A new report has found huge tax evasion by foreign logging companies that are running rampant in Papua New Guinea. The Great Timber Heist was released by the Oakland Institute on February 16.
The PNG rainforest is the third largest in the world. It covers about 80% of the country, 60% of which is untouched forest.
Forests, especially old-growth forests, play an important part in removing carbon dioxide from the atmosphere. The clearing of forests is a major contributor to global warming. Not only does clearing remove the carbon-capturing ability of the plants, it also releases the large amounts of carbon that had been stored in the plants and soils.
PNG is the largest exporter of tropical wood in the world. In 2014, it exported 3.8 million cubic metres, mostly to China.
More than 15 million hectares of PNG forests are controlled by foreign companies. This is more than one-third of the country's 46 million hectares in foreign hands, mostly logging companies. Of this, about 5.5 million hectares has been leased through the Special Agriculture and Business Leases (SABL) scheme.
In 2011, the government began a Commission of Inquiry into SABLs in response to reports of corruption and lack of consultation with customary landowners. The final report, released in June 2013, investigated 42 SABLs and found that only four of those had proper consent from landowners and had a viable agricultural project.
It found fraud, misconduct and the failure of state agencies to perform their duties. PNG Prime Minister Peter O'Neill said: “The only conclusion that I can draw is that the policy on SABLs has failed miserably.”
But despite his promises to cancel illegal leases and reform the lease system, no real action has been taken so far.
The Oakland Institute's report and the 2013 film On Our Land found that logging in PNG has led to the betrayal of people's constitutional protections, and the loss of cultural heritage and land for millions of people.
The government turns a blind eye to the illegal and deceptive practices of the forest industry. Even the police often work on behalf of logging companies.
The Great Timber Heist report found huge tax discrepancies in the logging industry. The report examined 16 subsidiaries of the Malaysian firm Rimbunan Hijau. It found that most of them appear to declare little or no profits from the export of timber. In fact, they appear to have been operating mostly at a loss for more than a decade.
As a result, these companies do not have to pay the 30% tax on profits. The 16 companies were found to have accumulated about $32 million in tax credit in just seven years. The report estimated that PNG may be losing more than $100 million in tax revenue each year.
The report found the companies are likely using transfer pricing to exploit the tax loophole. This involves companies under-pricing timber export prices and overpricing operating costs to make it seem that they are making little or no profits, or even a loss.
The declared export prices for PNG timber are much lower than prices of other major exporters of tropical logs. For the past 15 years, the average price per cubic metre has been 20% lower for PNG than the average of five other major exporters.
For example, in 2014, the PNG price per cubic metre was $210 compared with an average of $388 for the five other major exporters. This makes a $679 million difference in annual revenue for the PNG industry.
Transfer pricing occurs when buyers and sellers make agreements to sell at a lower formal price, with the understanding that secondary payments will be made later. This allows the exporter to claim lower profits and thus avoid taxes.
Companies can also make their profits appear weaker by overpricing their operating costs. For example, the report found that the RH subsidiaries often buy goods and services from their sister subsidiaries. They can charge each other high prices, thus making it look like each individual subsidiary is making a loss when the group as a whole is making a profit.
In On Our Land, Rosa Koian from Bismarck Ramu Group said: “We can feed Papua New Guinea, we can feed Australia ... these other struggles of big development, people are saying 'OK, this is a good company, its going to work for us, it's going to bring in millions of kina for Papua New Guinea.
“I will be happy, the day will come when we see all our mothers and children can access healthcare for free; all our children can access up to university education for free.
“Then we say this is real development for Papua New Guinea. Then we say that our mines have paid for our education, for our healthcare.”
The left-wing movements in Latin America provide an example of what Koian wishes for. Like the rest of Latin America, countries such as Venezuela and Bolivia have suffered heavy exploition by foreign corporations for their natural resources. Large amounts of wealth have flown out of the countries while their people became poorer.
But the socialist governments of Hugo Chavez in Venezuela and Evo Morales in Bolivia nationalised key sectors of industry. They then used the revenue to cut poverty and provide better services, dramatically expanding free, accessible health care and education.
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