Malaysian timber giant Rimbunan Hijau’s Papua New Guinea is undervaluing its timber exports and overstating its costs to show a loss, and escape taxes, think-tank Oakland Institute said.

Poring over data in a report released on Monday, Oakland Institute said the firm’s 16 subsidiaries have been declaring losses for more than a decade but were in fact channelling the profits to tax havens.

The profits are then repatriated to Malaysia under the guise of foreign direct investment, the policy research house said in a 25-page report.

“Our investigation of the web of firms, subsidiaries, and tax haven-based holding companies involved in PNG logging suggests that goods and services are often purchased from sister or holding companies, leading to a real opportunity for both overpricing and underpricing.

“The industry pays export duties and levies on logs amounting to an average of US$80 million (about RM337 million) per year, but the use of underpricing can have a significant effect both on income tax and export duties.

“Our research suggests that it is likely that hundreds of millions of dollars have been lost in recent years through such tax evasion,” the report read.

'Smear campaign'

Rimbunan Hijau PNG, however, deemed the report “groundless” and said it was part of a “Western anti-forestry” lobby.

“ The Oakland Institute appears to want to sustain the campaign funded by foreign NGOs to halt commercial forestry in PNG. This campaign has failed,” Rimbunan Hijau PNG corporate policy manager Axel Wilhelm told Malaysiakini in an e-mail.

He said recent satellite remote sensing provided by Japan International Cooperation Agency shows PNG forests are not being gutted, and that 80 percent of the country is forested.

Japan International Cooperation Agency in a pamphlet on its project, however, noted that land spanning more than one hectare with trees higher than three metres and a canopy cover of more than 10 percent, is administratively defined as forest in PNG.

Environmentalists argue that this could include plantations and other deforested areas now used for other purposes.

The Rimbunan Hijau's group chairperson is Sibu businessman Tiong Hiew King, who also controls Sin Chew Jit Poh owner, Media Chinese International.

Oakland Institute said Rimbunan Hijau PNG’s subsidiaries accumulated US$32 million (about RM135 million) in tax credit in seven years, by under-declaring profit.

Firms which operate at a loss need not pay the 30 percent corporate income tax imposed in PNG, and can earn tax credits from which it can deduct the amount of taxes it needs to pay in the future, it said.

Loss in US$100 million per year in tax revenue

“The discrepancies found in PNG timber export prices and the operational losses declared by many logging companies seem to indicate that transfer pricing is taking place in PNG’s forest industry – resulting in a loss of tax revenue that may exceed US$100 million (about RM421.46 million) per year,” it said.

For example, the average price per cubic metre for tropical logs from PNG in the past 15 years is 20 percent lower than the other five major exporters of tropical timber, it said.

In 2014, the PNG export price per cubic metre was US$210 (about RM885.06), when the average price for the other major experts of tropical wood was 46 percent higher at US$388 (about RM1,635.32).

This means a whopping US$679 million (about RM2.8 billion) in difference in the declared revenue for the industry and what it should have actually made in 2014, Oakland Institute said.

PNG in 2014 overtook Malaysia as the largest exporter of tropical timber.

Rimbunan Hijau PNG declared losses for nine consecutive years, and two years of profits – a trend evident in its subsidiaries, it said.

Its subsidiaries accumulated US$32 million (about RM134.86 million) in tax credits in 2004-2011, it said.

Holding companies

Oakland Institute said costs are over-stated by overpricing import equipment, transfer of overheads from headquarters and overpricing expatriate work.

Oakland Institute said Rimbunan Hijau PNG firms “spend significant resources on activities, goods, and services that are likely to involve sister companies”.

“Since Rimbunan Hijau has a variety of subsidiaries involved in different aspects of logging and timber processing, these operational expenses could be charged to sister companies,” it said.

It said timber firms hide profits by selling the logs to an offshore parent company which will then re-invoice or re-export them for a substantially higher price.

It found most Rimbunan Hijau holding firms are located in the British Virgin Islands.

They include Super Acme Ltd, Mooningham Ltd, Wilmington Co. Ltd., Subang Inc, and Proexcel Ltd. The rest are in Singapore (Monarch Logging Pte Ltd) and Hong Kong (Gotha Co Ltd and Glasfield Co Ltd).

“The role of BVI, Singapore, and Hong Kong in facilitating illicit financial flows, such as tax avoidance and transfer pricing, is well documented,” it said.

‘Legal obligations met’

However, Rimbunan Hijau’s Wilhelm said the group “ meets all its legal obligations, including payment of taxes, duties, levies and royalties”.

He said timber firms operate at a loss for periods due to volatile international prices and cost pressures, and need long-time horizons to balance out the losses.

He added that the group is “progressively diversified” and invested in other industries in PNG, signifying its commitment to the country.

“ Rimbunan Hijau has been applauded by successive PNG governments for making major investments in PNG.”