The tax woman cometh
Finance Minister Sri Mulyani Indrawati recovered a world record US$360 billion in hidden assets in a tax amnesty that still fell short of target
At a mid-March meeting with G-20 officials and central bankers in the German spa town of Baden-Baden, Indonesian Finance Minister Sri Mulyani Indrawati had a stern message for compatriots: beware, the tax woman cometh.
Sri Mulyani, a former World Bank director, has helped to lead a nine-month tax amnesty program which has proven to be the most successful in history in terms of amount collected. The amnesty, which began in July 2016 and tied up today, offered lenient and generous terms in a bid to recover hidden assets and lost tax revenues at home and abroad.
Around US$360 billion (4,800 trillion rupiah) of previously undeclared assets were uncovered, a world record that beat recovery rates in Italy’s widely lauded 2009 tax amnesty program.
The tax windfall, provisionally estimated in reports at 112 trillion rupiah, or around US$8.4 billion, will also help Indonesia to achieve its goal of 5.1% economic growth this year through new spending that will aim to offset shaky prospects for key export industries amid rising policy uncertainties in China, Europe and the US.
Sri Mulyani said one-third of the assets declared came from tax havens overseas, including Singapore, the Cayman Islands, British Virgin Islands and Hong Kong. She said Indonesia would sign information-sharing agreements with 101 countries by September this year and that the world was “no longer a safe place” for Indonesian tax avoiders.
Sri Mulyani also announced plans to use new international information-sharing tools to reduce the room for tax dodgers to hide their cash. She said Indonesia was likely to scrap domestic bank secrecy laws and join a growing list of countries which shared a common financial database.
A 200% penalty will be imposed on those who dodged the amnesty program, tax officials said.
Since its recovery from the 1997-98 Asian financial crisis, Indonesia has struggled to get its citizens to pay, or even sign up for taxes. Of Indonesia’s 180 million adult citizens, only 27 million are registered taxpayers and rarely pay what they are estimated to owe.
In 2016, even with the amnesty in place, tax collection fell some 18% (US$17.6 billion) short of the government’s target. Indonesia’s tax-to-GDP ratio is among the lowest in the world at 10.8%, which Sri Mulyani hopes to boost in the next few years to 15%, closer to the global average.
The amnesty’s terms were lenient and generous. Penalties owed ranged between 2% and 10% of the value of declared assets, depending on when in the program they were declared, with no questions asked.
Corporate tax rates in Indonesia can reach as high as 30%. High-profile figures linked to the era of former dictator Suharto, such as his son Tommy Suharto and businessman-cum-politician Aburizal Bakrie, were among over 800,000 Indonesians to join the program.
Most of the estimated US$360 billion in declared assets were stashed in Indonesia, with around US$77.6 billion hidden abroad. Of that US$11 billion has actually been repatriated under special incentives, tax officials said.
Tax amnesty revenues will only do so much for Indonesia’s slowing economy, which grew 5% last year, well under President Joko Widodo’s government’s 7% projection. The economy relies heavily on domestic consumption, which makes up over two-thirds of gross domestic product. Widodo has vowed to spend heavily on ports, harbors, trains and roads to close a yawning infrastructure gap and spur growth.
Rising global protectionism could constrain that expansion even if spending is efficiently and quickly disbursed. Some analysts have speculated the US Federal Reserve could increase rates faster than expected, causing outflows from emerging markets such as Indonesia.
The tax amnesty’s program, despite its successes, has been criticized for forgiving corrupt behavior, a perennial problem in Indonesia. The OECD warned in October last year that amnesties in developed countries have shown the programs encourage tax evasion once grace periods expire.
Last year, Indonesian trade unions protested the amnesty, claiming it rewarded tax evaders at the expense of the poor.
Critics also note the actual tax revenues fell well short of the government’s ambitious initial target of 165 trillion rupiah (US$12.7 billion), with collection of around three-quarters that amount.
Analysts believe many wealthy Indonesians kept their undeclared assets overseas due to an onerous requirement that amnesty-declared assets must be parked in Indonesia for three years.
Sri Mulyani’s next task will be to mobilize the collected funds into efficient, growth-promoting stimulus measures. A special task force for such economic activities has already been created but must wait until all funds are collected and counted before devising spending plans.
Some are already earmarked to help plug the budget deficit, which has recently shrunk due to Sri Mulyani-led belt-tightening. Then the government will begin the enforcement component of the amnesty: pursuing non-compliant individuals.
Sri Mulyani has promised to hire more tax officials; Indonesia’s current ratio is a low at one per every 7,000 citizens. But despite the amnesty’s relative success, much work remains to be done before Indonesians truly fear and respect the taxman, or in Sri Mulyani’s case, tax woman.