JAKARTA (Dow Jones)--Indonesian palm oil exporters are pushing the government
for a major overhaul of the export tax system that will sharply lower palm oil
export taxes from current levels.

  If accepted, these suggestions would vastly improve the profitability of
plantation companies there, enabling them to get  much higher investment
ratings from investors.

  Indonesia's Trade Ministry is currently in talks with palm oil companies and
industry associations to "fine-tune" current tax rates, and will likely
announce a new taxation system before of the end of the third quarter.

  "We're hoping a progressive tax system would be imposed to replace the
current one in which a flat tax is imposed on the whole value of the palm oil
product," said Derom Bangun, executive chairman of Indonesia's Association of
Palm Oil Producers, or Gapki.

  Under the current export tax system, palm oil products are taxed at rates set
according to the government's calculation of global  prices, usually announced
every month.

  Palm oil incurs a 10% tax when global palm prices are between  $850-$1,099 a
metric ton, 15% when prices are $1,100-$1,199/ton, 20% when prices are
$1,200-$1,299/ton and 25% when prices are above $1,300/ton. There is no export
tax if prices fall below $850/ton.

  Gapki is suggesting a graduating scale with different rates.

  Under the proposal, assuming a palm price of $1,250/ton, sellers wouldn't pay
any tax for that portion of the price below $850/ton. They will pay 10% or
$25/ton for the portion of the price between $850-$1,099/ton and 15% or
$15/ton, for the $1,100-$1,199 portion.  The tax will be 20% or $10 on that
part of the price between $1,200/ton and $1,250/ton.

  This would result in a total tax of $50 per ton on sales of palm oil at
$1,250/ton, whereas under the current system, exporters would be taxed $250 for
each ton sold at that price.

  The government is yet to say what changes will be made to the tax structure.

  "We're looking at how we can fine-tune the current taxation system. (The new
structure) should be ready during the third quarter of this year," Indonesia's
Trade Minister Mari Elka Pangestu told reporters last week.

  Pangestu declined to say what the new system would entail as several options
are being discussed and specifics have yet to be agreed upon.

   Change Can Discourage Smuggling, Help Small Growers


  If Gapki's proposal is taken up by the government, the tax system would
effectively result in an 11%-20% earnings upside for Indonesian palm oil
producers, which may result in a re-rating of Indonesian palm oil companies,
said Teddy Oetomo, a research analyst with Credit Suisse.

  It may be difficult to find universal support for the proposal in light of
Indonesia's current tight budget, as it would result in a lower tax revenue for
the government, said Oetomo.

  But a lower tax could reduce the incentive to smuggle palm oil out of the
country and could in turn boost overall tax collection, he said.

  Indonesia has, in recent months, been trying to curb the smuggling of palm
oil, especially as prices began hitting record highs. The hike in export tax
rates to the current 10%-20% from as low as 1.5% early last year also led to an
increase in the incidence of smuggling.

  Indonesia announced in late March it would start auditing palm oil companies
for any discrepancies or signs of tax evasion after several cases of smuggling
were uncovered.

  Oetomo said Gapki's proposal would also benefit smallholders who have been
receiving less for their oil palm fruit bunches as higher taxes have meant
increased costs for palm oil companies.

  "Ensuring smallholders receive more money for their products would help
strengthen the government's political position in the run-up for the 2009
election," said Oetomo.

  Neighboring Malaysia recently announced a similar move, exempting small
farmers with up to 40 hectares of oil palm plantations from a windfall tax on
crude palm oil exports.

  Last year, Indonesia became the biggest palm oil producer in the world,
pushing longtime leader Malaysia to the second place. Indonesia produced 16.4
million tons of palm oil in 2007 while Malaysia was close behind with 15.8
million tons.