The Impact and Challenges of Tax Amnesty in Indonesia

Discussion Report Talking ASEAN

No.28 / October 2016

On Thursday, 27 October 2016, The Habibie Center hosted its Talking ASEAN dialogue entitled “The Impact and Challenges of Tax Amnesty in Indonesia” at The Habibie Center Building in Jakarta.

This edition of Talking ASEAN was moderated by Mr.Agustha Lumban Tobing (Researcher, ASEAN Studies Program, The Habibie Center) and featured an expert panel made up of Prof. Dr. John Hutagaol (Director, International Taxation, Ministry of Finance – Republic of Indonesia), Mr. Umar Juoro (Chairman of the Supervisory Board of Bank Indonesia/member of Board of Experts, The Habibie Center), and Mr. Yustinus Prastowo (Executive Director, Center for Indonesia Taxation Analysis (CITA)).

The objectives of this Talking ASEAN were to: (a) discuss the recent tax amnesty program in Indonesia, (b) identify the impact and consequences of the tax amnesty on Indonesia’s economy, (c) discuss the challenges from the implementation of the amnesty program, including its effects on Indonesia’s relations with neighboring ASEAN countries, and (d) provide recommendations to further improve the tax amnesty program.

This discussion report summarizes the key points of each speaker, as well as the question and answer session that followed.

Introduction: Recommendations:

Among the key recommendations that emerged from this particular Talking ASEAN dialogue was:

• continuing to encourage the government and parliament to overhaul the national taxation system through reforms to the country’s tax and banking laws;

• to institute administrative reforms including by separating the Directorate General of Taxation from the Ministry of Finance in order to draw a clear distinction between tax collectors and policy makers.

• to ensure people’s compliance with the tax system even after the tax amnesty program is concluded through various means including creatingan integrated database;

• to address the relatively low level of repatriation of overseas assets by making more encouraging tariff schemes and attractive options for domestic investments.

Introduction & Recommendations - Discussion Report Talking ASEAN1

October 201627Thursday,

INDONESIA NEEDS A HUGE NUMBER OF TAX REVENUE TO SUSTAIN AND STIMULATE THE GOVERNMENT’S NAWACITA PROGRAM AND YET INDONESIA’S TAX REVENUE CONTRIBUTES ONLY 71% OF THE TOTAL STATE BUDGET.

Prof. Dr. John Hutagaol Director, International Taxation, Ministry of Finance – Republic of Indonesia

Speaker’s Presentation - Discussion Report Talking ASEAN3

Prof. Dr. John Hutagaol, As the representative of the Indonesian Ministry of Finance, Prof. Hutagaol disclosed the government’s rationale behind the implementation of the tax amnesty program. He began by explaining the current tax condition in the country whereby the tax ratio in Indonesia of 11% is very low compared to its benchmark of 15%. As such the current tax condition was 4% lower than the government’s target.

Thelow percentage of tax ratio also indicates the small number of Indonesia’s tax revenues. Ironically, on the other hand Indonesia needs a huge number of tax revenue to sustain and stimulate the government’s Nawacita program. Indonesia’s tax revenue contributes only 71% of the total state budget. According to Prof. Hutagaol, the current tax revenuewouldnotsufficethecurrentgovernment’sobjective which it intends to achieve by the end of the Jokowi Administration period.

However, Prof. Hutagaol added, we can improve this situation by empowering the capacity of tax revenue to support state’s budget. The problem is that a lot of Indonesians are outside of the tax system—many of them do not pay taxes and they do notpossess a taxpayer registration number (NPWP). This is a crucial problem for the government who rely heavily on tax revenues to realise its Nawacita program.

Secondly, the implementation of the tax amnesty program is also motivated by the Indonesian government’s commitment to the era of “Global Transparency for Financial Information for Tax Purposes.” Indonesia has an obligation to collect datafromfinancialinstitutionsandtoexchangethisinformation with partnering countries. This activity occurs on a reciprocal basis. Furthermore, this global transparency era also forces the government to revise domestic regulations, such as the sharia banking law and capital market law which require secrecy of informationfortaxpurposes.Thissecrecydoesnotfitwith international best practices. Therefore, to adjust with Indonesia’s commitments, the current regulation needs to be reviewed.

These two aforementioned backgrounds are the main rationale behind the implementation of the tax amnesty. Through the tax amnesty, those who have problems with tax compliance will be forgiven for their wrongdoings in the past. This hopefully would lead to an honest act by taxpayers who could contribute to the high level of tax compliance, and therefore would lead to an increase in tax revenues for the state. The post-amnesty program is expected to help maintain the conducive climate that we have after the tax amnesty.

The first period of the tax amnesty has been atremendous success in terms of the amount of asset declared and money sent back. The government is proud to settle these issues of underground economy. Previously, many assets were not recorded by the statistic bureau, tax office or central bank,but since the introduction of thetax amnesty, those assets are now recorded. Prof. Hutagaol further stated that this program has reached a remarkable achievement because of the increasing people’s trust in the program. Furthermore, President Jokowi’s intervention as well as the Ministry of Finance’s experience has contributed in the trust building. Not tomentionthecommitmentoftaxofficialsandtheaccumulative cooperation from other institutions.

Yustinus PrastowoExecutive Director, Center for Indonesia Taxation Analysis (CITA)

INDONESIA RECORDED THE HIGHEST RATE OF REDEMPTION REVENUES FROM A TAX AMNESTY PROGRAM AMONG COUNTRIES IN THE WORLD. THE PROGRAM ALSO BOOSTED THE NUMBER OF REGISTERED TAXPAYERS WITH A TOTAL OF 12,892 NEW TAXPAYERS REGISTERED SINCE THE START OF TAX AMNESTY IN JULY 2016.

Speaker’s Presentation - Discussion Report Talking ASEAN5

The second to speak was Mr. Yustinus Prastowo who considered the impact and challenges after the implementation of the tax amnesty. He expressed his appreciation towards the program as evidence of the great cooperation between the government, taxpayers and civil society.

Mr. Prastowo recognized the tax amnesty program as an aggressive move to increase the state’s tax po-tential in short term. For the past ten years, Mr. Prasto-wo added, the tax revenue target has never been reached except in 2008. After 2009, Indonesia’s tax growth declined as the economic growth declined. On the other side, the government is increasing its tax target by more than 30%. Mr. Prastowo saw this as a surprising move, since during this economic slow-down, we need more stimulus and incentive. But in-stead, the government chooses to increase the tax target.

The tax ratio in Indonesia is still relatively low com-pared with other countries and tends to stagnate. From 1972 to 2014, Indonesia faced stagnation in its tax ratio, which did not move beyond the range of 7-10%. Meanwhile, South Korea has successfully doubled the tax ratio to 25%. At the same time, tax compliance submission of annual income tax returns is also still low.

In 2014, only 10.8 million taxpayers completed an in-come tax return; below the targeted 18.4 million tax-payers. Moreover, no more than 900 thousand tax-payers have underpayment status on their tax return. Therefore, Mr. Pranowo saw that the implementation of the tax amnesty is to recover from the current poor situation.

Mr. Pranowo continued to explore the problemswith the tax amnesty’s implementation. First, the policy would be unfair for those taxpayers who have a good level of previous compliance but never received any incentive from the government. Secondly, the scope of tax amnesty only covers Income Tax, Value Added Tax (VAT) and Luxury-Goods Sales Tax (LST). Third, there is a growing perception that the tax am-nesty is a blanket protection for criminals and corrup-

tion. Fourth, while the Tax Amnesty Law was aimed at boosting capital and asset repatriation, the tariff scheme formoney redemption was not encouraging enough for taxpayers to repatriate their money from overseas.

In addition to the achievement mentioned by Prof. Hutagaol in the previous presentation, Mr. Pranowo also noted that Indonesia recorded the highest rate of redemption revenues from a tax amnesty pro-gram among countries in the world. The program also boosts the number of registered taxpayers. A total of 12,892 new taxpayers were registered since the start of tax amnesty in July 2016.

Finally, Mr. Pranowo projected that this tax amnesty program should be utilized as a bridge to the new system. It is important to consistently push the gov-ernment and parliament to continue tax reforms and to amend the tax laws. He also suggested to create a separation between the Directorate Gen-eral of Taxation and Ministry of Finance, in order to draw a clear distinction between the policy makers and the tax collectors.

Umar Juoro Chairman of the Supervisory Board of Bank Indonesia/Member of Board of Experts, The Habibie Center

ON THE FUTURE OF THE TAX AMNESTY, DESPITE THE ADDITIONAL SHORT TERM TAX REVENUES GAINED, THERE IS THE RISK THAT THE TAX AMNESTY REVENUE IS A ‘ONE OFF RESULT” WITH QUESTIONABLE SUSTAINABILITY FOR TAX REFORM.

Speaker’s Presentation - Discussion Report Talking ASEAN7

Mr. Umar Juoro was the lastto present his views on the topic of the tax amnesty. He considered the policy as a rushed one with an ambitious target. In a short period of time, parliament passed the Tax Amnesty Law with the government expecting Rp 165 trillion in revenues from the tax amnesty. It is projected that there would be around Rp 3,000-4,000 trillion of additional fundsthat would be transferred to the Indonesian state.

According to Mr. Juoro, the tax amnesty is targeted towards taxpayers with overseas asset. He further ar-gued that the current rate of repatriation is not as low as the released data. A lot of the money are already in Indonesia. In that sense, Mr. Juoro did not feel that there was a recorded and clear information about repatriations, especially on the number of declara-tion that the Indonesian state received.

On the future of the tax amnesty, Mr. Juowo felt that despite the additional short term tax revenues gained, there is the risk that the tax amnesty revenue is a ‘one off result’ with questionable sustainability for tax reform. There is an indication, especially for indi-vidual taxpayers, that they would take advantage of the opportunity to clear up their non-compliance tax record. The low turn up for fund repatriation shows that the tax amnesty participants remain doubtful about the legal protection that was promised as well as the inadequate opportunities for domestic investment with reasonable returns. The government would like to maintain the momentum of the tax am-nesty program to propel tax reform, among others by using asset declaration as the base for tax com-pliance. However, taxpayers would likely go back to their old behavior of non-tax compliance.

For his conclusion, Mr. Juoro argued that the tax am-nesty is seen as a step for tax reform that makes tax revenue higher and sustainable. As the tax ratio for Indonesia is still low at around 12%, there should be serious efforts to increase this tax ratio. He also men-tioned that there is a growing discourse to set up a seperatetaxoffice(suchasaUS-styleIRS)seperatefrom the Ministry of Finance. Finally, Mr. Juoro saw

that the program had positives and negatives. The cooperativeandhelpfulnatureoftaxofficersmadethe public comfortable improving the latter’s views of government public service. On the other hand, the public remains worried and insecure about the personal financial records that are now stored bythe bank. Therefore, Mr. Juoro emphasized that we needtofindthebalance.

Question and Answer - Discussion Report Talking ASEAN 8

Question and Answer• From the discussion, we acknowledge

that there is a trust issue from taxpayers towards tax administrators. The growing phenomenon of Indonesians buying property in Singapore is an indicator of this lack of trust. Is this issue going to hamper the effectiveness of the tax amnesty?

• Many Indonesians deposit their money in other countries, but the repatriation rate following the tax amnesty is still low. How do we consider this kind of deposit? Is it dirty money?

• Please elaborate more on the tax regulation for SMEs?

Agustha L. TobingResearcher, ASEAN Studies Program The Habibie Center, moderates the discussion.

Prof. Dr. John Hutagaol:The best tax system depends on the perception of taxpayers to the tax system. The credibility of a tax system leads to greater voluntary compliance. The success of the current tax amnesty implementation was due to the taxpayers’ trust.The tax amnesty is portrayed like a high quality product with low price for

taxpayers. First, it gives no sanctions for previous non-compliance. Second, it benefits them to declareadditional assets based on value according to the taxpayers. The tax amnesty is part of the government’s generosity in order to educate the Indonesian people to be an honest taxpayer. Our responsibility is to disclose this and to disseminate this program.The repatriation program is actually quite significant.This is not a technical problem, but more of a legislation problem. Much of the money is already in Indonesia.The SMEs landscape is quite unique with 57 million business players in Indonesia. The government realizes that they can not attract this group voluntarily. Therefore, the government introduced the 1% income tax system without having to meet VAT obligation.

Mr. Yustinus PrastowoOn the issue of why the Indonesian people prefer to buy property outside the country, this is the instinct of an economic man: to seek incentives. Therefore, the Indonesian government should be creative in presenting incentives so that the people will be interested in the package. The taxpayers should be treated as investors in order to make them comfortable to invest in Indonesia.With regards to offshore assets, we probably should be more optimistic with the growing digital information technology. In the early 2000s, the OECD also initiated a transparency program but now it has been more than 15 years and they are still struggling with this issue. The ASEAN Economic Community opens up the possibility of increasing the level of coordination for tax sharing. This is an opportunity for Indonesia.

Mr. Umar JuoroPeople are worried if they purchase assets, the bank and the tax administration will know and it makes them uncomfortable. This is one of the reasons why people are reluctant to declare their asset. The principle of ‘willingness to pay’ is also important. For the income tax, the amount being paid is quite high, therefore many professionals are unwilling to report because it is too high for them. However on the other hand, in a sense people also like to contribute to their own country without having to rely on grants coming from other country.

PROJECT SUPERVISOR: Rahimah Abdulrahim (Executive Director) & Hadi Kuntjara (Deputy Director for Operations) | HEAD OF ASEAN STUDIES PROGRAM: A. Ibrahim Almuttaqi | RESEARCHERS: Fina Astriana, Muhamad Arif, Askabea Fadhilla, Agustha Lumban Tobing | FINANCE & ADMINISTRATION: Mila Oktaviani | LAYOUT & DESIGN: Rahma Simamora

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