How Indonesia is facing a huge loss in its fishing and coal trade

Source: gallery-photo – indikaenergy.co.id

By: Rizky Deco Praha – Researcher at The PRAKARSA

Indonesia has been losing about IDR 7.3 trillion (US$480 million) annually over the last decade through illicit financial flows (IFF), such as tax evasion and theft within the coal and fisheries sector. The sum was more than what the country received in development aid, as the latest PRAKARSA study has shown.

The estimate in the IFF on Fishery and Coal Trade 100-page report is the most comprehensive for Indonesia's two misinvoicing commodities. Using the Gross Export Reversal method, it compares the recorded trade value by Indonesia with all the partner countries in the fisheries and coal sectors over the last 10 years.

The losses also stem from underreporting and cost and profit shifting to tax havens. In this case, most companies act as traders who live in countries with more efficient tax rates and even tax havens.

The report notes Indonesia's illicit value of $14.5 billion per year for only these two commodities and calls Indonesia a “benefactor of natural resources to the world,” echoing economists' observations that an actively developing Indonesia is one of the highest natural resources net capital exporters because of this trend.

The report also shows the export value of coal briquette commodities accounts for nearly three-quarters of the total annual figure. For example, it shows one sub-commodity, bituminous coal, for 49 percent of total under-invoicing exports worth $13,2 billion in 2021.

On these IFF issues, several financial motives commonly make it happen. Still, the numbers come mostly from underreporting, tax avoidance under profit shifting to tax havens.

Understating a commodity's actual value and countries' trade partners will help the government minimize money leakage gaps and identify state revenue maximization through hidden trade profits abroad, depriving developing countries of foreign exchange and eroding their tax base.

Indonesia's fishery and coal commodities have been included in the highly undertaxed sectors where the gross domestic product contribution is far more significant than its tax contribution.

The high contribution of these two sectors is due to relatively high production. During 2021 alone, the steep rise in coal prices increased Indonesia's coal production, exports and state revenues. Unfortunately, this increase in coal production was accompanied by an increase in trade value and misinvoicing.

Tackling illicit flows has so far been a priority for the United Nations, which internationally agreed on 16.1 points of the Sustainable Development Goals (SDGs) by the target of 2030. Before that, the Organization for Economic Cooperation and Development (OECD) countries created a Financial Action Task Force (FATF) and standards to combat financial crime and IFF.

IFF has been part of the underground economy that is hardly traced. Global Financial Integrity classifies this illegal movement as an illicit flow when funds are illegally earned, transferred and utilized across an international border.

In developing countries, according to the World Bank, IFF results in the loss of desperately needed resources to fund public initiatives or critical investments, such as many supporting infrastructures.

While much attention is given to the problem of illicit capital outflows, the problem of inflows is also a severe issue. Common reasons for illicit inflows are tax evasion and financing the illegal activities of international criminal networks engaged, one of which is the smuggling of valuable minerals. Both illicit outflows and inflows result in the same problem: taxes are not being paid to the government.

The Indonesian government has done several things under the radar through the Finance Ministry. Due to the complexity of the issue, the results shown are insignificant and require acceleration across sectors.

The government is aware of the transfer pricing and profit-shifting matters. It improves export and import governance by establishing a node data system for accuracy and up-to-date commodity sectors. However, this still only applies to the food and health sector.

Potential illicit flows also occur in Indonesia due to regulatory inconsistencies. Although there are restrictions on coal export policies, during 2022 the practice of granting permits, imposing tariffs and the contract system underwent several changes. Rent seekers then could maximize these policy changes to take loopholes and potentially illegal finance occurs.

In collaboration with the Corruption Eradication Commission (KPK), the government has also promoted beneficial ownership to tackle corruption, money laundering and illicit financial flows. Unfortunately, the integration of this data has not yet been effective and requires coordination steps that are more holistic and simultaneous.

Indonesia is not the only country to deal with issues of trade and multinational tax avoidance practices. Indonesia's trading partner countries certainly have different tax systems. Some are even tax haven countries. Meanwhile, in this aspect, no government can interfere with a country's domestic policies.

Soon, the government needs detailed and precise information regarding export forms from the Directorate General of Customs and Excise. The data is crucial because there needs to be more balance between the buyer and their destination. The government needs to sit down and have collaborative talks between related institutions for integration and coordination.

Source: thejakartapost.com

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