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Japan-Backed Power Plant in Indonesia Caught Avoiding Taxes and Violating Rights

SNA (London) — The Indonesian coal mining conglomerate Adaro Energy, which is allied with the Japanese companies J-Power, Itochu, as well as a number of public and private Japanese banks, has been avoiding local taxes for more than a decade, depriving the Indonesian government of about US$125 million in income from 2009 to 2017, and has even been accused of provoking human rights abuses in the country.

As revealed in a new Global Witness report, Adaro Energy is in a venture with its Japanese partners to construct a 1,900 MW coal-fired power plant in Batang, Indonesia. If constructed, the plant would be the largest of its kind in Indonesia.

MUFG, SMBC, Mizuho, JBIC and the Japanese government have bankrolled the plant to the tune of billions of dollars. It has faced several delays, but is currently around 40% complete. Once it is up and running in 2020, it is expected to create around US$80 million a month in revenue.

Yet the Global Witness report, titled Taxing Times for Adaro, lays bare how the firm swindled the Indonesian government out of US$125 million through their tax minimization efforts. Adaro funneled most of its profits to subsidiaries in tax havens, through which they conducted a variety of activities while paying low taxes or none at all.

One of their subsidiaries, Coaltrade Services International, is located in the low-tax, low-regulation international trading hub of Singapore. The report shows that Adaro purchased coal from its Indonesian subsidiaries at low prices, later selling the coal in Singapore to third-parties at marked-up prices.

In Singapore, Coaltrade’s profits were taxed at only 10.7%, around a fifth of average Indonesian rates. While it is true that Singapore is an international trading hub famed worldwide for its finance and business sector, it is likely that Adaro funneled profits there simply to minimize tax.

There is precedent for this kind of behavior, which may not technically be illegal but is certainly frowned upon. BHP and Rio Tinto have previously been in hot water with Australian tax authorities over their profits in Singapore. BHP was forced to pay US$374 million to Australian tax authorities to put an end to that particular saga.

Furthermore, a large percentage of Coaltrade profits (around 90%) were funneled to subsidiaries based in Mauritius, another tax haven. For almost a decade, the subsidiaries Arindo Holdings and Vindoor Investments were not required to pay tax on any of their profits. In September 2017, when Arindo changed its official status to become listed on the Mauritius stock exchange, they then coughed up taxes in line with a meager 3% rate.

Global Witness investigations showed that these subsidiaries existed primarily to store assets and funds. Adaro also later created Adaro Capital, another subsidiary, this time located in the Malaysian tax-haven Labuan. Adaro has said publicly that the company was set up to make investments on Adaro’s behalf, though not in Indonesia.

Adaro Capital ended up acquiring Rio Tinto’s 80% stake in the Kestrel coal mine, located in Queensland, Australia, for US$2.25 billion.

As Global Witness points out in their report, there is now a reputational risk for the Japanese companies (and for the Japanese government itself) which choose to associate themselves with a company that engages in tax minimization to the detriment of the Indonesian people.

But the new revelations simply add to a long list of controversies associated with the Batang plant.

Prime Minister Shinzo Abe, who has been publicly supportive of the plant, has insisted that the construction of the plant will make “great progress” in the fight against climate change, but the facts suggest otherwise.

While it is true that the plant uses a special technology that reduces CO2 emissions, it is nevertheless still a coal-fired power plant. As Greenpeace Indonesia has said, “The planned coal plant will pollute rich coastal fishing waters and threaten the livelihoods of more than 10,000 small-scale fishermen.” Greenpeace adds that the plant will emit 226 kilograms of mercury a year, and will pump 10.8 tons of carbon into the atmosphere. At least five villages will need to be sacrificed to make way for the plant, along with hundreds of hectares of plantations and paddy fields.

At the rate at which Indonesia is building new coal-fired power stations, including this one, the total emissions from their energy sector will double by next year.

Many who oppose the plant claim that JBIC has violated its own stringent environmental and social guidelines in backing the plant; the state-owned institution supposedly promotes “sustainable development” and the guidelines declare that the bank “confirms that project proponents undertake appropriate environmental and social considerations so as to prevent or minimize the impact on the environment and local communities.”

Abe has come under fire for backing the plant. He has previously positioned himself as someone who is concerned about climate change, penning articles in outlets such as the Financial Times with titles like “Join Japan and Act Now to Save Our Planet.” Yet Japan is one of the largest public investors in coal-fired power plants globally, investing as much as US$14.5 billion over the last five years.

In addition, Indonesia has massive geothermal and solar potential, raising the question of whether constructing new coal-fired power plants are truly necessary in the first place.

Several human rights groups have also protested against the project, along with the locals who will be directly impacted by the plant themselves. The Indonesian government was forced to use the 2012 land acquisition law, which enables the seizure of land “in the name of public interest” in light of refusal by villagers to cooperate with the project.

Demonstrators have held protests outside the Japanese Embassy in Jakarta, and several villagers who will be affected by the project made the long journey to Tokyo to personally file complaints with JBIC, Itochu, and J-Power.

Indonesian authorities have done all they can to clamp down on this peaceful resistance, arresting and jailing several protestors.

The Indonesian National Commission on Human Rights sent letters directly to Prime Minister Abe, pleading that Tokyo should pay more attention to the human rights issues associated with the plant. The letter claims that, since 2013, “intimidations and physical and mental threats” have been orchestrated against landowners who refuse to make way for the project. It also alleged that “heavy machines driven by military soldiers hired by the government and the consortium made canals surrounding the properties of local people who were refusing to sell.”

The Abe administration has maintained silence about these human rights concerns.

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