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Indonesia races to reform tax laws after amnesty

Push to implement new financial rules to allow international data exchange

Participants in Indonesia's tax amnesty wait at the tax department in Jakarta on March 31, the last day of the program. (Photo by Erwida Maulia)

JAKARTA -- Indonesia's Finance Ministry is racing against time to reform the country's tax system in order to adopt an international framework to exchange taxpayers' data with other countries next year.

The Automatic Exchange of Information framework, developed by the Organization for Economic Cooperation and Development, is seen as key measure for Indonesia to crack down on tax evaders after its tax amnesty program ended on March 31. The one-off, nine-month program revealed a total of 4.88 quadrillion rupiah ($366 billion) in previously-unreported assets -- equal to 39% of the country's gross domestic product. But only a quarter was offshore, lower than the government's estimates of at least 3 quadrillion rupiah.

The AEOI requires Indonesia's tax office to have automatic access to taxpayers' data at local financial institutions -- including bank and insurance companies -- as well as in the capital markets. This will allow the tax office to automatically send data on foreign taxpayers to tax authorities in their countries of origin, and obtain financial data on Indonesian taxpayers in other jurisdictions in exchange.

"The reciprocal principle ... is dubbed one of the most important criteria of the AEOI," Finance Minister Sri Mulyani Indrawati said when visiting the tax office headquarters in Jakarta on March 31. "The Indonesian directorate general for taxation must have access to information and have powers that are equal with those of tax authorities in other jurisdictions -- with same details."

Some 100 countries have committed to the AEOI, half of which -- including Britain, Germany and tax havens such as the British Virgin Islands and Cayman Islands -- are due to undertake their first exchanges this year. Indonesia is among 47 jurisdictions committed to starting exchanges in 2018, including Australia, China, Hong Kong, Japan, Singapore and Switzerland.

But in Indonesia, the implementation of AEOI requires revision of numerous laws and technical regulations, including those governing the tax sector, the banking industry and the capital markets. Completing the necessary revisions before 2018 is "impossible," tax office spokesman Hestu Yoga Saksama told the Nikkei Asian Review on Thursday.

Instead, the government is mulling a government regulation that can bypass the usual parliamentary procedures, which are infamously slow. Known as Perppu, the regulation needs only the President's signature. "The Perppu is being discussed... it's supposed to be ready for signing by the President next week," Saksama said.

Regulatory preparedness

He added that the Perppu must be issued before June, when Indonesia must report its progress on regulatory preparedness to the OECD's Global Forum. With the pro-government coalition controlling parliament, President Joko Widodo's administration seems confident lawmakers will not attempt to overthrow the Perppu.

Apart from the ongoing regulatory adjustments, Indonesia's Finance Ministry has also been improving information technology infrastructure in the tax sector -- including the introduction of electronic filing of tax returns last year and the recent launch of a single digital identity card for tax and customs purposes. IT and administrative capabilities, as well as protection of data from misuse, are another requirement for the AEOI.

Bank Central Asia President Jahja Setiaatmadja said Indonesia's largest private lender will be ready to comply with the automatic exchange regime.

"I think there should be no problem as long as all banks participate... and the treatment is equal in regards to information exchange," Setiaatmadja said. "And especially after the tax amnesty program, shouldn't everyone have participated in that already? If they haven't, then it's their own fault."

Preventing capital outflows from Indonesia will also depend on whether it can compete with mature financial centers like Singapore and Hong Kong. "Maybe 2,000 trillion rupiah is still outside Indonesia right now... There are many reasons people keep money outside," said Pahala Mansury, director of treasury and finance at state-owned lender Bank Mandiri. "The challenge for us is, how are we going to be able to deepen the financial sector?"

The tax amnesty and AEOI participation reflect a determination to widen the tax base in a country with poor tax compliance. Of Indonesia's 250 million people, only 32 million are registered taxpayers and only 8.9 million submitted tax returns last year. The tax-to-GDP ratio is less than 11%, lower than that of regional peers such as Malaysia, the Philippines, Singapore and Thailand -- which range between 14% and 17%. In comparison, OECD members' ratios range from 30% to 50%.

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