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OJK should let government kill bank secrecy rules
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To be fair, the 1998 Banking Law makes explicit exemptions, including for taxation purposes. Banks can divulge their depositors’ data upon the order of the banking authority after receiving a request from the finance minister. (JP/File)
R
ecent comments by the commissioner for banking supervision of the Financial Services Authority (OJK) indicated that because of international pressure toward greater transparency, the OJK is willing to share financial information with the Directorate General of Taxation.
It is unclear, however, whether he was referring to information regarding foreigners with financial accounts in Indonesia, or information about Indonesian citizens. If he was referring to foreigners, indeed the OJK is already sharing their information with the tax office. If he was referring to Indonesian citizens, however, then he was contradicting a comment made a day earlier by his own deputy who clearly opposed sharing information being shared with the Indonesian tax authority, citing fears that this move will “reduce investments in Indonesia”.
The confusion, hesitancy, or refusal of the OJK to share the financial information of Indonesian citizens might be seen as a technical issue or egotistical a matter of ego between the OJK and the tax office and nothing more, but this would be a mistaken view. What is at stake is much more than that. This is about whether we will let the financial industry run its course uninterrupted, oblivious to the needs of the people, or yield for the greater good.
To understand why this matters, we must begin with a brief discussion about the self-assessment system of taxation.
Under the self-assessment regime, the government relies on the information provided by taxpayers on their returns. Consequently, this means that to ensure compliance the government needs to verify the information disclosed by taxpayers and this data-matching necessarily requires information from external third parties, including banks and other financial institutions.
Taking cover behind the rule of bank secrecy, as enshrined in the 1998 Banking Law, the bankers religiously reject and in some cases successfully thwart attempts by the government to access depositors’ financial information. A regulation issued in January 2015 by the Deputy Finance Minister Mardiasmo, who was then acting director general of taxes, requiring banks to submit withholding slips of taxes paid on interest was roundly criticized not only by bankers but also by the OJK. The mighty lords of finance then swiftly condemned the regulation to the limbo of indefinitely postponed regulations. Lasting only 25 days, the regulation was as good as dead on arrival.
Now the same battle is set to repeat with the tax office pushing for a comprehensive tax reform that would entail the dismantling of the banking secrecy rules that prohibit banks from disclosing information about their customers.
To be fair, the 1998 Banking Law makes explicit exemptions, including for taxation purposes. Banks can divulge their depositors’ data upon the order of the banking authority after receiving a request from the finance minister.
In this regard, the General Taxation Law (UU KUP) allows the finance minister to request banking data pertaining only to specific persons and only if there are investigations or other enforcement actions underway against these persons.
Herein lies the problem: Access to financial data is granted only if there are indications of tax crimes, but often tax crimes can only be discovered after verifying tax returns against third-party information, especially financial information. Anyone familiar with Excel will know this as the circular reference error, more commonly known as the chickenand-egg problem: Financial information is required to uncover a tax crime but a tax crime is the prerequisite to get access to financial information. Practically, this means that in Indonesia virtually no financial information is available to the taxman for datamatching purposes.
In other words, companies and individuals can still cheat on their taxes by placing their legally earned income in legally protected bank accounts, hidden from the eyes of the taxman. More importantly, though, tax cheaters not only cheat the taxman but also their fellow Indonesians, especially the 28 million (officially) poor people who are the most vulnerable and thus most in need of government interventions in the form of provision of basic needs and other support.
Therefore, as a matter of principle, we ordinary citizens should be concerned about the current debate and we must lend our support to the tax office, the government agency tasked to raise thousands of trillions of rupiah in taxes to fund government spending, in its push to kill the bank secrecy rule.
In their refusal, the bankers and even the OJK have stated that bank secrecy is a pillar of the banking industry and is paramount for keeping and attracting depositors’ money and therefore they asserted it is a non-negotiable condition.
Their premise rests on the understanding that bankers are the confidantes of their clients and must therefore respect that trust by protecting the privacy of the customers. Indeed, it is so. However, their conclusion that secrecy is so important it is inviolable is wrong: Private information revealed to bankers and transaction data are secret only to parties who have no legal, moral, or social basis to know the information.
By virtue of tax being a compulsory contribution of the citizens to the state, however, the government has every right to make sure that its citizens pay their fair share and this requires unrestricted access to all relevant data from thirdparty sources. Therefore, the principle of bank secrecy is subject to the higher principle of justice and fairness and therefore the OJK should let the government start dismantling Indonesian bank secrecy for taxation purposes.
The old argument that Indonesians will pull their funds out of the country and place them in overseas accounts is also weak since more than 100 jurisdictions worldwide, including the fortresses of bank secrecy like Switzerland and Singapore, have all committed to financial information exchanges on an automatic basis.
Moreover, in view of the OJK’s willingness to share foreigners’ financial information with foreign authorities, it is the more perplexing why it still refuses to share information about Indonesian citizens with Indonesian authorities.
Finally, if the OJK agrees to this and bankers are required to share with the tax office the financial information of Indonesian citizens, then the sacred duty to guard the privacy of the account holders is also shared with the tax office.
In the age of proliferating leaks and cyberattacks, both the financial industry and the government should ensure that the private information of account holders is kept safe and confidential. Safeguard mechanisms, both in regulations and IT infrastructure, such as access rights and encryption, should be designed to minimize the probability of leaks and reduce the possibility of disclosing clear information about account holders if leaks do occur.
Lack of data or access to data, most importantly financial information, has been used as an excuse by the tax office for its chronic failure to collect the necessary revenue to fund government spending. If the push for greater transparency in the domestic setting is successful, this will leave the tax office with nobody to blame anymore.
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