Indonesia’s palm oil tax change comes under fire

By Michelle Knott

- Last updated on GMT

Related tags Palm oil Indonesia Malaysia

Indonesia’s new tax structure for palm oil exports has sparked concern among competing refiners abroad and palm oil growers at home.

The new regime includes a complex set of thresholds and export tax rates that vary with the international price of palm oil, but it essentially cuts the maximum export tax on refined, bleached and deodorised palm oil (RBD) to 10%, while the top rate for crude palm oil (CPO) remains virtually unchanged at 22.5%. The differential is designed to boost growth in the refining industry in Indonesia, which is the world’s largest producer of palm oil.

International advantage

Malaysia is the world’s number two producer, and its refiners are worried about the potential impact of the Indonesian policy. The chief executive of the Palm Oil Refiners Association of Malaysia (PORAM) claimed this week that the move will give their Indonesian counterparts an immediate price advantage of between $72 and $129 per tonne for RBD exports.

Mohammad Jaaffar Ahmad told Reuters that it will have a direct effect on Malaysian refiners because the country does not grow enough palm oil to feed the refinery industry and has to import significant stocks of CPO from Indonesia.

According to the Malaysian Palm Oil Board, the Malaysian industry has produced over 12m tonnes of CPO so far this year and imported around 880,000 tonnes.

With Indonesia slashing its RBD palm oil export tax and keeping CPO tax virtually unchanged, more oil will be channeled to Indonesia plants, limiting supply for Malaysia and raising feedstock costs. "Based on the above scenario, we do not discount the possibility of much smaller capacity refiners having to shut down as they may not be able to operate at the minimum capacity to be profitable,"​ he said.

Ahmad added that Malaysia has already lost around over 260,000 tonnes of refining capacity between 2008 and 2010: "This is mainly because of cheaper raw materials and lower export duty imposed by Indonesian Government for that market sector."

Trouble at home

Meanwhile the Indonesian Palm Oil Association (GAPKI) have also condemned the new tax structure, saying that complex formula for CPO rates will mean upstream producers paying more for the rest of the year, based on the expected market price of between US$1000 and $1100. This further proves that export tax is actually an instrument of state revenues,”​ said GAPKI in a statement.

GAPKI also maintained that the policy penalises farmers, who are responsible for 40 per cent of Indonesia's CPO production industry. The association says that the differential rate means growers will effectively be subsidising the downstream processors. “It only happens in Indonesia [that the government forces] farmers to subsidise big business and not vice versa,”​ said GAPKI.

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