Transparency Solomon Islands is concerned at the involvement of politicians in assessing the export log values. There are well-authenticated stories circulating in Honiara that the government is losing $1m to $2m a week in revenue because the price on which export duty is paid on logs is too low-and that this has been going on for several years, losing hundreds of millions of dollars that should have gone into improving government services. It is said that ministers have been fixing low export prices under pressure from logging companies with whom they were involved. Why would that be so, and how could it happen? How can it be stopped?
Export duty is paid at a rate fixed by the Minister of Finance. It is paid on the value of the log when it is loaded onto the ship. This is known as the fob price-'free on board', all charges up to and including loading having been paid. The exporter declares this fob value in the customs entry documents for the shipment. He may or may not be telling the truth, but it is an offence to give false information.
The fob price is different from what the buyer overseas will be paying for the log. The buyer is paying the exporter whatever price they have agreed (which of course may not be the same as the exporter is declaring to Customs). The buyer is also paying insurance and freight for the shipping of the log. What the buyer pays is called the cif price, meaning cost (the fob cost) plus insurance and freight. This general level of these prices is reported for various log species and sizes in regularly published market surveys in timber importing countries.
When the exporter here in Solomon Islands declares the fob price on the export entry documents there are several reasons why he might falsely declare a low fob price. First, to reduce the amount of export duty he has to pay. Second, to reduce the income he appears to be earning in Solomon Islands, to avoid paying business income tax to the government (he can arrange to receive some of the payment overseas by selling the logs to a related company for an artificially low price-this is called transfer pricing). And third, to reduce the amount of money he has to share with whoever contracted him to cut and export the logs-the so-called landowners and the middleman or agent who put the deal together.
With so many reasons why a falsely low fob price might be declared by exporters, many governments set a 'determined price' for payment of export duty. To do this they survey the regularly published overseas cif market prices for the type of logs they are exporting, obtain current freight and insurance rates (there are many shipping and insurance companies in competition, so not much risk of false rates), average them out, and calculate what they consider is a fair fob export value for their logs. Then that is set as the price for payment of duty. This is a purely technical exercise with no political involvement. It should be a completely transparent process and the information that it is based on is readily available and can be locally published.
The new government has made a commitment in its policy goals for forestry 'to ensure Solomon Islands receives fair returns on the export of round logs that reflect true international market prices'. And in its policy goals for finance it has promised 'improved revenue collection with tax reforms that are more efficient and fair'. TSI welcomes the government's policy goal and advises that an excellent way to start will be to remove without further delay the non-transparent influence of ministerial discretion from the fixing of the determined price for round log exports.
This should be set transparently and mechanically by officials at regular intervals without any political intervention, and the basis of the determined price should be published in the local media. Any objections by logging companies would be restricted to matters of fact and dealt with by the appropriate officials. This will protect ministers from accusations of improperly intervening in the setting of export prices, and place the whole process on a transparent and publicly accountable basis. And it will undoubtedly improve revenue.
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TSI SAYS "SETTING THE 'DETERMINED PRICE' FOR LOGS IS NOT A JOB FOR MPS"
Disclaimer: The views and opinions expressed in this letter are those of Transparency Solomon Islands (TSI) and do not necessarily reflect the official policy or position of Solomon Times Online.
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