JAKARTA (Reuters) – Indonesia will crack down on corporate tax avoidance via transfer pricing this year to try and recoup 200 trillion rupiah ($15.6 billion) in lost state income, mainly in the commodities sector, the new head of the tax office told Reuters.
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, trailing behind Malaysia, Singapore, Thailand and the Philippines, according to the World Bank.
Sigit Priadi Pramudito, the country’s director-general of taxes, said in an interview late on Monday that 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.