Asia

Economic nationalism at the heart of Indonesia’s tax amnesty programme

Economic nationalism at the heart of Indonesia’s tax amnesty programme
Indonesia’s wealth-management industry is nowhere nearly as developed and varied as Singapore’s — mostly comprising government and state-owned-enterprises bonds — leaving potential investors with very limited choices. Photo: Reuters
Published: 4:00 AM, July 26, 2016
Updated: 9:35 AM, July 26, 2016

After much dithering by its House of Representatives, Indonesia finally enacted its Tax Amnesty Bill early this month. The new law, which took effect last week, seeks to entice rich Indonesian taxpayers with undeclared or under-reported wealth or assets, both in the country and outside, to declare them voluntarily, in exchange for non-prosecution and major discount rates as incentives. It also encourages those with funds deposited overseas to repatriate and invest them in local bonds and schemes.

Jakarta’s desire to maximise its revenues from tax is understandable, especially in the wake of last year’s less-than-expected collection yields and the increasing burden on the national budget imposed by the growing list of populist subsidies in education, healthcare and infrastructure demands.

But how realistic is the Tax Amnesty law in terms of delivering its designated targets?

There are signs that President Joko “Jokowi” Widodo’s administration considers the new law its cornerstone economic policy this year, so much so that it is eager to portend success even if it is still in its early days.

The Finance Minister recently told a parliamentary committee that the North Jakarta taxation office had already started collecting revenues on the very first day that the programme came into effect.

Even Coordinating Minister for Political, Legal, and Security Affairs, Mr Luhut Binsar Pandjaitan, in a Facebook post, linked this year’s improved foreign investment figures to the efficacy of the tax amnesty. Given that the law has barely passed its first month, his conclusion rests on shaky ground.

It is more likely that this year’s growth in foreign investment was spurred on by the retraction of most of the nationalist economic policies in the first few months of Mr Widodo’s presidency.

Yet to say that the days for economic nationalism in Indonesia are over is also too hasty. The tax amnesty is an apt example. At its core is the highly patriotic notion that Indonesian nationals are called upon — and cajoled — to give domestic investments preference, irrespective of commercial sensibilities.

Following the passage of the programme, Indonesian Finance Minister Bambang Brodjonegoro issued a directive to outline specific guidelines for fund repatriation and reinvestment that the new programme is expected to produce.

The directive mandates the creation of investment agencies, termed “gateways”, which would oversee and channel the repatriated funds into various domestic avenues of investment.

Mr Brodjonegoro has said the amnesty is expected to draw about 165 trillion rupiah (S$16.9 billion) for the government.

Clearly, Jakarta expects a bonanza. It also expects Indonesia to become an attractive investment destination eventually, at least for its citizens.

The minister had also told the press last year that the new programme would serve as the first thrust into broadening and deepening tax compliance among registered individual taxpayers whose tax contributions only make up 10 per cent of the government’s aggregate tax revenues.

Then, he alleged that billions of dollars owned by Indonesia’s rich are currently parked “in a specific country”, and it later became apparent that he was referring to Singapore.

SPOTLIGHT ON SINGAPORE

So how does Singapore figure in the new tax amnesty programme?

Central to the success of the new programme is the Standard for the Automatic Exchange of Information (AEOI), also known as Common Reporting Standard, a global initiative by the Organisation for Economic Cooperation and Development (OECD).

Although Indonesia is not a member of the OECD, Jakarta — along with Singapore — agreed to participate in the AEOI initiative in May 2014, with the start year for automatic reporting for both countries scheduled for 2018. So far, more than 80 countries have become signatories.

AEOI is effectively the leverage with which the Indonesian government hopes to coax taxpayers to: Declare their hitherto unacknowledged wealth, repatriate their overseas funds to invest them within the country for a minimum of three years or pay the taxes on them at discount rates before March 2017. Failure to do so may result in prosecution entailing maximum penalties under the law for tax avoidance after financial data starts streaming in 2018.

However, even as an AEOI signatory, for the Indonesian government to start exchanging and requesting financial data from other countries such as Singapore, for instance, may be more complicated than meets the eye.

Diverse protocols exist before the actual exchange can take place. Certain tenets of the convention will have to be legislated by the signatory, for one, and due diligences must be met. It remains to be seen whether Jakarta will be able to comply with all the requirements by 2018.

The Indonesian Parliament is, after all, notorious for rejecting treaties or agreements with foreign countries. Posturing against foreign influence has become very popular in Indonesian politics these days.

In the lead-up to the passage of the Tax Amnesty Bill through the House of Representatives, government officials, including Mr Brodjonegoro the Finance Minister, even hinted that Singapore, fearing a massive capital flight, had been lobbying the Parliament to block the Bill.

Last week, Mr Brodjonegoro went further by professing to believe in the theory that Singapore is somehow conspiring against the new law.

“Let them (do their worst). I am not afraid of Singapore; it’s merely a tiny country,” he reportedly told a parliamentary committee.

Singapore has stated that recent claims that it is implementing policies to “thwart” the tax amnesty programme are untrue.

Yet, to some Indonesian politicians, Singapore — as a popular overseas investment destination for Indonesians — unwittingly represents a stumbling block to the scheme.

The fact that Singapore seems to be singled out for this unflattering honour suggests that the policy targets the upper-middle class and the nouveau riche as opposed to the conglomerate super-rich classes.

The latter, using a sophisticated network of offshore accounts, could easily circumnavigate the new law by choosing countries outside the AEOI scope. By the virtue of its proximity and reputation, Singapore, however, remains the most attractive for the former.

Many Indonesians choose Singapore as a place to invest their money because it has a reputation as a stable, sophisticated and secure financial and commercial hub. It has a reputation that has been cultivated for decades, and it is not something that Indonesia possesses at the moment.

Furthermore, Indonesia’s wealth-management industry is nowhere nearly as developed and varied as Singapore’s — mostly comprising government and state-owned-enterprises bond — leaving potential investors with very limited choices.

The 2016 Index of economic freedom by the Heritage Foundation lists Singapore as the second-freest economy globally, only topped by Hong Kong. It is no coincidence that Singapore is also the most affluent society in South-east Asia.

It is also a clue as to why a coercive economic policy like the tax amnesty could only make the country’s economy less free. The elephant in the room is that the policy — if it proves successful at all — could only further erode Indonesia’s competitive edge as a place of business and commerce.

SOCIAL JEALOUSY

The policy may serve Indonesia’s short-term budgetary needs, but in the globalised economy of today, it definitely strikes the wrong note. Even in its most optimistic strain, the expected revenue projected by the Finance Minister from the Bill is probably unrealistic.

The fault lies not with the system adhered to by the Indonesian government, but with the way its laws are implemented, or rather, not implemented.

Mr Barry Desker, Singapore’s ambassador to Indonesia from 1986 to 1993, related in an op-ed last year an illustrative anecdote: He dined at the Nadaman restaurant in Singapore with an Indonesian friend, who happened to be a fugitive wanted by the Indonesian government for embezzling US$500 million (S$679.5 million).

And yet there he was, moving about freely with a valid Indonesian passport and, astonishingly, paying for the meal with a diamond credit card issued by a bank to which he owed part of the money.

The story may be a source of mirth for many, but it is hard to believe that the Indonesian government was unaware of the fugitive’s ownership of an Indonesian passport or why it was never revoked.

The Indonesian monetary authorities and the bank that issued his credit card must have been aware of the person’s status as a credit-card holder, too.

Stories like these cast doubt on whether, for instance, the stream of financial data received by Indonesia under the AEOI exchange would truly help the country to enforce its own laws or tax regime.

Further, the Bill itself is also morally dubious, especially when Jakarta ironically claims that its long-term goals were tax compliance and to entrench the mentality of paying taxes among Indonesians.

If the government was serious about enforcing tax discipline, it would empower the Directorate of Taxation with the powers and resources to track down miscreants and their assets, instead of opting for the easiest way out through a tax amnesty.

Offering tax discounts to people who can afford to pay the full amount, while most ordinary Indonesian workers have no choice but to pay their tax in full — because it is automatically deducted from their wages — can only stir up resentment.

Much of social jealousy in Indonesia stems from the preferential treatment and perks enjoyed by rich customers at most commercial outlets. Ordinary Indonesians often joke about how the rich folks always get the best discounts at shops. And now, to rub salt into the wound, the government dangles tax discounts for the prodigal rich.

There is nothing wrong with the Indonesian government’s desire to broaden its taxation base and generate more investment for the country.

However, the best way to turn Indonesia into a desirable financial hub would be to tackle the rampant problems with venality, lack of meritocracy, abysmal rule of law and political volatility that continue to beset the Indonesian economy.

Resorting to policies that completely disregard the fundamentals seems like a folly, at best a penchant for quick fixes.

 

ABOUT THE AUTHOR: Johannes Nugroho is a writer from Surabaya.