Southeast Asia | Tax amnesty reveals new depths of Indonesian corruption

Tax amnesty reveals new depths of Indonesian corruption

The program fell short of its lofty collection goals but showed a harsh light on the pervasiveness of tax evasion among the country's elite

Jakarta, March 31, 2017 4:11 PM (UTC+8)
Indonesian  Photo: Reuters/Supri
Indonesian Photo: Reuters/Supri

Indonesia’s ongoing wave of economic nationalism, which has left prospective foreign investors wondering whether they are welcome at all, apparently doesn’t extend to wealthy Indonesians bringing home cash and other assets stashed in offshore havens.

Indeed, when the country’s historic nine-month tax amnesty ended today, only 146 trillion rupiah (US$11 billion) in assets had actually been repatriated from such favored havens as Singapore, Hong Kong, and the British Virgin and Cayman islands.

That’s a far cry from the Rp1,000 trillion (US$75 billion) officials expected to flood back into the country in a fit of patriotic fervor, but the target was always going to be unreachable because around half of the overseas holdings are in buildings and apartments.

If the government has been disappointed at the final outcome, the three-phase exercise has been an intriguing exercise in the light it has shone on how much money wealthy Indonesians have stashed abroad, dribbling it home when it is needed.

Indonesian President Joko Widodo speaks about the tax amnesty program to members of the business community in Jakarta, Indonesia February 28, 2017 in this photo taken by Antara Foto. Picture taken February 28, 2017.  Antara Foto/Akbar Nugroho Gumay/via REUTERS         ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. FOR EDITORIAL USE ONLY. MANDATORY CREDIT. INDONESIA OUT. - RTX31XCQ
Forgiving: Indonesian President Joko Widodo speaks about the tax amnesty to members of the local business community. Photo: Antara Foto via Reuters/Akbar Nugroho Gumay

Targeted in Jakarta’s 1997-98 riots, Indonesian-Chinese in particular have always had a reason to look for overseas bolt-holes because of the discrimination they continue to endure as a consequence of their disproportionate hold on the economy.

But as the Panama Papers showed, ethnic Indonesian tycoons aren’t much different. “This is a hostile environment for private investment,” says one foreign executive. “Private investors have always been squeezed and they’re being squeezed even more now. No-one trusts the tax department.”

Many who joined the amnesty did so out of fear of being caught up in the implementation next year of the Organization for Economic Co-operation and Development’s (OECD) Automatic Exchange of Information initiative that will allow tax authorities greater access to their overseas assets.

Another incentive was a pledge that tax inspectors would not investigate the source of previously undeclared funds, even if they are the suspected fruit of corruption. That has not gone down well with the OECED and protesting workers, who feel it favors the cheat and penalizes the compliant.

For all the early skepticism, and a shortfall in expectations, the amnesty has still turned out to be the most successful of its kind in history, exceeding Italy’s 2009 program which unearthed 80 billion euros in assets and 4 billion euros in extra tax revenue.

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Overall, the Indonesian government collected 112 trillion rupiah (US$8.4 billion) in redemption payments, down from its target of 165 rupiah trillion (US$12.4 billion), but sufficient to help plug a yawning gap in projected tax revenues.

Much of the lucre – 97 trillion rupiah (US$7.3 billion) — came during the first phase of the amnesty between last July and September when there was only a 4% tax on overseas assets, compared with 2% if the money was wired back into domestic bank accounts for a mandated three years.

With the tax rates rising from to 3%-6% and 5%-10% during the second and third phases, the final three months garnered only 2 trillion rupiah to add to the 103 trillion rupiah taken between July and December.

Collecting data on a total of 4,800 trillion rupiah (US$360 billion) in previously undeclared assets has provided an illuminating insight into what Indonesians have secreted away offshore – and accumulated at home in the form of untaxed real estate.

Most surprising for officials was the amount of newly-disclosed domestic assets, which topped Rp3,600 trillion (US$270 billion), far exceeding the Rp1,033 trillion (US$77.6 billion) kept abroad by those who participated in the amnesty — 73% of it in Singapore.

People walk past a mock one thousand Rupiah coin on display at Bank Indonesia's headquarters in Jakarta, Indonesia, November 17, 2016. Photo: Reuters / Beawiharta
Big money: The tax amnesty uncovered an estimated US$360 billion of hidden assets. Photo: Reuters / Beawiharta

One of the reasons for that is taxpayers had only focused in the past on their income and not on fixed assets. Many were alarmed to discover that while the amnesty tax rate was low, it was still too much to pay on undeclared property inherited decades ago and, in some cases, now worth millions of dollars.

In the end, the tax office was forced to change the rules on land valuation from the end of 2015 to the actual time of acquisition — or at a level which made the payment more affordable for salaried workers and retirees on modest incomes.

Worryingly, however, while the amnesty may have unearthed three million new taxpayers and increased overall revenue collection, non-amnesty revenues reached only 83% of the Finance Ministry’s 2016 objective, even less than in 2015 and 2014.

“Weak fiscal revenues continue to pose a downside risk to lower economic growth,” the World Bank warned in its March quarterly report. “Lower revenue collection could constrain fiscal spending and much-needed infrastructure investment.”

This isn’t good news for Finance Minister Sri Mulyani Indrawati, who made it clear from the start that the real benefit would be the information the amnesty turns up, which hopefully will allow for wider tax collection in the future.

Rather than worry about targets, the former World Bank managing director said the whole idea has been to create confidence, restore trust in the fairness of the tax system and, in doing so, expand the tax base.

Indonesia Finance Minister Sri Mulyani Indrawati gestures during a meeting at the Finance Ministry office in Jakarta, Indonesia, January 3, 2017  in this photo taken by Antara Foto.  Antara Foto/Rosa Panggabean/ via REUTERS   ATTENTION EDITORS - THIS IMAGE WAS PROVIDED BY A THIRD PARTY. FOR EDITORIAL USE ONLY. MANDATORY CREDIT. INDONESIA OUT. - RTX2XC1W
Collection agent: Indonesian Finance Minister Sri Mulyani Indrawati during a meeting at the Finance Ministry on January 3, 2017 Photo: Antara Foto via Reuters/Rosa Panggabean

Such a reality check was sorely needed, even if it is an admission of widespread tax evasion among the 118 million-strong work force. In the past two years, the government has set unrealistic tax objectives for a country with a tax-to-GDP ratio of 11% – one of the lowest in the region.

Sri Mulyani wants to eventually expand compliance to 15%, beyond the global average of 14.8%. But that will depend on whether the government can ram through a four-year tax reform agenda, including a list of quick-fire measures by the end of this year.

Few Indonesians trust tax officials, who have long had a reputation for so-called “hunting in the zoo” – squeezing and often black-mailing vulnerable tax-payers – instead of tracking down fat-cat tax evaders and widening the pool.

More taxpayers may also mean less tolerance for the corrupt politicians and bureaucrats, whose blatant theft of state funds, evidenced by the ongoing US$173 million electronic identity card scandal, doesn’t draw the public outrage it deserves.

A man waits to register for the government's tax amnesty programme at a branch of the tax office in Jakarta, Indonesia September 30, 2016. REUTERS/Iqro Rinaldi - RTSQ536
Trust deficit: A man waits to register for the government’s tax amnesty program at a tax office in Jakarta, Photo: Reuters/Iqro Rinaldi 

A finance minister in the previous Susilo Bambang Yudhoyono government, Sri Mulyani knows this better than most after her efforts to reform the tax office were forestalled when she was unfairly hounded out of office in 2010 over the Bank Century bailout scandal.

She spent six years at the World Bank’s Washington headquarters before being lured back by President Widodo, anxious to secure her help in managing the tax amnesty and finding other ways to get the economy back on a stronger growth track.

The president is widely believed to have offered the country’s cleanest and most capable public servant a shot at the vice-presidency in 2019 to lure her back from her $400,000-plus, tax-free job, in Washington, which friends said she had become bored with anyway.

Critics complain the finance minister has become more of a politician than an economist this past year, but only time will tell if she has succeeded in achieving what she set out to do: getting her fellow citizens to put their trust in the taxman, the one person they have always feared.

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