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26.02.2015 01:50 Age: 21 days

Indonesia to crack down on corporate tax avoidance through transfer pricing

Indonesia aims to recoup equivalent of HK$120b in blitz on tax avoidance that uses the method to reduce local liabilities, with miners the key focus, reports the Wall Street Journal.

Indonesia will crack down on corporate tax avoidance via transfer pricing this year to try to recoup 200 trillion rupiah (HK$120.2 billion) in lost state income, mainly in the commodities sector, the new head of the tax office said.

President Joko Widodo's administration, which took office in October, is planning to double its infrastructure spending this year to build ports, power plants and other projects, and the tax office figure for lost income would cover more than two-thirds of that spending.

As a proportion of gross domestic product (GDP), Indonesia, Southeast Asia's largest economy, has one of the lowest tax takes in the region, according to the World Bank.

Sigit Priadi Pramudito, the country's director-general of taxes, said many Indonesian companies, particularly in the coal, palm oil, cocoa and other commodities sectors, were avoiding corporate taxes by using transfer pricing.

He declined to give names, but said some of them were major companies.

Under the transfer pricing method, an Indonesian company sells its goods to a subsidiary in another country below market prices, and the subsidiary in turn sells them to the market.

This effectively reduces profits in Indonesia and increases them in that foreign country.

"There's a lot of potential in this area. We suspect that all along, they have been using the transfer pricing method," Pramudito said. "This year we will chase them."

The tax office has the authority to adjust the tax bill of a company if it suspects that a sale to a related entity is under-priced. In the past, it was difficult to prove companies had under-priced their goods as the tax office lacked comparable data on market prices, Pramudito said.

But it had now collected more comprehensive data and was increasing its number of officers, he said, adding that it could take such companies to a tax court and had won some cases.

Widodo plans to add 4,000 taxmen a year to the existing 36,000 to help achieve an ambitious tax revenue target of 1,489.3 trillion rupiah this year, up 30 per cent from last year.

During his presidential campaign last year, Widodo pledged to increase tax collection to 16 per cent of GDP from about 12 per cent, and the tax office is keen to close any loopholes.

The tax crackdown on the resources sector comes at a time when the prices of commodities have fallen to multi-year lows.

Even so, many of them were still making big profits, Pramudito said. "The fact is, their profits are still tremendous, and using that method [transfer pricing] adds to the profits," he said.

When asked whether the tax crackdown would hurt the investment climate in Indonesia, Pramudito said boosting investment should not come at the expense of tax compliance.