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Impacts of tax pardon questioned
The governmentâs plan to implement a tax amnesty for financial criminals might bring more harm than good to the Indonesian economy, analysts are warning
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he government's plan to implement a tax amnesty for financial criminals might bring more harm than good to the Indonesian economy, analysts are warning.
Yustinus Prastowo, an executive director for the Center for Indonesia Taxation Analysis (CITA), said on Monday that the plan could potentially create 'moral hazard', which could discourage existing compliant taxpayers from fulfilling their future obligations.
'I'm not against a tax amnesty, but I disagree with the idea of broadening the pardon to include crimes committed by corrupt officials and money launderers,' said Yustinus, a former member of the Tax Revenues Optimization Team (TOPP).
He said that if it went ahead with the plan, Indonesia would be the first to implement a tax amnesty that pardons politically sensitive crimes such as corruption and money laundering. 'Instead of boosting revenues, this controversy might discourage compliant taxpayers from paying their obligations ' it's a moral hazard,' he added.
A tax amnesty has been widely debated as it would waive prosecution for past offenses for citizens who failed to comply with previous tax obligations, to lure them to reinvest money in the country.
In an interview with The Jakarta Post on Sunday, Finance Minister Bambang Brodjonegoro said that the policy, which could be implemented as soon as this year, would not be an ordinary tax amnesty, as it would cover pardons for general financial crimes such as corruption and money laundering.
When asked his response to possible criticism of the policy's moral hazard, Bambang said, 'Do we want the status quo or do we want to change things? If we want the status quo, fine. But who's happy? Tell me, who is happy for the funds to stay overseas? Singapore, that's who. Once this policy is implemented, [Singapore] will be affected.'
Bambang cited as an example Italy, which used to enact regular amnesties to repatriate proceeds parked by organized-crime groups in Swiss banks.
The Bank of Italy has estimated that in the first six months after its implementation in Sept. 2009 its country's tax amnesty policy attracted ¤97 billion (US$110.5 billion) back into the country, or almost 20 percent of the total Italian assets parked overseas of ¤500 billion, as estimated by the central bank.
The tax amnesty implemented in Italy only gave pardons to tax evaders under tax-related crimes, not for general crimes, which is the proposal floated by the Indonesian government, said Yustinus, who once acted as advisor to President Joko 'Jokowi' Widodo in the President's TOPP.
Euben Paracuelles, a Singapore-based economist with Nomura Holdings, noted that an amnesty was voluntary by definition so its successful enforcement ' even after granting pardon to general crimes ' would remain an open question. 'I think market participants will be skeptical about this,' he noted.
'The government needs to convincingly establish the extent of these so-called funds from financial crimes and whether this will have a significant impact. Otherwise, this policy will be seen as barking up the wrong tree,' explained Paracuelles.
Indonesia's tax-to-gross domestic product (GDP) of around 11 percent is among the lowest in Southeast Asia. This year, Jokowi has instructed his ministers to broaden the country's tax base, with the President aiming for a 30-percent year-on-year increase in tax collection, which is expected to hit Rp 1.29 quadrillion this year.
However, with the Finance Ministry already declaring that 2015 would be an 'education year' for compliant taxpayers, the implementation of a full-fledged tax amnesty would be a contrast to such a mission and, particularly, would tarnish Jokowi's anticorruption commitment, economists have said.
'There is the risk that ' while not the intention of the policy ' this could be interpreted as legitimizing corruption,' Philip McNicholas, an economist from BNP Paribas, commented on Monday.
'In turn, that could damage the Jokowi administration's credibility and popularity, ultimately hurting the President's capacity to deliver on his reform agenda,' he warned.
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Proposals for the amnesty
1. The amnesty will take the form of a special law.
2. The bill on the amnesty will be submitted to the House of Representatives this year after the deliberation
of the revision of the general tax system (KUP) law.
3. If passed, the law will be implemented this year.
4. The repatriated funds will be locked for a certain period, preventing them from being sent back overseas.
5. Financial crimes related to taxes, money laundering and corruption will be covered by the measure.
6. The amnesty is supposed to trigger a kind of national reconciliation.
7. The measure is the idea of many, including the President.
8. Proponents of the amnesty will need to convince law enforcement agencies to support it.
9. Those willing to repatriate the funds are still required to pay taxes on the funds, but will be exempt from any charges.
(Source: Excerpted from interview with Finance Minister Bambang Brodjonegoro)
