Critics argue that the tax pardon would be unfair to honest taxpayers and hence could encourage future noncompliance on account of the anticipation of another amnesty. They suggest that instead of giving an amnesty, cracking down on tax dodgers would be better, especially when the government can take advantage of the Automatic Exchange of Information (AEoI) program, to be implemented in 2018 by members of the Organization for Economic Cooperation and Development (OECD). 

While I share the same argument, the flip side of the coin is that there is ample evidence that amnesty can work wonders, especially when it is executed carefully as a part of a large enforcement effort. Among other benefits, it generates a much needed short-term revenues windfall, repatriation of flight capital, more detailed information of taxpayers’ non-compliance and public awareness on tax enforcement programs. 

Furthermore, one has to also consider the amnesty as an integral part of President Joko “Jokowi” Widodo’s tax reform strategies. Especially when it is specifically stated in the road map established by the Directorate General of Taxation that 2016 is the tax amnesty year as a follow up to the 2015 tax education, to be followed by stronger tax enforcement in 2017. 

Next, in 2018 the tax office is expected to become a semiautonomous revenues agency — which signifies a new dawn of a strong tax administration in Indonesia. In short, the tax amnesty is a final piece of a jigsaw to provide a window of opportunity for tax fraudsters before new restrictions are put in place and harsher repressive measures are taken against tax evaders. 

Before further discussing this bold step from the government, we need to understand what the new bill has to offer. 

The law covers at least four key provisions. First, the amnesty is offered only for nine months, from July to the end of March, 2017. Second, to attract asset repatriation, individuals with hidden assets abroad will face no criminal prosecution or penalties, other than a flat fee of between 2 and 10 percent of the value of the assets repatriated or declared, depending on how quickly they declare their stash and whether they repatriate them.

Further, the law stipulates that the repatriated assets must be kept in Indonesia for at least three years and invested in government debt instruments and other appointed investment products, or in government projects. 

Third, to lure small medium enterprises (SMEs) into the tax system, the law also offers a 0.5 or 2 percent redemption rate for SMEs, depending on business size. Such initiative was applauded by the business community considering the substantial size of this business segment. 

Finally, the voluntary data disclosed or provided by the tax evaders will be kept by the tax office to be used as a source for future tax payment.

Those key provisions lead to the overarching question related to the short-term impact of the amnesty. This includes how many individuals, businesses and SMEs will participate, how much of the overseas assets could be repatriated and whether the proceeds match government forecast to cover the current budget gap. 

My view is that a tax pardon can woo most of Indonesia’s rich individuals and businesses who stash their assets abroad. As such, the tax revenues garnered from amnesty could match or even surpass the US$18 billion target. The optimistic view is grounded on the timing of the amnesty, which corresponds with global efforts to fight tax evasion and secretive tax havens. 

The global initiatives, coupled with offshore entity revelations such as the leakage of the Panama Papers, will definitely limit the options for individuals and businesses to hide their money overseas. 

Therefore the better option for tax evaders would be taking advantage of tax amnesty from the government, come clean and repatriate the assets. Data from the Panama Papers shows that at least 3,500 Indonesian individuals and firms have used off-shores entities to hide their assets and evade and avoid tax obligations.

In the same vein, the government estimated that at least 6,000 individuals stashed funds abroad. Their total assets are estimated at over Rp11.4 quadrillion (US$900 billion). Many are believed to be keeping some of their funds in offshore financial centers out of concern about inflation, rupiah depreciation, political uncertainty and high taxes on financial income. 

Another source of optimism stems from the recent international success in unlocking money stashed in tax havens. Chile, for example, amassed US$1.5 billion in tax revenues from tax amnesty in 2015, more than ten times the amount forecast. Italy netted $4.4 billion from a similar initiative in 2014, far beyond the initial target. Australia collected $600 million in 2015 and uncovered $4 billion held in secret offshore bank accounts. 

No wonder other countries are also to follow suit. Brazil, for instance, just signed an amnesty law in January, and expects to collect $20 billion for government coffers from $400 billion in offshore accounts. With the right moves, Indonesia’s tax amnesty program can also score a similar success story. 

Turning our focus to the impact of tax amnesty on SMEs, contrary to the above, the predicted outcome seems measly. This is unfortunate, given their 58 percent contribution to the gross domestic product (GDP) and the fact that they account for 98 percent of total enterprises in the country.

Indeed, the 0.5 and 2 percent tax amnesty rate given to SMEs may look attractive at first. However, compared to similar cases in other countries, the rate offered by our government is short of appeal. In Thailand, for example, with more than 2.7 million SMEs contributing to 96 percent of Thai enterprises, the government offered full exemption of income tax for a year and a 10 percent reduced tax rate the year after for SMEs that participated in the program. 

Another problem that may hinder SMEs from participating in the tax amnesty program is the high compliance cost. Compliance costs tend to increase with the number of taxes that an entrepreneur is subjected to, the complexity of the tax rules, and the number of levels of government involved in levying and collecting taxes. 

The current tax rate charged to Indonesian SMEs may also be another loophole for tax evasion. Under current rules, SMEs are charged 1 percent tax of total turnovers instead of profit. This turnover tax imposes a higher tax burden, especially on less efficient firms and young start-up businesses. Hence, this will be the area where the tax office has to focus in the future. 

While this article discusses the merits of tax amnesty and the potential outcomes, the second part will discuss potential issues in implementing the amnesty and necessary steps to be taken by the tax office to make amnesty successful in the long run.

Although Indonesia has applied similar programs to the tax amnesty four times ( 1964, 1984, 2008 and 2015 ), the scale and impact of these programs were not as significant as the current initiative. Thus, it comes as no surprise that concerns have been raised regarding long-term consequences and the ability of the Directorate General of Taxation to manage the 2016 tax amnesty policy. 

The main point of this concern is related to loopholes within the tax amnesty law and whether any additional regulatory framework is needed to minimize these. Moreover, questions have been asked on how to further transform the tax office into a credible tax authority so that taxpayers will favor voluntarily compliance post the amnesty period. 

With regard to loopholes, the approved bill is far more comprehensive than the initial 2015 draft; the final bill has additional provisions to ensure that the tax amnesty program is successful. For example, the redemption rate is now contingent on whether assets are repatriated or not. The tax office also requires amnesty participants to submit taxpayer detailed information, which will be stored and used as a reference for future tax obligations. 

However, in my opinion, there are at least three further issues to be considered: the tax redemption rate, data provided by tax amnesty participants and the criminal offense discharged by the amnesty program.

The one-off penalty charges are still lower compared to comparable international programs. Indonesia charges a 2 to 10 percent redemption rate on assets owned by tax evaders. Other countries, such as Argentina and Brazil, charge a higher rate; Brazil charges 15 percent on the value of reported assets and Argentina charges 5 or 10 percent. It could be assumed that the tax office aims to invite more repatriated assets and therefore higher tax revenues, yet the rate seems too lenient and is unfavorably low compared to similar tax amnesties. 

In relation to the data provided by tax amnesty participants, the tax office requires complete taxpayer information, such as a full list of assets, liabilities and latest tax return. However, one important piece of data is missing: access to a taxpayers’ bank account information. This information is crucial to monitor the movement of a taxpayers’ funds and therefore more transparent tax reporting in the future. Gaining access to a taxpayers’ bank account information is a crucial step to tax compliance and enforcement. 

Under a tax amnesty, taxpayers can legalize anything without fear of prosecution or investigation. The law, however, does not specify which criminal offenses are to be whitewashed. As such, it opens up a plethora of possibilities for any money related to corruption, drugs or human trafficking to be discharged. It is clear that we still need specific guidance to deal with the issue.

The issues mentioned above above are add-on considerations for the tax office. The tax office needs to further transform itself to be a credible tax authority.  

Before further discussing tax office transformation, it is worth noting that, on its own, a tax amnesty has no direct effect in increasing compliance and long-run tax revenue. To become a successful program and thus improve tax office credibility, an amnesty should be combined with other strategies. 

The gross revenue from amnesty can be used to plug the budget hole, especially when the revenue is under achieved and expenditure is rising rapidly. In the mid-term, an effective tax amnesty program is expected to increase the tax base and therefore future revenue collection, as tax evaders are brought into the tax system. 

As a tax policy, an amnesty can be considered an equitable measure, because the revenue collected from tax evaders reduces disparity in the effective tax rate.

The tax office should start targeting the big fish and bring this to the attention of the public. This includes well-publicized seizures of businesses owned by renowned tax evaders and equally well-publicized criminal prosecutions.

After targeted enforcement comes conscience. The pubic appreciates inspiring examples. When the sense of justice is revived, attitudes are slowly but markedly redefined. Tax evasion is no longer viewed as a victimless crime. Public service advertising is targeted at changing public attitudes. As such, it is expected that the enemy is no longer the tax collector but the tax evader.

To successfully implement those measures, the tax office needs the full support of all stakeholders. The tax office needs to be backed up by other law enforcement agencies. Better assistance and coordination with the National Police should prevent incidences such as the case in which two tax officers were stabbed to death while collecting taxes from a rubber trader in North Sumatra.

Most of the time, taxpayer data is scattered across several investigative agencies and requires due processing. Lack of data and coordination between the tax office and other investigative agencies such as the National Police, Financial Services Authority (OJK) and Financial Transactions Reports and Analysis Centre (PPATK) adds to the problem and results in data-mining with no yield. 

Finally, the tax office’s internal organization badly needs an overhaul. It is well known that the tax office is severely understaffed, with approximately 30,000 officers to manage an astonishing 25 million individual taxpayers and two million corporate taxpayers. 

That is an average of one officer overseeing 900 taxpayers, a very high ratio despite the use of information technology in the current tax administration process. The tax office has indicated that it requires at least 95,000 tax officers to be able to optimally manage the tax administration process and thus achieve its tax revenue target. 

Hopefully, the plan to establish a semi-autonomous revenue agency can be realized promptly so as to rejuvenate and empower the tax office. 

***

The writer, a senior faculty member of the Accounting and Finance Department at BINUS University in Jakarta, is currently researching corporate tax avoidance and financial statement fraud for his PhD degree at Monash University, Australia.

---------------

We are looking for information, opinions, and in-depth analysis from experts or scholars in a variety of fields. We choose articles based on facts or opinions about general news, as well as quality analysis and commentary about Indonesia or international events. Send your piece to community@jakpost.com.

Popular

Government to permanently relocate 10,000 people after Ruang eruptions

Kokubo's injury time penalty save secures title for Japan

Residents fear for safety as Mount Ruang volcano erupts