After long-term struggles to meet tax collection targets, the government rolled out a bold tax amnesty initiative in 2016. The programme – eliminating criminal prosecution and large back tax bills, and offering lower tax rates on hidden assets – has been successful, as trillions of rupiahs of onshore and offshore assets and income have been declared in the amnesty period.
However, repatriating these assets has proven challenging, and the Ministry of Finance (MoF) is working to improve transparency at domestic financial institutions. The benefits of enhanced auditing, compliance and enforcement are significant: revenues would be a critical source of funding for the government’s Rp5500trn ($414.6bn) infrastructure agenda and bring the country in line with international best practises, which should in turn bolster foreign inflows and attract new investment.
COLLECTION CHALLENGES: Low tax collection can constrain growth. The country’s tax-to-GDP ratio has not exceeded 12% in recent years, compared to rates of 25-50% in many developed countries. This was 10.8% in 2014, one of the lowest rates among ASEAN countries. That year, Thailand’s tax-to-GDP ratio was 17%, followed by Malaysia at 15.5%, the Philippines at 14.4%, Singapore at 14.2% and Vietnam at 13.8%.
This is partly due to the prevalence of low-wage employment in the informal economy. Only 27m Indonesians are registered to pay taxes, and there were 10m active taxpayers in 2014. Although the Ministry for Economic Affairs says at least 44m citizens should be paying taxes, enforcement is difficult, with 55-65% of the population informally employed. There were 37,000 citizens working for the MoF’s Directorate General of Taxation (DGT) in 2015, equivalent to one per 7000 people. The MoF reported in 2015 that 62,000 more employees would be necessary to improve compliance.
MISSING THE TARGET: As a result, the government has consistently missed its tax revenue collection targets, including two failed amnesty programmes launched in 1964 and 1984. There have been ongoing challenges in this area, and the DGT reported that just 53% of the collection target for 2015 had been met by September of that year, or Rp686trn ($51.7bn) of a targeted Rp1294trn ($97.5bn). Although the DGT had projected this figure to rise to 93.1% by the end of 2015, the MoF later reported that tax realisation reached Rp1060.9trn ($80bn) in 2015, or 82% of the yearly target.
The government’s 2016 revenue collection target was Rp1167trn ($88bn) – 10% higher than 2015’s realisation, with authorities forecasting an additional Rp60trn ($4.5bn) of new taxes collected following the launch of the amnesty programme.
DECLARING ASSETS: The tax amnesty programme was under discussion since 2015, with officials initially proposing policies that would pardon local businesses most active in the informal sector, as many avoided registering for taxes out of fear of needing to make historical back payments. The intention of the policy was to allow those with international assets or residence to repatriate assets without incurring major penalties.
Under the programme, which was officially launched in July 2016, individuals and companies declaring onshore or offshore assets and income were charged between 2% and 10% in penalty interest, while other declared funds were repatriated. International media reported that at the time of the first deadline in September 2016, more than 10,000 people per day had declared assets, with these people subject to a 2% tax rate, compared to the standard corporate tax rate of 25%. The tax amnesty initiative was forecast to provide a critical revenue source for the government’s substantial infrastructure development programme.
REWARDS: Over 970,000 participants declared assets during the nine-month amnesty period, with the total amount of declared hidden assets valued at Rp4881trn ($367.9bn), according to MoF data, equivalent to nearly 40% of GDP. Domestic assets comprised the most significant portion of the total, with the MoF reporting that Rp3698trn ($278.7bn) had been declared, against Rp1036trn ($80.1bn) of offshore assets. The Employers’ Association of Indonesia reported that nearly all of its 15,000 members joined the programme, in part because tax officials were not required to trace declared origins of assets, and therefore could not disclose any subsequent information to law enforcement.
Authorities collected around Rp135trn ($10.2bn) in penalties, and the initiative has been described as one of the most successful in history. Indeed, when Standard & Poor’s upgraded Indonesia’s sovereign ratings to investment grade in May 2017, they cited tax reform as a motivating factor. The upgrade was forecast to boost foreign inflows by $3bn-5bn in 2017, demonstrating the knock-on benefits of improved tax collection.
The programme will also help Indonesia meet several global transparency standards, including OECD guidelines on the automatic exchange of information (AEI). Over 100 countries have committed to meeting these standards, including Singapore – the most common offshore tax location for Indonesian citizens, with an estimated $200bn in offshore assets – and Switzerland. The OECD’s AEI regime was effective as of January 2017, and bilateral reporting is expected to follow in 2018.
ROOM FOR IMPROVEMENT: Despite an increase in activity, the DGT remains understaffed: agents monitor hundreds of companies and individuals at a time, reporting in early 2017 that effective enforcement was being hampered by a lack of access to third-party data.
Repatriating newly declared income and assets has also been challenging. Although a large amount of assets was declared, only Rp147trn ($11.1bn ) had been repatriated as of April 2017. “Indonesia’s 2016/17 tax amnesty initiative was a success by global standards,” Hans Anand Beck, senior country economist for the World Bank in Indonesia, told OBG. “Total declared assets reached 122.1% of the government’s Rp4000trn ($302bn) target; however, the share of declared offshore assets that were repatriated only reached 14.7% of the government’s Rp1000trn ($75.4bn) target.”
Authorities reported that most repatriated money is currently in state-owned banks, and has not yet been allocated to infrastructure projects as planned. In addition, while the government had hoped to see more than 2m people participate in the programme, less than 1m did so. Just 12m Indonesians filed a tax return in 2016, with the majority of informal employees and rural residents continuing to fall outside the country’s tax net.
Although the government had hoped to collect Rp1539.2trn ($116bn) in taxes in 2016, it fell short of this target by Rp255.6trn ($19.3bn). The collection target for 2017 is Rp1498.9trn ($113bn). However, in March 2017 the World Bank reported that it still expects Indonesia to miss its 2017 tax realisation target by Rp70trn ($5.3bn), and the tax-to-GDP ratio is forecast to remain below 11% of GDP.
REFORM RAMPS UP: Despite some early successes, authorities are moving to roll out new tax reforms to improve transparency and information sharing, with the goal of cracking down on tax evaders who did not declare assets during the amnesty period. The majority of large businesses and wealthy citizens have already participated in the programme, and authorities will next focus on small and medium-sized enterprises, many of which continue to operate in the informal economy.
Legal reforms also received a boost in May 2017 when the government introduced a new regulation granting tax authorities greater access to information on accounts at domestic financial institutions, including bank accounts. It is expected to notably improve monitoring and enforcement, further demonstrating Indonesia’s commitment to joining the OECD’s AEI initiative.
Under the proposed regulation, banks and insurance companies would need to provide information on clients’ accounts – including cash balances and financial gains – at the request of tax authorities, and this could also be shared with foreign tax authorities.
Upon making the announcement, Sri Mulyani Indrawati, the minister of finance, told media that the DGT would not monitor small accounts – generally understood to be those containing less than $250,000 – while a new regulation will also ensure authorities cannot access information for personal reasons. The Deposit Insurance Corporation reported that as of February 2017, there were around 1m accounts in Indonesia containing at least $250,000.
INCREASED AUDITING: Auditing and enforcement of taxation is expected to increase in coming years, pushing the country closer to meeting its realisation targets. DGT officials have said that the government’s tax collection team, comprising MoF officials and World Bank advisors, is redeploying thousands of tax officers to auditing activities throughout 2017. Tax evaders who did not declare their assets during the amnesty periods reportedly face fines of up to 200% more than the tax they would have paid under the programme.
Augmented staff numbers at the DGT will help improve enforcement. As of 2016 there were 38,000 tax collection agents working at the directorate – 1000 more than in 2014 – assisting in achieving the MoF’s goal to increase the tax-to-GDP ratio to 15% by 2020.
