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Indonesia's tax amnesty fails to bring money home

$365 billion in hidden assets declared, but domestic and external turmoil discourage repatriation

Participants in Indonesia's tax amnesty wait at the tax headquarters in Jakarta on Friday, the last day of the policy.

JAKARTA -- Indonesia's tax amnesty, which came to an end Friday, has exposed the massive scale of uncollected tax from its citizens, who declared at least 4,866 trillion rupiah ($365 billion) in hidden assets during the nine-month program. But the total of overseas assets brought home was far below the government's target, dealing a setback to its infrastructure development plans.

People crowded tax offices in major cities across Indonesia from Friday morning as the deadline loomed. At the headquarters of the tax directorate general in Jakarta, at least 1,000 people waited to submit documents to the staff, many of whom would work through the night to accommodate last-minute applicants.

Finance Minister Sri Mulyani Indrawati paid the place a visit late in the evening, saying she was "satisfied" with the hard work of the entire tax office ranks despite lower-than-expected participation.

"After today, hopefully the tax sector will move from darkness into light," she said. "I hope this moment can serve as a milestone toward a new era of good governance and improved business process and work performance."

Of Indonesia's 250 million people, only 32 million are registered taxpayers and only 8.9 million submitted tax returns last year. The amnesty, which gives citizens who declare hidden assets and pay a small penalty immunity from criminal prosecution, was aimed to give a quick boost to the government's revenues while widening its database of taxpayers and taxable assets.

Around 965,000 people reported 4,866 trillion rupiah of previously undeclared assets -- equal to nearly 40% of Indonesia's GDP. The government collected 135 trillion rupiah in penalties, which is expected to help it ramp up infrastructure spending while maintaining the budget deficit under the legal limit of 3% of GDP. David Sumual, chief economist at local lender Bank Central Asia, called the results "quite remarkable achievements."

But the funds committed for repatriation only reached 147 trillion rupiah, or less than a fifth of the 1,000 trillion rupiah target. Officials said the majority of returned money is still parked in banks. This dents the government's hopes for funds to be channeled to finance infrastructure projects before President Joko Widodo's term comes to an end in 2019.

Fewer than half of the government's target of 2 million people took part in the amnesty.

Technical and regulatory issues were cited as big obstacles to repatriation. Officials have mentioned difficulties in liquidating illiquid assets like real estate. Indrawati added that some foreign jurisdictions gave Indonesian nationals intending to repatriate their money a hard time.

"They had to undergo some kind of an anti-money-laundering test to clarify the legality of their money," the minister said. "So the Indonesian government talked to the foreign authorities and said participation in tax amnesty means the participants have been pardoned."

But some observers noted a lack of attractive investment instruments in the country compared to the neighboring city state of Singapore, where most offshore assets of Indonesian nationals are parked.

The second half of the program was also clouded by rising political uncertainties, both at home and abroad. Large demonstrations by Muslim groups surrounding the Jakarta governor election late last year raised concerns over political turmoil. That, coupled, with external factors such as Donald Trump's U.S. presidency and the geopolitical situation in Europe, have reduced investment appetite for Indonesia. "In addition to the [domestic] political risk, they also saw external risks," Sumual said.

Indrawati's efforts will now shift to cracking down on suspected tax evaders who did not participate. Figures show that only 1,000 trillion rupiah of offshore assets have been declared, far lower than previous official estimates of 3,000 trillion to 13,000 trillion rupiah. The tax amnesty, Indonesia's first in decades, offered rates as low as 2-10% of total values of assets. Officials have threatened fines as high as 200% of the amount of tax that people have to pay if they are found to have undeclared assets after the amnesty program.

Banks have been told to resume submitting reports of their customers' credit card use, and the government is working to remove a secrecy clause in Indonesia's banking law to help the tax office pursue potential evaders. These are in part to support Indonesia's adoption of the framework for the automatic exchange of information among countries, introduced by the Organization for Economic Cooperation and Development and set to take effect next year. Indonesian officials are optimistic the framework will put more pressure on tax evaders stacking their money overseas.

"We'll work on complying common reporting standards from the OECD in order to implement [AEOI's] reciprocal principle," Indrawati said.

Tax office spokesman Hestu Yoga Saksama said most on the list of Indonesia's richest people have participated in the tax amnesty.

"But the question is, have those who participated reported all of their offshore assets?" he told a TV interviewer.

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