jakarta, Indonesia, 3 November 2020  – A coalition of 25 civil society groups published evidence (1) of pulp industry’s practices of profit shifting in order to reduce corporate tax bills (2). The organisations called on the Government of Indonesia to crack down on profit shifting, a practice that costs Indonesia at least US$15.6 billion in government revenue annually, and demanded buyers and investors to avoid business with companies failing to pay the due contribution to society, and failing to respect the environment, global climate and human rights.

The new evidence seems to indicate that Toba Pulp’s affiliated companies under APRIL Group – one of Indonesia’s paper giants – in 2016 started understating revenues by US$ 242 million and reduced their potential tax bill by an estimated US$ 60 million in less than three years (2016-2018). APRIL supplies dissolving pulp to viscose mills in China operated by its sister-company Sateri, which in turn supplies some of the world’s largest fashion brands, “big box” clothing stores, and online retailers including H&M, Tesco, Marks & Spencer, and Esprit.

Danang Widoyoko, Director of Transparency International Indonesia, said: “Not only do profit shifting practices cause tax leakage and undermine the government’s ability to fund health and economic programs, they also undervalue export earnings that are crucial for macroeconomic stability and inflation control. At a time 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”.

The report “The Macao Money Machine: Profit Shifting and Tax Leakage in Indonesia’s Pulp Exports” comes as Indonesia’s budget deficit has ballooned and its 2020 growth prospects have dimmed. It highlights the case of PT Toba Pulp Lestari Tbk, a pulp producer in North Sumatra that mis-reported the grade of its pulp so it could reduce its corporate tax bill. The civil society report estimates that over a ten-year period (2007-2016), Toba Pulp understated revenues by US$ 426 million and avoided potentially paying an estimated US$ 108 million in tax. 

Sergio Baffoni, Indonesia project coordinator at EPN said: “Companies like Toba Pulp Lestari and APRIL built their business on extensive deforestation, massive climate impacts and human rights violations. Now they are also adopting doubtful schemes to try avoiding tax payments. We urge APRIL buyers and investors to avoid any business, including investments, lending, or any type of financial services, with APRIL, its brands, and RGE and its sister company Toba Pulp Lestari, also controlled by RGE’s owner, Mr. Sukanto Tanoto.” .  

Channing Mavrellis, of Washington DC think-tank Global Financial Integrity, said: “Customs, revenue, and financial services agencies need to work together to verify whether companies are fairly and accurately reporting their taxable revenues as well as honestly declaring their import and export transactions. This will go a long way to ensuring that companies cannot engage in abusive profit shifting and/or tax evasion, and will allow countries to better collect and mobilize their domestic resources to fund government services and national development“..

Notes to editors:

  1. The report has been published by a coalition of groups that include Environmental Paper Network (EPN), Prakarsa, Indonesia Corruption Watch, Transparency International Indonesia, Tax Justice Network, and Global Financial Integrity. 
  2. Profit shifting refers to “tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations,” according to the Organisation for Economic Cooperation and Development (OECD). These strategies facilitate the leakage of taxable profits generated within Indonesia to other countries. The use of profit shifting practices and the channeling of financial transactions through countries with low corporate tax rates are not necessarily illegal and may be legitimate, provided they are conducted in accordance with relevant laws and regulations. 

Contacts:

Sergio Baffoni, Indonesia project coordinator, Environmental Paper Network,  ‭+49 162 3812528‬, sergio.baffoni@environmentalpaper.org

Danang Widoyoko, Director of Transparency International Indonesia, +62 21-2279 2806 dwidoyoko@ti.or.id