4/26/2018 Can Indonesia be a World Pilot Project for Tax Amnesty?

– Brink – The Edge of Risk

E CO N O MY

Can Indonesia be a World

Pilot Project for Tax
Amnesty?
February 12, 2017

Asmiati Malik
Doctoral Researcher at the University of Birmingham

Nurhastuty Wardhani
Ph.D. Candidate at the Queensland University of Technology and Lecturer in Accountancy
and Islamic Finance at Trisakti University

The initial goal of the tax amnesty program under Indonesian President
Joko Jokowi’s administration is the repatriation of funds from tax havens
abroad. It mainly targets the taxes avoided by the rich who make up 1
percent of the population, but own 50 percent of the total wealth in
Indonesia.

It also represents an attempt to address inequality and the wide gap

between the rich and poor. Data shows that Indonesia’s Gini coefficient
increased from 30 to 41 between 2000 and 2013, proving that the
benefits of economic growth had not trickled down sufficiently to help
the conditions of the poorer population.

With a population of more than 255 million and one of the largest
economies in the region, Indonesia has a taxpayer ratio of only 11
percent. That partly contributed to the government’s budget deficit,
which will reach $25 billion in 2017 or about 2.41 percent of total GDP.
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Tax reform and the introduction of a tax amnesty program was one way
to address this issue. It was not an easy task as the initiative was met
with resistance from the House of Representatives (DPR) and some
economists, and was even the subject of skepticism from the
International Monetary Fund.

But recent reports show the program has been successful so far. It has
been suggested this is in fact the most successful tax amnesty program
in the world. By October, it had already resulted in revenue of $7.44
billion for the state, or 62 percent of the government’s revenue collection
target by March 2017.

Although the program has been a success, skepticism was also raised
because only 0.8 percent of the country’s 50 million taxpayers joined the
amnesty program in the first round. This number reflects that the
success of the tax amnesty program is drawn from the state’s revenue of
tax penalties from the tax avoiders, and not necessarily from raising
awareness relating to taxpayers’ compliance.

What Makes it a Success?

Tax is one of the essential foundations of building a strong sovereign

state. It needs support from the taxpayers (people) and a support system
(government).

The success of President Jokowi’s tax amnesty relies on three substantial

factors.

First, the government has enjoyed support from inside the government
body, political parties, the public and investors, which leads to political
and economic stability. The strong leadership of President Jokowi and
the professionalism of Sri Mulyani Indrawati, the Minister of Finance,
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also played a major role in winning the trust and confidence of both the
public and private sectors.

Due to its tax amnesty policy, Indonesia met nearly two-thirds of the
revenue target ahead of schedule.

Second, the Indonesian government set the tax amnesty at a very

generous rate of 2 percent on domestic assets and 4 percent on declared
offshore assets in the first three months, whereas some other countries
set the rates at much higher levels of 10 percent or more. Also, the
government did not bother asking about the origin of the funds.

Additionally, taxpayers prefer to report their assets now instead of doing

it later when the rates are increased or when the new regulations of
Automatic Exchange of Information (AEOI) come into play in 2017 and
2018. By that time, it will be hard for tax avoiders to hide their financial
asset information from tax authorities in offshore bank accounts.

The last factor is the confidence in the legal system, which is enshrined
in law no.11/2016 and provides full protection and commitment from the
state as the highest institution.

Strategy for Improving the Amnesty Program

While the Indonesian government nearly met two-thirds of the revenue

target—or 62 percent from the first period of tax amnesty—by October
2016, this is just the beginning of boosting tax revenue and increasing
tax compliance in society on a sustained basis.

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Tax compliance issues should be the focus of the Indonesian

government. The OECD has said that repeated tax amnesty programs in
the OECD countries, for instance, just led to a temporary increase in tax
revenues, but also encouraged future tax evasion, besides neglecting the
fairness principles toward honest taxpayers. While Indonesia is not a
member of the OECD, the organization’s views should be considered and
Indonesia should learn from experiences of other countries that have
implemented tax amnesty.

The tax amnesty scheme will continue until March 2017. There are a few
strategies that the government should implement to bring about the
right policy for tax amnesty. First, the government should coordinate
with Indonesian embassies overseas to encourage Indonesian workers
and entrepreneurs to participate in repatriation and in disclosing their
assets. At the moment, Indonesian ambassadors are not regarded as
economic strategy partners, but that should change.

Additionally, the tax amnesty target should be made clear. The Ministry
of Finance has done the right thing by focusing on certain
professions such as doctors, lawyers, entrepreneurs and small
businesses. However, the program can be more effective if the Ministry
of Finance collaborates with other ministries such as the Ministry of
Health to target doctors or Ministry of Trade to target small businesses,
for instance.

Beyond Tax Amnesty

Once this particular amnesty program ends, the Indonesian government

should attempt to educate citizens and spread awareness about tax
compliance by connecting it with the social responsibility of taxpayers.
For instance, corporate taxes can be associated with corporate social
responsibility if their payments have implications for the wider
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community by providing funds for the provision of public goods such as

education, public health care and public transport.

Finally, systems should be adopted urgently to reduce corruption by tax

officers who accept bribes. It has been reported that in prior tax amnesty
schemes some companies attempted to bribe tax officers in order to
evade taxes.

When awareness of tax compliance is low, it implies low trust from

society in the government, particularly in terms of whether taxes will be
used for wasteful and corrupt practices, or toward meaningful
development. This highlights the need for the Indonesian government
and other regional governments to change the mentality of individuals
across the system in their effort to reform tax administration.

Policy Repatriation Tax Amnesty

Asmiati Malik
Doctoral Researcher at the University of Birmingham

Asmiati Malik is a doctoral researcher at the University of

Birmingham. Her research interests lie in Energy Policy,
Fiscal policy, and ASEAN+3 (China, South Korea and Japan)
Economy, among others.

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Nurhastuty Wardhani
Ph.D. Candidate at the Queensland University of Technology and Lecturer in
Accountancy and Islamic Finance at Trisakti University

Nurhastuty Wardhani is a Ph.D. candidate at the

Queensland University of Technology and a permanent
lecturer at Trisakti University in Jakarta, teaching
Accounting Theory, Good Corporate Governance, and
Advanced Accounting. She is also co-founder and chairman
of INSPIRE (Islamic Finance Spirit for Indonesia) that
provides training & consulting in Islamic Finance.

URL: http://www.brinknews.com/asia/can-indonesia-be-a-world-pilot-project-for-tax-amnesty/

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