By comparing United Nations Comtrade data on Indonesia’s imports and exports, as reported by Statistics Indonesia, with the same data reported by our trading partners, huge discrepancies have been revealed in just two commodities alone: fish and coal. By calculating the loss that these discrepancies have caused for value added tax (VAT), royalties and income taxes it has been shown that Indonesia lost a total of US$5.6 billion of tax revenue during the period 2012-2022, of which $3.8 billion was due to unpaid royalties on coal exports.

Indonesia’s trade statistics are derived from Customs data, which in turn relies on paper invoices and self-declarations made by Indonesian importers and exporters. Misreporting and mis-invoicing by traders should always be anticipated, as they will often try to avoid paying tax and duties as well as avoiding administrative regulations and currency controls.

The Prakarsa study reveals that in imports, mis-invoicing is occurring in two ways. When under-invoiced, the value of exports to Indonesia as declared by other countries is higher than the value reported by Indonesia, so the Indonesian importers pay less duties and taxes. However, when over-invoiced, the export values declared by other countries are even higher than the import values reported by Indonesia, implying that there is an illicit outflow of funds and money laundering.

Prakarsa found a similar situation with exports: when over-invoiced, the value of exports (and thus, the export receipt) reported by Indonesia is less than the value received and reported at destination. This happens particularly in the case of fish. In other cases, the value of exports reported by Indonesia is less than what is actually received at destinations, implying another illicit transfer of funds. This happens particularly in the case of coal.

As the exchange of export and import data with other countries via the Automatic Exchange of Information (AEOI) is unlikely to happen in the short term, an immediate and effective step that could be implemented by Indonesia would be electronic invoicing.

Such discrepancies and tax losses could be avoided, and our balance of trade statistics be more accurate, if foreign exporters of goods and services to Indonesia were required to submit an electronic invoice via a central government platform eliminating paper and scanned copies. Once introduced, such a system would immediately eliminate any discrepancies between our import data and the data of other countries exporting to Indonesia.

As electronic invoices cannot be altered and manipulated, their introduction on cross-border trade would ensure more accurate payment of Customs duties and VAT and would reduce the opportunity for money laundering and illicit financial flows. The need for such a system was already highlighted by this paper in May 2022 when the Trade Ministry apparently lost track of palm oil exports.

Electronic invoicing in international trade would also ensure that the economic ministries would have real-time data on Indonesia’s trade, which is essential for the making of prompt and appropriate trade-policy decisions.

The miserable failure of the mandatory domestic market obligation (DMO) imposed on palm oil producers in the first half of 2022 to ensure domestic supplies and stabilize the cooking oil price at the fixed level is another example of how urgent the introduction of an electronic-invoicing system is to our international trade.

The recent government decision to increase the DMO volume for palm oil companies from 300,000 to 500,000 tonnes daily could again become a major barrier to seamless exporting, because companies have to cope with byzantine bureaucratic red tape to obtain export licenses.

Without an electronic invoicing system, the verification of domestic sales, as a prerequisite to obtaining an export license, was vulnerable to loopholes and corruption, such as in what occurred in the first half of 2022, an executive of the Indonesian Palm Oil Association (Gapki) said. An electronic invoicing system would make the verification of sales under the DMO a smooth process. 

But the key to seamless and transparent invoice verification is that the government establish an international e-invoicing platform, by which all export invoices could be created electronically.

Exporters wishing to issue an invoice to an overseas buyer would create the e-invoice online on an e-invoicing platform owned and administered by the Finance Ministry. As soon as the invoice is created it could be shared in real time with all other key agencies, such as the ministries of trade, agriculture and industry as well as the central bank, the Directorate General of Taxes as well as the Directorate General of Customs and Excise. 

Such a platform would enable the coordinating economic minister to have real-time oversight of the volume of palm oil being exported, which could be matched against the domestic sales and the production volumes known to the Industry Ministry. The verification procedure, which is the backbone of a successful DMO, would be solved when combined with cross-border or international e-invoicing.

Cross-border e-invoices are a powerful and comprehensive product.  E-invoices cannot be repudiated or falsified. They have unique identifiers and can be delivered to all relevant parties in an instant. Suppliers cannot deny the issuance of an invoice and cannot alter an invoice once it has been cleared. Digitalizing the process in this way has achieved considerable success in Latin America.

Extended to imported goods, such an e-invoicing system would ensure that goods and services procured from abroad were correctly invoiced, the right amount of tax was paid and external payments were fully reconciled with import declarations. They would become a reliable basis for the correct collection of VAT and customs duties.

 ***

The writer is senior editor at The Jakarta Post.