Transfer Pricing and Trade Malpractice in the Papua New Guinea (PNG) Log Export Industry

Abstract

The paper examines the evidence to suggest that there is extensive trade malpractice in the Papua New Guinea log export industry. The malpractice comes in the form of transfer pricing, species misidentification and under measurement of logs. The evidence provided strongly supports the hypothesis that there is extensive malpractice. On the basis of international trade statistics it is possible to demonstrate that PNG logs trade at prices that are substantially at variance with those of logs of other countries in the region. Moreover pricing behaviour appears to be consistent with the administered price hypothesis. The available evidence, gathered from tax files indicates that firms in the PNG forest industry make no taxable profit over long periods of time yet there is no tendency for these firms to exit the market. This would indicate that the firms are actually making profits by various illegal means. It is argued that the various forms of malpractice are symptoms of the same phenomena and any attempt to deal with transfer pricing without simultaneously dealing with species misidentification and under measurement will be pointless as these are alternative strategies of tax evasion.