Ford Motor Indonesia Facing a Tax Scandal & Lawsuit
In early 2016 Ford Motor Indonesia, the local unit of American car-maker Ford Motor Company, announced it will have completed its exit from Indonesia (and Japan) by the start of 2017. This decision was made because Ford has been unable to compete with its Japanese counterparts on the markets of Indonesia and Japan. The sudden move to exit Indonesia was not warmly welcomed by Ford Motor Co's dealers in Indonesia. The 31 Ford local dealerships demanded USD $75 million in compensation. More recently, Ford Motor Indonesia has become the center of a tax scandal.
Indonesian authorities, which have been eager to boost tax revenue realization (for example through the tax amnesty program), said they will investigate reports that claim Ford Motor Indonesia tried to avoid a high tax on its Everest sport utility vehicle.
According to media reports, Ford Motor Indonesia imported 10-seat Everest vehicles (manufactured at its Thailand-based factory) that were rearranged into 7-seat vehicles after arriving in Indonesia. Through this strategy it allegedly avoided a much higher tax tariff. A 10-seat vehicle is subjected to a 10 percent sales tax (being classified as a minibus), while a 7-seat vehicle is subjected to a 40 percent sales tax (being classified as a 'luxury good'). The imports of 10-seat vehicles occurred between the years 2007 and 2014.
Lea Kartika Indra, Communications Director of Ford Motor Indonesia, said Ford denies that it has been engaged in any form of tax avoidance in Indonesia.
Yustinus Prastowo, Executive Director of the Center for Indonesian Taxation Analysis (CITA), stated that the penalty for such tax avoidance would be the paying back of taxes four times the original amount and imprisonment (up to three years) for the company's executives. He added that if these allegations are true it means that there are still many flaws in Indonesia's tax and import systems, flaws that cost the government significant amounts of tax revenue each year.
Earlier this year Ford already faced problems in Indonesia. After its sudden decision to exit Indonesia a total of 31 local Ford dealers threatened to sue Ford, Ford International Services and Ford Motor Indonesia. These dealers, who account for 85 percent of total Ford sales in Indonesia, demand USD $75 million in compensation as they have invested in showrooms and other facilities (buildings, equipment and manpower) to support an expansion plan that was announced by Ford in 2011. The recent decision of Ford to exit Indonesia came as a total surprise and causes financial damages to these local dealers.
Read more: Overview of Indonesia's Automotive Industry
Ford started to invest in Indonesia in 2002 by opening a manufacturing plant in a country that is characterized by a very low per capita car ownership ratio, while production costs are attractive due to low minimum wages. In the late 2000s Indonesia's car sales started to thrive supported by rapidly expanding per capita GDP and people's rising purchasing power. With the middle class expanding rapidly, demand for cars surged. However, this market is dominated by Japanese car giants, particularly Toyota, Honda and Daihatsu. Western car manufacturers have been unable to compete with their Japanese counterparts.
Controlling only about 0.6 percent of the market in Indonesia, Ford announced in early 2016 that it will have exited Indonesia by the start of 2017. This decision is expected to cost around 500 jobs. In 2015 Ford's sales in Indonesia plunged 50 percent to 6,100 vehicles.