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Indonesia: Tax Amnesty Proposed

(May 10, 2016) On May 17, 2016, the Indonesian House of Representatives (Dewan Perwakilan Rakyat, or DPR) will begin to discuss the administration’s proposed tax amnesty legislation. The proposal has been advocated by President Joko Widodo for the last six months, but has run into political opposition in the past. It is now listed as priority legislation on the DPR’s website. When the DPR started a three-week recess on April 29, 2016, consensus on the amnesty provisions had not been reached. The main goal of the reform is to have large amounts of Indonesian currency now kept overseas return to Indonesia. That would result in additional tax revenue, which would help reduce the government’s budget deficit. (Tax Amnesty: What Is It and Why Does It Matter?, JAKARTA GLOBE (May 9, 2016); RUU tentang Pengampunan Pajak [Bill on Tax Amnesty], PROLEGNAS PRIORITAS (2016) [PRIORITY PROPOSED LEGISLATION (2016)], DPR website (last visited May 9, 2016) (scroll down page to item 36.)

Background to the Proposal

The official estimate is that as much as $900 billion in assets may have been sent abroad by Indonesians seeking to avoid taxation. Indonesia routinely has difficulty collecting the taxes it imposes; in 2015 only 82% of expected taxes were paid, and its ratio of tax revenue to Gross Domestic Product was near 10%. That ratio for most Southeast Asian nations is between 13% and 15%. (Tax Amnesties: Making Crime Pay, ECONOMIST (Apr. 9, 2016).)

Indonesia’s aim is to increase tax revenues 30% over last year, but by the end of the first quarter of 2016, tax revenues were only 14% of the desired Rp1,360 trillion (about US$101.5 billion). The proposal would repatriate money before the implementation of the Automatic Exchange of Information framework with certain tax haven nations, including the British Virgin Islands and Mauritius. Those two countries have little trade with Indonesia but have been top sources of foreign investment in the country in recent years; the government therefore suspects that Indonesians may have used the two jurisdictions to hide income and avoid taxation. (Tax Amnesty: What Is It and Why Does It Matter?, supra.)

Tax Amnesty Proposal

The proposal includes permitting taxpayers to report income they have hidden in the past, without being charged with tax avoidance by the tax court. Such taxpayers would merely pay a special tax and receive a pardon for their previous tax evasion. Similar offers extended in 1964 and 1984 were not very successful, due to low participation rates. (Id.) As presently conceived, this amnesty will be in force until the end of the year, although some lawmakers and others have called for it to be extended. The program will be available to both those with a tax identification number and those that do not have such a number. (Id.)

The special tax will be quite low in comparison with the top tax rate of 30%, and those who benefit will also avoid paying the 200% fine on back taxes that would otherwise be imposed. The special tax will be only 1% of the amount that had been sheltered from tax for those who report promptly, while those who wait more than nine months will have to pay 6%. (Id.; Tax Amnesties: Making Crime Pay, supra.)

Criticisms of the Plan

One criticism of the plan is that it is too lenient. Even with a higher special tax rate, as long as it were below the prevailing maximum tax rate, Indonesia could potentially still attract repatriated funds and come out with higher revenue. Furthermore, if the country waited for the information exchange pact to come into force in 2018, revenue might be even higher. Nicholas Shaxson of the Tax Justice Network argues that it is “very likely that powerful people in Indonesia have engineered this to make sure they’re not exposed and not subject to penalties.” (Tax Amnesties: Making Crime Pay, supra.) The government argues that the revenue is needed now, so it is worthwhile to implement the proposal. (Id.)

Others have suggested that if a great quantity of money is repatriated suddenly, Indonesia’s banking sector would be strained. Yustinua Prastowo of the Center for Indonesian Taxation Analysis expressed the opinion that because those who currently do pay their taxes do not benefit from the proposed amnesty, they may be discouraged from fulfilling their obligations in the future. A private tax consultancy company, Danny Darussalam Tax Center, suggested that instead of a single initiative offering tax amnesty, the government should be preparing an overall tax reform plan. (Tax Amnesty: What Is It and Why Does It Matter?, supra.)