In a plenary session on Tuesday (28/06), Indonesia's House of Representatives (DPR) passed the controversial Tax Amnesty Bill into law as well as the revised 2016 state budget. The Indonesian government will be relieved to see the Tax Amnesty Bill come into effect on 1 July 2016 (ending in May 2017) as it expects the bill to boost tax revenue this year by IDR 165 trillion (approx. USD $12.4 billion). Through tax incentives and the pardoning of tax crimes, the tax amnesty program makes it attractive for tax evaders to declare their offshore assets and repatriate these into Indonesia.
Indonesia's tax amnesty program is controversial because (former) tax evaders are basically being rewarded for their (past) tax crimes. In the eyes of those (few) Indonesian tax payers that have been fulfilling their tax obligations faithfully it is an unfair situation. As such, the tax amnesty program could in fact undermine taxpayers' confidence in (the righteousness of) the whole tax system (Indonesia's tax-to-GDP ratio is already very low at around 12 percent). On the other hand, the additional state revenue that is generated through the amnesty program can be used for infrastructure development and social programs and therefore should benefit society as a whole. However, it should also not be forgotten that the tax amnesty program brings along costs (for the designing, marketing and running of the program, while waived fees and penalties also form a source of missed income).
The Tax Amnesty Bill, which consists of 13 chapters and 25 articles, offers special tax rates between 2 - 5 percent to those who declare and repatriate their offshore assets or those who declare assets that are already located in Indonesia (the repatriated funds have to remain in Indonesia - in investment instruments such as state-owned corporate bonds, state bonds, mutual funds, and real estate investment trusts - for at least three years after repatriation). In case people only want to declare their offshore assets but not repatriate these funds into Indonesia, then the government offers special tax rates between 4 - 10 percent. Indonesia's normal income tax rates go up as high as 25 percent.
The tax amnesty program was proposed by the central government in an effort to collect more tax income. This year the government's budget deficit runs the risk of exceeding the 3 percent of gross domestic product (GDP) cap (if spending were to be continued as planned) due to weaker-than-expected tax revenue. Weak tax revenue is not only the cause of the economic slowdown and low commodity prices but also the cause of an overly ambitious (read: highly unrealistic) tax revenue target set in the 2016 State Budget. If the amnesty program lives up to the government's expectations then the budget deficit issue will be off the table immediately without needing to cut government spending.
However, it remains unsure whether Indonesia's tax evaders are eager to use this pardon, even though it is made attractive by tax incentives as well as the government's promise that the data that are gathered through the amnesty program will not be used for investigations into criminal activities. Indonesian Finance Minister Bambang Brodjonegoro added, however, that those that can be linked to terrorism, drug trafficking or people smuggling, as well as money laundering can still run the risk of being prosecuted.
Indonesia's Tax Collection Target and Realization 2008-2015
(in IDR trillion)
(in IDR trillion)
(in IDR trillion)
Source: Bisnis Indonesia
Earlier, Indonesia's Finance Ministry estimated that some IDR 4,000 trillion (approx. USD $301 billion) is stashed offshore by Indonesian individuals. The ministry added that the tax amnesty program would bring in additional tax revenue worth around USD $4.4 billion in 2016. However, it is obviously difficult to estimate the size of these secret, undeclared assets and therefore estimations vary widely. Bank Indonesia previously estimated that the amnesty program can bring home about IDR 560 trillion (approx. USD $42 billion) in offshore assets and IDR 46 trillion (approx. USD $3.5 billion) in additional tax revenue while the Financial Services Authority (OJK) said there could be an additional USD $42 billion injected into local commercial banks before the year-end due to the repatriation of offshore funds. Personally, I believe there will not exist huge enthusiasm among the nation's tax dodgers to come clean through the tax amnesty program, simply because they find it too risky, despite the government's guarantee not to prosecute tax evaders. The Indonesian government is known for its flip-flop policies and therefore tax evaders may find it safer to leave their secretly stashed offshore/onshore assets undeclared. It is also unsure to what extent the tax amnesty program has been socialized in Indonesian society. Many tax dodgers in Indonesia may not be aware of the program's details.
Indonesia's DPR Passes the Revised 2016 State Budget
Today (28/06), Indonesia's House of Representatives (DPR) also approved the revisions to the 2016 state budget. Most importantly - and as expected - the budget deficit has been widened to 2.35 percent of GDP, or IDR 296.7 trillion (approx. USD $22.3 billion). In the original budget the deficit was set at 2.15 percent of GDP. Despite having cut energy subsidies (fuel and electricity), the government has trouble to collect enough state revenue to cover its expenditures. It is interesting to keep an eye on tax collection through the tax amnesty program.
This column was written by R.M.A van der Schaar, the Managing Director of Indonesia Investments. He obtained his Masters degree in Southeast Asian Studies from Leiden University (the Netherlands) with a major focus on the society, history and linguistics of Indonesia.