VIII. Appendix: Methodology for Estimating Timber Revenue Loss

Royalty and Reforestation Fees

Calculating the amount of revenue lost to the government first requires an estimation of what the government should have charged for the wood harvested in Indonesia. We do this in several steps.

The amount of taxes and fees to be paid on wood harvest is prescribed by government regulation. The vast majority of government revenue is from the reforestation tax (Dana Reboisasi, or DR) and the forest products royalty fee (Pajak Sumber Daya Hutan, or PSDH). Royalties are charged per volume (cubic meters) produced, as a proportion of value of the wood. The domestic market value of merantitimber (the dominant species in western Indonesian forests) was set by government regulation[200] at Rp500,000/cubic meter(US$53/cubic meter). This government rate provides a considerable discount on the real value of the wood because for the last several years the actual market value[201] of meranti was almost five times higher, around $240/cubic meter (see Figure 6).

The Reforestation Fee is also volume-based and varies with the species of timber and region of harvest. In 1999, a government regulation set the DR at $16/cubic meter of meranti.[202] The fee is set in US dollars but may be paid in Indonesian rupiah. The government-set exchange rate for the DR payment is Rp5000/$, or Rp80,000/cubic meter of meranti. This rate provides a considerable discount because the actual exchange rate has been considerably higher for about a decade (see Figure 7). Currently, the market rate is roughly twice the government rate.

To calculate the amount of revenue lost to the government, we first take the volume of legal timber that was undercharged through use of these below-market rates, and calculate the amount that the government could have collected had they used actual market value and exchange rates. Second, we take the volume of illegal wood for which no fees were collected into state coffers (often bribes to individual officials are termed “fees,” but these “fees” go into the pocket of individuals rather than into the state budget) and calculate what the government could have collected had they used the real market rates.

Transfer pricing

In the final step, we make an estimate of the amount of revenue lost to one particular form of tax evasion where exporters undervalue timber exports in order to avoid value-based taxes. This illegal practice is called “transfer pricing.” To develop an estimate of the amount of transfer pricing, we use an accepted international finance method called “mirror statistics.” In this method, we compare the value of exports reported by the ministry with the value of imports that the importing countries report to the UN Food and Agriculture Organization (FAO) and the International Tropical Timber Organization (ITTO), as shown in Figure 8 below. The difference between the value of what Indonesia says it is exporting to individual countries and the value those importers say they received from Indonesia is consistent with transfer pricing,  as well as smuggling out of Indonesia but legal reporting on entry to the importing country.[203]

Our total annual estimate of revenue lost to the Indonesian government is derived from the sum of the amount undercharged by undervaluing timber and exchange prices (or, unacknowledged subsidy), the amount of fees uncollected on illegally harvested wood (using real timber and exchange prices), and the estimated amount of export taxes evaded through transfer prices (see Figure below). It does not include losses due to the evasion of corporate and income taxes and certain minor taxes (which collectively are a small fraction of the DR and PSDH), losses due to unreported smuggling, and the consumption of wood by mills (possibly numbering in the hundreds) with production capacities of less than 6000 cubic meters per year.

Even when government data is exclusively used (instead of the FAO/ITTO data for timber consumption within Indonesia), the loss is still staggering: