T

he law ushering in a new era of the government’s ability to access financial information for tax purposes has passed its final hurdle at the House. This means that banks and other financial institutions will soon start transmitting their customers’ data to the Directorate General of Taxation (DGT) on an annual basis, as well as on request.

With this law, the government hopes to expand the tax base by forcing non-compliant taxpayers to reveal their true financial affairs, report their true income, and pay their fair share of tax.

The likelihood of this law to achieve these goals depends on three factors.

First, quite obviously, the availability of data, which in turn depends on how well the government and industry can manage the security of data transmission and safeguard the huge amount of electronic data.

All it takes to shatter the fragile trust granted to the DGT to receive and request financial data is just one leak. It does not matter whether the leak happened by accident or by purpose, by hackers or rogue employees, but once the account holders’ data is out in the wild, there will be enormous pressure to review or even repeal the law.

Therefore, it is paramount that all parties involved, especially the DGT, not only satisfy the Global Forum security and safeguard requirements, but also prepare for all eventualities and establish a set of mechanisms to mitigate disasters and control the damage when a leak does occur.

Second, having received the data, the tax office must be able not only to analyze the data but also make sense of it, to extract meaningful insights and to build a more complete picture of taxpayers.

The purpose of having more data is precisely to give the tax office a better understanding of taxpayers, their incomes and expenditures, their assets and liabilities, and thus the ability to evaluate their compliance.

Unfortunately, those who oppose transparency succeeded in raising the minimum reportable account size from Rp 200 million (about US$15,000) to Rp 1 billion. As a result, the number of reportable accounts was greatly reduced from 2.3 million to less than 500,000.

Such a high threshold and correspondingly low number of reportable accounts diminishes the effectiveness of the law by eliminating a large segment of the population, weakening the integrity of the tax compliance monitoring system, and creating a feasible loophole where the 500,000 account holders can hide.

Anyone with more than Rp 1 billion in their bank account and who has something to hide or just simply shudders at the thought of having their financial lives visible to the tax office, can choose to downsize and split their existing accounts into smaller accounts scattered across a few banks. If many people choose this route, then soon the reportable segment will completely vanish or be reduced significantly.

Therefore in the near future, once the dust has settled, the threshold should be lowered or abolished altogether.

As private citizens, it is perfectly acceptable that we prefer our financial information be kept safe and secret from other private citizens.

But as members of the public, there is really no good reason to deny the government from having the requisite information including financial information, which it needs to ensure our accountability as citizens of the republic.

Paying taxes is a matter of civic duty, and a democratic government that represents the people has the right and even the obligation to make sure that its citizens pay their fair share of tax.

But of course, only a democratic government operating in a just manner and under a trusted system can demand compliance. In other words, the public will comply only if they trust the government. Here, no amount of government talk can do the job and convince the public to pay their taxes if all the public sees is injustice, corruption and a weak judicial system.

For its part, the DGT still has a long way to go to improve its public image. The controversy surrounding the Access of Information Law was fueled in no small part by deep public distrust of the institution.

But a long way to go does not necessarily mean it will take a long time to get there. The leadership at the DGT must take bold initiatives to reform the culture of the institution, increase the integrity of its staff and leaders and reduce the cost of compliance.

The access to financial information granted by the new law is a perfect opportunity to show off the kind of integrity and progress the institution is now embarking on.

The DGT can choose to use its new-found power to scare off heretofore non-compliant taxpayers and overflow the prisons with millions of previously dishonest taxpayers. Given the large deficit of trust between the public and the DGT, this strategy is almost certain to backfire.

Alternatively, the DGT can choose to dangle its weapons and offer another round of amnesty. Although this would make the government appear very generous, the public might interpret this as weakness and if so, this could further damage the government’s credibility and create even more distrust.

Yet another strategy is to proceed with collecting and analyzing third-party information to build a more complete picture of taxpayers, and then let them know that the DGT has enough knowledge to enforce the law. Send identified taxpayers notices containing accurate information indicating that they have unpaid taxes, and ask them to correct their past mistakes and be compliant going forward.

This strategy will show the people how a government institution can act boldly and yet restrained, enforcing the law yet offering reconciliation. Such a strategy will boost the government’s credibility and improve public trust and compliance.

In conclusion, wisely wielding the new-found power to access financial information can demonstrate the kind of institution that the DGT aspires to be: bold, accountable and competent. Wielding this power recklessly, however, and the public will detect the incompetence and unreliability, and continue in its culture of non-compliance.
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The writer is a staff member at the Directorate General of Taxation at the Finance Ministry. The views expressed are his own.