Transparency Takes One Giant Leap Forward in Indonesia [Coal Asia Vol. 32]

Transparency Takes One Giant Leap Forward in Indonesia

By Ian Wollff

The author is an expatriate principal geologist of about 28 years experience in the Indonesian exploration & mining industry, and is employed by an international consultant company.

 

Indonesia’s first Extractive Industries Transparency Initiative (EITI Report), dated 22 April 2013 has been issued by the nation’s Multi Stakeholder Working Group. This independent report applies agreed upon procedures in accordance with auditing standards established by the Indonesian Institute of Certified Public Accountants. The report covers the 2009 calendar year, and all material revenues reported to have been paid by all major producers in the petroleum, coal and mineral sectors to the government, as well as all revenues reported to have been received by the government from those producers. Much of this article is taken from the EITI report, and the reader is advised to see the original for a complete understanding of the report, which may be downloaded from www.eiti.ekon.go.id

This review covers the 18 mineral and 54 coal mining companies that were requested to provide information on six forms of government taxes and fees. Of these 72 mining companies, only three small companies did not submit data (either because they were closed or because they were uncooperative). For the remainder that did report, the findings were as follows.

Summary of Findings on Government Revenue from Minerals
Government Revenue	Reported by Mining CompaniesUS $ (‘000)	Reported by DGT/ESDM/DGB US$ (‘000)	Un-reconcileddifferencesUS$ (‘000)
Corporate income tax	1,223,116.75	1,165,999.96	47,943.37
Royalties	197,510.03	194,949.31	2,560.73
Sales Revenue share	–	–	–
Dead Rent	1,610.33	2,456.69	(846.36)
Land and building tax	20,122.81	3,358.31	16,233.96
Dividends	288,994.58	276,870.05	12,124.53
TOTAL	1,731,404.50	1,643,634.32	78,016.23

 

Summary of Findings on Government Revenue from Coal
Government Revenue	Reported by Mining CompaniesUS $ (‘000)	Reported by DGT/ESDM/DGB US$ (‘000)	Un-reconcileddifferencesUS$ (‘000)
Corporate income tax	1,109,956.93	1,294,089.79	(272,941.16)
Royalties	938,167.18	958,992.68	(20,852.50)
Sales Revenue share	215,581.62	248,382.03	(32,800.41)
Dead Rent	2,368.56	2,273.38	95.14
Land and building tax	6,281.92	2,690.69	2,879.00
Dividends	63,063.72	63,063.72	–
TOTAL	2,335,419.93	2,569,492.29	(323,592.93)

Note: DGT = Ministry of Finance’s DG of Tax. EDSM = Ministry of Energy and Mineral Resource’s DG of Minerals and Coal. DGB = Ministry of Finance’s DG of Budget. 

The report contains a number of complex audit findings. One of the most difficult aspects of the reconciliation was that the DG of Tax cannot unilaterally provide information to EITI. Mining companies are first requested to assist in providing letters to the DG of Tax authorizing it to provide such tax payment information. There were complications in securing letters from companies, and also related to the information provided in some of those letters. As a result, amounts reported in the tables above by the DG of Tax exclude amounts for corporate income tax and land & building tax received from certain mining companies which either failed to provide tax authorization letters to the DG of Tax, or whose letters contained taxpayer numbers or tax object numbers with which the DG of Tax did not agree. For this reason, in the tables above, in the rows for corporate income tax and land and building tax, the first column minus the second column do not equal the third.

Overall, there were 19 mining companies that did not provide adequate tax authorization disclosure letters to government, with total reported payments of $98,032,000 that were excluded from the reconciliation process. For this reason, the total revenue amount of income taxes actually received by government is greater what is stated in the above tables.

More generally, reasons for un-reconciled differences in royalty, sales revenue share and dead rent included companies reporting formats that were not compatible to the EITI survey categories and some under reporting of 2009 royalties and income taxes.

The most significant discrepancy in reporting of corporate income tax by a mineral producer was PT. Timah (Persero) Tbk, a subsidiary PT. Tambang Timah, which reported paying US$39,907,000 in income tax, while no tax receipts were reported by the DG of Tax from Timah. The more significant coal mining companies that reported lower tax than what the government reported receiving were; PT. Arutmin Indonesia said it sent $133,840,000 less than what the government said it received; PT Kaltim Prima Coal, $86,339,000 less; PT. Bahari Cakrawala Sebuku, $31,541,000 less; PT. Adaro Indonesia; $11,321,000 less.

As a separate but related matter, the DG of Tax reported to EITI a higher number for corporate income tax received from mining companies reporting to EITI than it reported receiving from all mining companies nationwide (including the smaller subset of EITI mining companies). DG Tax maintains that the latter figure is smaller due to the present migration of data from an old tax office computer system to a new tax office computer system in the Tax office.

Reconciliation for land and building tax was complicated because such taxes are often paid to district tax offices, using companies’ district branch tax numbers which are unrecognized by the DG Tax in Jakarta. Overall, the report noted that some un-reconciled differences could have been reconciled with more time and effort.

The report identifies a number of opportunities for improvement:

1. The ESDM and Treasury should work together to synchronize monitoring of payment of royalties, sales revenue share and dead rent by mining companies.
2. The accuracy of ESDM reporting on Dead Rent could be improved, particularly as this revenue is shared with local government.

The report provides a list of each mineral and coal company tax reporting, and details the type of payment made to and received by the Government, any audit adjustments made by the EITI, and any remaining un-reconciled amounts, disaggregated to the level of each individual mining company.

Dr. Emy Perdanahari, chairwoman of EITI Indonesia secretariat commented: With the release of this report, the public will finally know how much, officially speaking, each resource company paid to each government agency. This is a huge milestone in government transparency.

The next EITI report will cover more companies, will begin to review receipts of some provincial and district governments, and will widen the number of revenue streams covered in previous reports.

The author feels the immediate response from industry and government will be a measure of the impact of this first EITI report.

• Companies that promptly react to this report by issuing statements of support for the EITI process and clarification regarding their audit adjustments will be a further measure of which company directors are acting with due corporate responsibility.
• We may also look for Ministerial press releases in support of the EITI process, plus Ministerial directives for the Mines Directorate General to begin to instigate improved systems of keeping track of non tax revenues received by the government, as well as requiring companies to report more diligently and carefully in the future, so that EITI Indonesia reconciliations are less arduous.

Indonesia missed its April 2013 deadline for undergoing “validation” (or independent internal evaluation by an accredited party). The international EITI Board has granted Indonesian a three month extension to complete this obligation. Indonesia’s next report in December of this year will be a further milestone in transparency, and ongoing compliance with EITI by Indonesia.

 An Independent Perspective

David W. Brown, a World Bank Advisor on the EITI prepared a Summary of Findings of Indonesia’s 2009 EITI Report. His analysis makes the following observations:

1. One of the most difficult areas to reconcile was the DG of Minerals and Coal records of royalties paid. In all, 275 individual adjustments were made to numbers originally reported by the DG. The Reconciler also communicated with companies, and made 101 individual adjustments to royalty and sales revenue shares numbers that they had reported. The total of 376 adjustments made for coal royalties alone represent more than half of the 642 adjustments made in the entire EITI Indonesia report.

2. Indonesia has become the world’s largest exporter of thermal coal. Thirty percent of Indonesia’s billionaires have made part or all of their fortunes in the coal sector, and 20 percent of the capitalization of the Indonesia stock market is from coal companies. Yet the total amount of the contribution of coal companies to national revenues was, before EITI, not a public figure. Under EITI Indonesia, the government reported that the 2009 income tax contribution of 38 of the nation’s largest coal companies was $1.294 billion and for the 53 largest royalty-payers $1.207 billion, or a combined total of just over $2.5 billion, which is just less than three percent of all revenues collected by the government that year.

3. In recent years the number of locally licensed mining companies in Indonesia has exploded to more than 10,000. However, as long as the Indonesian public does not have even the most basic information on locally licensed mining companies, including their names, what they mine, and how much they do (or do not) contribute to the national treasury, it is difficult for the public to have confidence that these mines are genuinely assisting the nation’s development in the long run, particularly in view of the negative externalities that many generate. EITI Indonesia tells the public the names of the 22 largest of the nation’s 10,000+ locally licensed mining companies, what commodities they produce, and how much revenue they conveyed to the state.

In each successive year, the list of locally‐licensed companies reporting under EITI Indonesia will grow, and so will the public’s understanding of these companies. Compared to the first report, the second EITI Indonesia report, which will come out at the end of 2013, will see a rise in the number of reporting locally-licensed gold companies from 0 to 2; tin from 4 to 18; nickel from 1 to 14; iron from 0 to 3; bauxite from 2 to 7; and coal from 15 to 106.

4. The EITI report is important because it pertains to Extractive Industry (EI) revenues that are redistributed by the central government to the local level. Some 80 percent of mineral and coal royalties are required by law to be redistributed by the national government to the district, surrounding districts, and provinces within which these operations are located.

Indonesian citizens are mostly unaware of the amount of resource revenues that their local governments are entitled to receive. Moreover, how much is supposed to originate from which company in a given year has, up to now, never been a public figure. As a result, citizens in resource‐revenue‐rich districts have not been in as strong a position to
request better services from local governments than would be the case if such information
were available.

As a result of this information being made available, and distributed locally through a range of communications products, it is hoped that citizens in resource‐revenue‐rich districts will be in a stronger position to request better services from local governments. Economist Faisal Basri refers to the EITI reports’ highly detailed information on EI revenue sharing as “a tool for the people to force accountability from their government.”

5. If there is a single message that comes out of this report, it is that the resolved and
unresolved discrepancies that surfaced during the EITI Indonesia process point less to theft or misappropriation, than they do to disputes, human error, and sub-optimal revenue
management. Having said that, while EITI Indonesia may be able to spot leakages once oil, gas and minerals revenues have entered the system, it is not able to identify under‐payment or non‐payment by companies.