Papua New Guinea fines logging company US$40 million for tax evasion

Is this the beginning of the end of PNG’s Great Timber Heist?

PHOTO Credit: The Oakland Institute

Papua New Guinea’s Internal Revenue Commission has imposed a K140 million (about US$40 million) tax assessment on a logging company for illegal tax evasion. IRC withheld the name of the company. In a statement, the IRC explains that,

In accordance with the taxpayer’s right to the protection of the law and the appellate process to review the audit findings, the Commissioner General is unable to disclose the identity of the taxpayer at this time.

The IRC carried out a transfer pricing audit on the company. This is the first concrete result of more than 20 audits that the IRC announced in May 2021.

In a statement, Sam Koim, Commissioner General of the IRC, says,

“The logging sector in PNG has long been suspected of involvement in tax evasion. Instead of turning a blind [eye], we have initiated over twenty audits since I took office. Cross-border transfer pricing audits are intricate and time-consuming; hence it has taken some time. I am pleased to report that this is the first outcome of those audits.”

Transfer pricing

Transfer pricing refers to undervaluing the price of logs sold and exported to related companies or companies within a multinational group. At the same time, companies overvalue imported equipment and machinery, overhead costs, and consultancy work.

The IRC states that,

The main transfer pricing issue uncovered by the audit is that the taxpayer sold log species to related parties at prices lower than international market prices and thus reported a lower income than if its logs would have been sold at arm’s length. This means an under-pricing of log species sold by the taxpayer to related parties with significant pricing differences compared to market prices prior to and during the audit period, therefore not generating the fair amount of revenue and consequently not paying any corporate income tax.

The IRC found that the logging company’s finances were dire. The company’s liabilities exceed assets. It is at risk of bankruptcy. The company’s revenues are inadequate to cover costs. No capital is available for expansion. The company is financially unable to operate on a day-to-day basis.

The company did not cooperate with the audit and provided limited information. It denied that it was linked to any overseas partners. The IRC comments that the company’s failure to tell the truth about its log buyer “was an indication that it intended to hide something”.

The IRC notes that making false and misleading declarations to the IRC could lead to a four year prison sentence. The IRC states that, “The IRC will prosecute not only the taxpayers but also those who are responsible for hiding information and making false declarations to the IRC to reduce their tax liabilities.”

1989: The Barnett Report

Transfer pricing is not something new in the logging industry. In 1987, PNG’s then-Prime Minister, Paias Wingti, set up a Commission of Inquiry into the logging industry in the country. The inquiry was chaired by Judge Tos Barnett and the final report was published two years later.

The final report of the Barnett Inquiry stated that,

It was impossible to turn a blind eye to transfer pricing as it soon became apparent that it was a major preoccupation of the great majority of the companies being studied. It was the source of funds from which improper benefits were being sought and paid and was a major consideration when assessing the achievements of FIC [Forest Industries Council] State Marketing and the benefits flowing to the State from that involvement.

2016: The Great Timber Heist

In 2016, the Oakland Institute published a report titled “The Great Timber Heist: The Logging Industry in Papua New Guinea”. The report documents the dubious mechanisms that logging companies in Papua New Guinea use to evade taxes.

The Oakland Institute followed up two years later with another report: “The Great Timber Heist-Continued: Tax Evasion and Illegal Logging in Papua New Guinea”. This report reveals that the :

The financial records of 16 subsidiaries of PNG’s largest log exporter, the Rimbunan Hijau (RH) Group, show that these companies declare little to no profit. Actually, the more they harvest and export timber, the more money they declare in losses. While their exports have gone up over the past six years, so have their financial losses, leading to the accumulation of a record amount of tax credit, which is likely to prevent payment of any income tax in the years to come.

An Oakland Institute press release about the IRC fine on a logging company for tax evasion includes this statement from Eddie Tanago, Campaign Manager at Act Now!, a PNG-based NGO:

“The announcement of the K140 million levy for tax evasion is a direct result of the ground-breaking investigative research and advocacy done by Oakland Institute, and a powerful example of effective partnership between an international organization and local civil society groups on issues of corporate crime.”