Uncovering the hidden assets of Indonesians

Just a day before the end of the first phase of Indonesia’s tax amnesty on Sept 30, a beaming Cabinet Secretary Pramono Anung told the press that the programme had surpassed expectations. Despite earlier widespread scepticism voiced even by Vice- President Jusuf Kalla, it has successfully beaten the odds for now.

From a meagre 3.69 trillion rupiah (S$390 million) collected on Sept 1, the scheme gained strength, and eventually collected 97.2 trillion rupiah. This works out to be 58.9 per cent of the full target of 165 trillion rupiah. New asset declarations reached 3,603.6 trillion rupiah — 90.1 per cent of the government’s target of 4,000 trillion rupiah.

The landmark tax amnesty is designed to recover billions lost through tax evasion and in assets parked overseas by Indonesia’s wealthy citizens. In return for declaring assets by March 2017, the government will impose tax rates ranging from 2 to 10 per cent. For repatriating the money by the same deadline, citizens can enjoy tax rates ranging from 2 to 5 per cent.

The sudden success of the tax amnesty owes much to new Finance Minister Sri Mulyani Indrawati. Ms Indrawati is a former World Bank managing director who served as Indonesia’s finance minister (2005-2010) under President Susilo Bambang Yudhoyono. Her credentials are seen as impeccable. She is, in effect, the current administration’s badge of fiscal soundness.

As such, Ms Indrawati’s takeover of Indonesia’s Ministry of Finance in late July was timely. The tax amnesty had just started on July 18 under her predecessor, Mr Bambang Brodjonegoro. The approach taken by the two could not be more contrasting. Mr Brodjonegoro had kick-started the programme in contentious circumstances, predicting and alleging sabotage against the programme by Singapore and other foreign entities. In doing so, he unwittingly undermined the scheme before it could take off, and his own credibility, to push it through.

His public intransigence may have been intended for the domestic audience, to provide it with a convenient scapegoat should the amnesty fail. A counterpoint to his allegations lies in the government’s decision to license three foreign banks to act as “perception banks” or trustees for repatriated funds under the scheme, including the Singapore-owned DBS Bank. If Jakarta were truly convinced of the possibility of foreign sabotage, it would probably have banned foreign banks from becoming trustees.

By contrast, Ms Indrawati has been a model of calm professionalism. She never repeated her predecessor’s accusation of foul play by any foreign country. Even when the Indonesian media was rife with stories on Singapore banks reporting their Indonesian clients for repatriating their funds, the minister did not rise to the nationalist bait. Instead she flatly told the press that the action was part of Singapore’s obligations as a member of the Financial Action Task Force (FATF).

Ms Indrawati also signed a ministerial decree on Aug 23 to include assets owned indirectly through Special Purpose Vehicles (SPV) as part of the tax amnesty programme, which proved to be a turning point for the scheme.

An SPV is a legal entity, usually a subsidiary company, created to act as a proxy through which someone can own a business interest without being easily detected. The decision rectified the initial impression that the amnesty was targeting middle class tax payers and small to medium-sized enterprises (SMEs).

The misperception had been serious enough to compel Muhammadiyah, the country’s second-largest Muslim organisation, to call the tax amnesty programme “morally flawed” as, instead of targeting the super rich who “have been stashing their ill-gotten gains overseas”, the government looked to press hard on SMEs as easy pickings.

Again it was the Finance Minister who was sent by the President to iron things out with Muhammadiyah, amid rumours that the latter planned to launch a judicial review at the Constitutional Court. Consequently, by mid-September, Muhammadiyah seemed to have been pacified and publicly denied that it was planning a lawsuit.

Another watershed event was when both President Joko Widodo and Ms Indrawati hosted a dinner at the palace on Sept 22 for Indonesia’s top industrialists to convince them to participate in the amnesty.

Ultimately, it was indeed the bigwigs of the economy who delivered the success of the amnesty to the government.

Despite the success of the first phase of Indonesia’s tax amnesty, questions must be asked as to what comes next.

First, there remains some opposition to the programme. Trade unions have staged mass demonstrations in Jakarta, demanding the revocation of the tax amnesty. Labourers in the formal sector may have cause for grievance, since they have always had their income tax automatically deducted from their pay by the companies they work for, making tax dodging impossible. Indonesia’s trade unions and economic nationalists have long complained about the government’s “neo-lib” (neo-liberal) policies, an accusation that also tainted Ms Indrawati when she was last Finance Minister.

But domestic opposition to Indonesia’s tax amnesty is unlikely to derail the scheme. The government continues to enjoy new confidence from the July Cabinet reshuffle, and since the Golkar Party officially joined the ruling coalition in May this year, President Widodo’s government has an overwhelming majority in Parliament.

The amnesty had the short-term goal of patching up the projected government budget deficit this year. However, its long-term aim is to better map out future taxation sources.

Since taxation in Indonesia is based on “voluntary reporting” — coupled with poor connectivity and synchronicity between government departments’ databases — it has always been very difficult for the tax office to assess the accuracy of its clients’ reports.

Now the tax amnesty offered a unique glimpse into the extent of their wealth; the question is how to harness it to improve the country. This has been a rare reality check on how low the tax-to-GDP ratio has been.

“We will use and maintain this (new) database to identify potential sources of taxation for next year and beyond,” Ms Indrawati said at the conclusion of the first phase of Indonesia’s tax amnesty programme. The days of easy tax-dodging in Indonesia may be numbered.

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