T

he tax amnesty has officially ended. Some public and media commentators deemed the program a success, underscoring the Rp 4.8 quadrillion (US$355.5 billion) worth of previously unreported assets declared by almost 1 million taxpayers and raking in more than Rp 114 trillion in penalty fees in the process. Others, however, remained skeptical, highlighting the fact that the tax pardon initiative failed to achieve some of its targets.

Most notably: the lower than expected amount of repatriated funds. Indeed, based on tax office data, although more than Rp 1 quadrillion worth of foreign assets was declared during the amnesty, only Rp 147 trillion in funds stashed abroad were repatriated.

This begs the question of why the program was unable to bring the sizeable amount of money home. More importantly, what should the government do in the future to entice those assets back?

In my opinion, the main reason for the meager results of repatriated funds is because some foreign governments gave Indonesians a hard time when they wanted to send the money home.

Singapore, for example, a country where most of the foreign assets were declared, required its banks to file a suspicious transaction report with the Commercial Affairs Department, a police unit that deals with financial crimes, whenever a client availed of the tax amnesty and wished to repatriate their assets.

Some Singaporean bankers may have even suggested that when a client told them that he/she was availing of the amnesty, that they suspected the client’s assets may not comply with regulations and that they would therefore report the client to the authorities.

As a result, despite the Indonesian government’s best efforts to convince taxpayers to continue repatriating their assets, most of them decided to take a safer route. That is, declare the assets to the Indonesian tax office during the amnesty but not repatriate them, thereby not exposing the taxpayers to further scrutiny by authorities abroad.

Another plausible explanation of why Indonesian taxpayers may not have repatriated their assets is due to their foreign portfolio investment strategy.

Scholars such as French and Poterba (1991) have long argued that there are significant advantages available to investors from international portfolio diversification, such as insurance against economic risks that are specific to an investor’s home country and a higher annual rate of return.

Indeed, given the sophisticated financial infrastructure of foreign countries such as Singapore, it might be the case that they have many nontax benefits as vehicles for global diversification.

Coupled with the lingering worries about Indonesia’s economic and political stability, it is logical that most taxpayers decided to leave their money overseas.

Furthermore, unexpected political changes — such as Brexit in the United Kingdom and the Trump effect — could also reinforce the decision not to bring foreign funds back to Indonesia.

The new protectionism approach in those two major economies could leave the global fight against tax avoidance and secrecy jurisdiction in tatters.

British Chancellor Phillip Hammond, for instance, remarked in January that “Britain could transform its economic model into that of a corporate tax haven if the European Union fails to provide it with an agreement on market access after Brexit.”

Meanwhile, United States President Donald Trump is planning to slash the corporate tax rate to as low as 15 percent to attract more investors to the US.

Such situations could further discourage Indonesians from repatriating their money, as they may have more options and protection if they keep the money in various tax haven countries.

Finally, an important lesson for the government and the tax office in light of the asset repatriation issue is the importance of strong cooperation with other countries to trace money owned by Indonesians abroad. This is especially true given Indonesia’s intention to implement the Automatic Exchange of Information (AEOI) program very soon.

The application of the AEOI will not automatically result in an exchange of information between all countries, as Indonesia and other jurisdictions have to enter into an agreement to share data reciprocally.

Thus, benefits to the Indonesian tax office in implementing the AEOI rests in the information it receives from other jurisdictions.

Given recent experience where some countries made it difficult for Indonesians to take part in the tax amnesty and repatriate their assets, the government has to prepare bargaining chips to make sure we can tie up with as many jurisdictions as possible and thus improve mutual tax information sharing arrangements between Indonesia and other countries.
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The writer is a senior faculty member at the accounting and finance department at BINUS University, Jakarta. He is currently undertaking a PhD program in Monash University, Australia. His research interest is on corporate tax avoidance and financial statement fraud.