Importance of Tax Amesty Regulations and Data Protection Guarantee

The Panamian Papers incident of a “not so common household name” Mossack Fonseca prior to the incident underscores the ever challenging issue facing the government vis a vis the rich.

However, is that always the case? It does not need to be so. Embracing the tax reality facing the wealthy group but realising that fomenting an environment to make it conducive for the rich to declare is crucial if a country needs to re-align its social economic programs via the tax mechanisms to not just “tax the rich” but also “ensure fair protection and confidentiality to the ‘more well of’” too.

Let us look at this controversial tax amnesty reintroduction, (if based on memory) it is the third introduction of such a tax amnesty by the Indonesia Government.

What’s the talk about Tax Amnesty?

  • According to the proposed draft bill, the National Tax Amnesty means that the applicant will be released from outstanding tax payable, tax administrative sanction, tax criminal sanction, and certain criminal sanction in the field of tax by paying certain amount of redemption as stipulated under the draft bill.
  • One of the main reasons government proposes the draft bill (“Draft”) is due to the finding of the fact that many Indonesian people has a large amount of financial and non-financial assets offshore.
  • The proposed amnesty, which the government had previously planned to implement in 2015, would allow people to declare previously unreported assets and benefit from tax rates as low as 3 percent. That compares with the corporate tax rate of 25 percent and the top rate of 30 percent for personal income.
  • If the Draft passed into the law, the owners of offshore assets shall have the opportunity to repatriate their money into Indonesia with low taxation.
  • According to Indonesian Finance Minister, Bambang Brodjonegoro, in normal conditions, this would serve the sense of justice. But the issue now in Indonesia is that there are massive amounts of people who are not paying. An amnesty is an innovation to break the deadlock.
  • The move will hopefully encourage Indonesians with money abroad to bring it home, said Brodjonegoro, saying Indonesians had an estimated 2,700 trillion rupiah of assets (or approx. US$204Million) in Singapore alone (as example).

Who can apply for tax amnesty?

  • Applicant is a person or entity who is entitled to apply for national tax amnesty by submitting a letter of request for amnesty, with the exception of person or entity that is currently involved in a lawsuit process, or is undergoing tax criminal charges or other specific criminal charges as stipulated under the draft.
  • National tax amnesty is given to the assets which reported on the letter of request of amnesty, whether they are located in Indonesia, or outside Indonesia.

How?

  • Amnesty will be given once the full settlement of certain tax amount, which is calculated by multiplying the applicable rate with the reported asset value is completed.
  • Once the amnesty is granted, the outstanding tax, tax administrative sanction, and tax criminal sanction which may be issued before the enactment of the law will be waived.
  • If later the tax authority finds there remain unreported assets after the amnesty has granted, the unreported assests will be subject to the normal tax.
  • The proposed rates are set out below:

No. Rate Periode of Request

  1. 3% October 2015 – December 2015
  2. 5% January 2016 – June 2016
  3. 8% July 2016 – December 2016
  • The requirements to request the tax amnesty as stipulated under the proposed draft are:
    1. owns a Taxpayer Registration Number (Nomor Pokok Wajib Pajak);
    2. submitting a letter of request for amnesty;
    3. pay the redemption;
    4. settled all the outstanding tax;
    5. confer a PoA to the Directorate General of Tax to allow them accessing all of the applicant’s accounts whether at the domestic and/or foreign banks for transactions after the applicant granted with the National Amnesty.

There are practical issues to consider:

Will tax obligor be released from condemnations, accusations? Really?

We are aware that the current Indonesian government is keen to lift the living standards of all Indonesians from all walks of life. In order to do so, the technocrats are looking at ways to increase the “financial war chest” in the Finance Ministry.

Based on anecdotal evidence, we are also aware that every blessed well-of Indonesian we speak to wants the country to progress and are willing, if proper protections, measures and adequate “confidentiality safeguards” are in place not to vilify and ridicule this group, they are willing to help. The reality is that, the government must show, this time, that it has the mettle and conviction to protect the information divulged if the rich individuals decide to repatriate the millions of their funds from abroad.

Having a “vault proof, theft proof, “prying eyes” proof data centre” where all these sensitive individuals’ financial information are kept – which Mossack Fonseca jealously guarded its clients’ information for years – is very important if the Government wants to assure this group of individuals’ information are kept safe.

Having the law without its implementing practical solutions for this group to feel “socially comfortable” and “morally permissible” to repatriate their wealth from overseas will be important. It will go a long way to achieve the Government’s long term goal of using such revenues to prime pump the economy to create jobs for the masses.

What constitutes income abroad? What constitutes income onshore?

One of the thorny issues is the recognition of worldwide tax regime for Indonesians, identical to the practice of the United States government. Whilst at the onset, it looks appealing, this perception is a problem. If the personal wealths are classified as repatriation of income from abroad, and in this regard – some countries that have a progressive tax rules allow income from abroad to be repatriated without any tax imposed, this would greatly appeal to the rich class of Indonesians.

What about zero tax for repatriation? What can 3% do? Wouldn’t 5% or 8% considered punitive?

Economist would agree that putting the monies into the economy would create multiplier effect of income that would benefit the masses greatly in terms of job creation, sectoral driven revenues etc. Based on World Bank’s estimate, Indonesia GDP stands at around US$900 billion. It is reported that the Government expects to net around US$4.4 billion if the Tax Amnesty prove to be a success. Indonesia government’s estimated expenditure is about US$80 billion annually. If this is a hypothetical example, US$4.4 billion represents approximately 5-6% of Government’s expenditures. However, US$4.4 billion represents 3% of the estimated wealth kept by Indonesians abroad.

Government should take a pragmatic view and allow no tax imposition to the repatriation of funds from abroad. Assuming the above estimates are accurate, an estimated total of US$110 billion in excess of private capital enterprise can potentially fund the PPP projects, SME industries, infrastructure and power projects. As we all know, private enterprise funds are used more carefully to reap profits for the company as well as the communities at large and business people are good at meeting these two (2) objectives. The multiplier effect will be tremendous based on the excess US$110 billion rather than tax these funds at source.

Creation of a robust framework to ensure the taxpayer information are kept confidential and that the information is used properly?

The reason the assets of the rich Indonesian taxpayers have been kept abroad is simply the rules of confidentiality in place in some of these jurisdictions. It is a sine qua non that setting up a robust framework to ensure taxpayer information are kept confidential must be in place within the sectors of the Indonesian ministries coordinating such effort. A framework principled after international practice and controls seen in similar established financial jurisdictions must be put in place to give comfort to honest taxpayers. Otherwise, according to Raya Soepriyatno from the Gerindra Party, and deputy chairman of the DPR’s Finance Committee has stated that it is unfair to the public for the following reasons: fearing it would offend dutiful taxpayers, believing that there is no guarantee that a tax amnesty will lead to higher tax income, and believing that the policy will not necessarily increase the state’s tax base to boost the confidence of the taxpayers contemplating to repatriate their funds back to Indonesia.

Housekeeping and conscientious effort to make it right

Indonesia has no real database on tax payers and not enough tax officers to chase people up. Government themselves should make a conscientious effort to reduce the amount of backlog, bureaucracy and tax laws to simply the tax regime in the country.