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Jakarta Post

Economic loss and the practice of nominee arrangements

Fadhil Hasan
Jakarta   ●   Mon, January 11, 2016

For the 2016 annual state budget (APBN), the government has a set an optimistic taxation target of more than Rp 1,360 trillion (US$94 billion).

However, given the lower-than-expected tax receipts last year, achieving the 2016 tax receipt target would be difficult as well.

Indonesia'€™s tax ratio (tax receipts against gross domestic product) has remained stagnant at around 11 to 12 percent, tax administration is still inefficient and tax evasion remains pervasive.

Hence we need a more rigorous system of tax collection.

An area that has not received much attention, as far as law enforcement in taxation is concerned, are the nominee investment practices in Indonesia.

So far, the practice of nominee arrangements or '€œinvestment jockeying'€ has yet to be examined further, especially in relation to the economic loss associated with such practices.

Keeping in mind that the practice of nominee arrangements violates Indonesia'€™s investment rules, the government needs to consider the economic losses incurred by such practices, such as lower state revenues and the closing of business opportunities for other small and medium-sized businesspeople.

The practice of nominee arrangements can be found in the tourism, property, retail and small and medium enterprise industries.

In Indonesia, there are several regulations that have clearly and firmly prohibited the practice of nominee arrangements in investment.

Article 33 of Law No. 25/2007 on capital investment prohibits the practice of nominee arrangements in foreign investment.

The ban of the nominee practice and shareholder nominee is intended to prevent companies from being legally owned by one person, while de facto being owned and controlled by another.

This regulation is consistent with Article 53 paragraph 4 of Law No. 40/2007 on limited liability companies, which also asserts the prohibition of the nominee structure within the legal system of Indonesia.

In more detailed terms, a ban on the practice of nominee arrangements is supported by the regulations of the Negative Investment List (DNI) stipulated in Presidential Regulation No. 39/2014 on closed business sectors and open business sectors, along with requirements in capital investment sector.

The DNI shows the government'€™s commitment to protect strategic sectors and domestic players in the economy.

Investment jockeying that erode domestic economic potential and tax revenues continue to take place.

One of the sectors that is protected under the DNI is that of small and medium-sized enterprises (UMKM). By protecting UMKM through DNI and with the prohibition of the practice of nominee through the capital investment regulations and limited liability companies regulations, it is hoped that these sectors can grow and develop in the management of domestic economic players.

Unfortunately, efforts to protect the Indonesian economy from the practice of nominee arrangements have
yielded little progress in policy implementation.

The ongoing practices of investment jockeying that erode domestic economic potential and tax revenues continue to take place due to the lack of coordinated oversight and strict sanctions imposed by the authorized agencies.

The practice of nominee arrangements is also prohibited in Thailand. The ban on nominee agreements in Thailand is set out in the Foreign Business Act.

Many foreign investors used nominee agreements when investing in Thailand in order to avoid regulations and requirements applied to foreign investors, such as the prohibition to invest in sectors that are included in the Negative Investment List.

By using a nominee agreement, foreign investors are able to hide the identity of the beneficial owner or owners so that any form of business entity is classified as a domestic company, which is not required to comply with such laws and regulations.

In addition to investing in prohibited sectors or sectors restricted for foreign investors, they also enter into a nominee agreement to gain full control over the company.

Although Indonesia and Thailand share similar legal views on the practice of nominee arrangements, each country has different sanction provisions. In the case of Indonesia, the Investment Law of 2007 (Article 33) states that all agreements and/or statements confirming that ownership of shares in a limited liability company for and on behalf of another person are declared null and void.

In Thailand the rules and regulations state those who carry out the practice of nominee arrangements can be subject to criminal sanctions.

Article 36 of the Foreign Business Act states that a Thai citizen who assists foreign investors to circumvent the Foreign Business Act by forming a nominee company is subject to a fine of 100,000 ($277) to 1 million baht or imprisonment of up to three years.

The Thai government has issued a number of regulations and initiatives to prevent the future practice of nominees. One of the initiatives undertaken by the Thai authorities is by conducting random investigations of domestic enterprises, especially companies engaged in sectors restricted by the Thai government for foreign investors and big businesses.

Investigations of businesses in Thailand found that the practice of nominee arrangements involved many accountants and lawyers, which led the Thai authorities to conduct in-depth investigations of domestic companies that placed accountants and lawyers on their board of directors and shareholders.

In practice, Thai authorities not only impose administrative sanction in the form of the revocation of business licenses of companies proven to practice nominee, but also establish criminal sanctions against those who engage in the practice of nominee arrangements in accordance with Article 36 of the Thai Foreign Business Act.

Strong enforcement of investment regulation should be high on the agenda of the government in reducing tax evasion and improving business competition.

With Indonesia'€™s large domestic market potential, the existence of the practice of nominee arrangements must be eliminated so that domestic economic actors can have the opportunity to thrive.

In addition to heavy penalties taken against business entities violating the rules of investment, there should be concerted efforts nationwide to raise public awareness of the damage caused by the practice of nominee arrangements in the business sector on state revenues and business competition.

The writer is senior economist at the Institute for Development of Economics and Finance (INDEF). This is a personal view.