A national political consensus is now highly probable for legislating the tax amnesty, a fiscal facility previously despised as an insult to the public’s sense of justice and a blank check for businesspeople and tax evaders to launder their money back home.
The tax amnesty idea has been on and off in public policy debates since 2003. But the idea seems to be more politically acceptable and economically more imperative now because of several factors.
The primary factor is that the government is severely strapped for cash at present, so if the House of Representatives does not approve the tax amnesty bill, the current state budget will suffer another deep cut because the government has budgeted Rp 165 trillion (US$12.38 billion) in additional revenues from tax penalties imposed on repatriated and declared assets.
Government data on Indonesians hiding assets overseas, last estimated at Rp 11.45 quadrillion, has also been strengthened and validated by the recent leakage of the Panama Papers on companies setting up special-purpose vehicles in tax haven countries.
Moreover, the upcoming system of global automatic exchange of information (AEOI) between tax authorities is expected to be powerful enough to force tax evaders to stop hiding and come home or at least declare their hundreds of billions of dollars of assets hidden overseas.
The AEOI system, scheduled to start in 2018, requires tax authorities to exchange information even without prior requests or criminal indications. For example, financial institutions in countries such as Singapore or Switzerland that collect information from existing and new clients are required to file this information with their respective tax authorities, which in turn are obliged to pass on the information to Indonesia’s taxation directorate general (DGT). Likewise, the Indonesian DGT should exchange information with the tax offices in those countries.
Under the AEOI framework, tax evaders cannot hide any longer. In fact, the AEOI could virtually override banking secrecy.
Despite the risks of moral hazards and the poor credibility of tax-law enforcement, a tax amnesty is not without a strong rationale, especially in Indonesia, where tax evasion has always been quite extensive, as indicated by the mere 12 percent tax ratio (tax revenues as a percentage of gross domestic product).
The supporters of the tax amnesty idea argue that as the DGT is unable to hunt down tax evaders and uncover their hidden assets, there is no harm in offering them a oneshot amnesty if the measure can lure back massive capital inflows.
Conglomerates or corruptors will not hesitate to reinvest their capital in Indonesia to expand the economy and create jobs once their previously hidden assets are declared legitimate under the amnesty program.
Raising tax revenue is a key challenge for low-income developing countries such as Indonesia. The government has to struggle to raise sufficient tax revenues to provide essential public goods and services.
The low tax take in Indonesia is largely due to weak enforcement. As the informal sector and the cash economy are dominant, taxable economic activities are easily hidden and do not leave behind verifiable information trails, such as receipts, bank records and credit card information. Audits are few in number and poorly targeted — partly because of the weakness of information trails.
Another potential benefit of the tax amnesty is the big chance of netting a large number of new taxpayers, including small and medium enterprises (SMEs), thereby broadening the tax base for future tax collection. The amnesty will also reduce the administrative costs of tax collection and improve tax compliance by monitoring new registered taxpayers.
Moreover, as the court system is both corrupt and overburdened, a tax amnesty may allow the tax administration to economize on prosecution costs.
Simply waiting for an efficient, strong tax administration system to be established before a tax amnesty is legislated would be a futile exercise as it would take more than five years to complete such a reform.
The weakest component of the tax authority is the internal control of tax auditors because the audit process is the most vulnerable to corruption. No one, not even the DGT chief, knows what goes on between auditors and audited taxpayers, except if the corruptors are caught red handed.
The experiences of other countries show that to achieve a successful tax amnesty program — one that generates a sustainable increase in revenue as a result of a larger tax base and higher tax compliance — the DGT should first be empowered to upgrade its capability and be given access to data and information from other government institutions as well as industry associations and private bodies.
But the fundamental problem encountered by the DGT lies in its acute lack of resources and the distrust in its integrity. The DGT has yet to complete extensive reforms that were begun in 2006 when Darmin Nasution, currently the chief economic minister, led the DGT.
In fact, Darmin himself recently expressed his apprehension about the full benefit of the planned tax amnesty if it is not immediately followed with strong law enforcement by a highly trusted tax authority.
The DTG should significantly improve its efficiency, technical competence and integrity, otherwise the House will not be willing to give it wider access to sensitive data protected by secrecy laws. Only with high integrity will the DGT be able to collect information from those in the corridors of power or those who are politically well-connected in light of tax audits.
Other government bodies will readily cooperate and open their vaults of data to the DGT only if the tax authority is perceived to possess impeccable integrity and demonstrates the highest standards of good governance.
Tax laws only mandate tax officials to audit annual tax returns. The question now is how the DGT could convince the public of the credibility of an audit of its own officials if it is not transparent about the findings of their audits.
