Indonesia's Tax Office now has more power to check whether people and companies indeed pay taxes. Last week the Indonesian government basically scrapped the existence of banking data secrecy by introducing a new regulation that gives the nation's tax authorities access to information on accounts held at financial institutions, including bank accounts. The new regulation should contribute to a more transparent financial system and boost the government's (much-need) tax revenue realization. However, Indonesian parliament still needs to approve the new regulation.
Although a government regulation issued by the president to replace an existing law (in Indonesian known as Perppu) becomes effective immediately, Indonesian Parliament must debate and vote on the regulation during its next sitting in order to turn it into law. As such, the future of the new regulation remains somewhat uncertain as the House has the power to repeal the regulation.
Previously there was no law in Indonesia that forces local banks to disclose clients' banking data to authorities. However, Indonesia had emphasized its commitment to join OECD's Automatic Exchange of Information (AEOI). The AEOI is an initiative for tax information exchange among 100 jurisdictions designed to reign in tax evasion across the world. Therefore, in order to join the program the Indonesian government had to design a new regulation. The new regulation now forces financial institutions, such as banks and insurance companies to report data of clients if requested by the Tax Office. Such data can include cash balances and financial gains from assets. These data can also be shared with tax authorities in other nations.
Previously, it was not completely impossible for authorities to obtain client data from financial institutions. For the purpose of an investigation into tax avoidance the Tax Office could request approval from the Financial Services Authority (OJK) to obtain specific data. However, it could take up to six months to get this approval, hence providing plenty of time to tax evaders to cover up any evidence of tax fraud.
The new regulation would be a new step in the government's quest to clean up Indonesia's troubled tax system. Between July 2016 and March 2017 the government had run a successful tax amnesty program, which was joined by 921,744 taxpayers (who declared around IDR 4,881 trillion - approx. USD $367 billion - worth of previously unreported assets).
There is few concern that Indonesia's financial system will be negatively affected by the new regulation as most of the popular tax havens - including Singapore, the British Virgin Islands, Hong Kong and the Cayman Islands - are signatories to the AEOI as well. Therefore, we do not expect to see sudden transfers of capital by Indonesian clients to other jurisdictions in order to avoid trouble.
Indonesian Finance Minister Sri Mulyani Indrawati added that Indonesia's Tax Office will not be interested in the small accounts, while she also emphasized a new ministerial regulation will be designed to protect clients from possible abuse by authorities (for example to make sure authorities cannot access client data for personal interests). However, what separates a small account from a big account remains undefined yet. Other nations that are part of the AEOI agreed to automatically report data of accounts that contain more than USD $250,000, or the equivalent in local currency, to the local tax authorities.
If Indonesia will also use the USD $250,000 threshold, then it means about one million accounts will come under the microscope of the Tax Office. Based on data from the Deposit Insurance Agency (LPS), there were about one million accounts with at least USD $250,000 (or the equivalent in rupiah) per February 2017.
Only 100 countries of 196. Oh my!
A bit of sleuthing will enable anyone with an internet connection to find a country bordering Indonesia that hasn't signed the AEOI to open an account.