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

Jakarta, March 31, 2017 4:11 PM (UTC+8)
Indonesian Minister of Finance Sri Mulyani Indrawati speaks during a panel discussion on financial inclusion at the 2016 annual meetings of the International Monetary Fund and the World Bank on October 7, 2016. Photo: AFP/ Zach Gibson
Indonesian Minister of Finance Sri Mulyani Indrawati speaks during a panel discussion on financial inclusion at the 2016 annual meetings of the International Monetary Fund and the World Bank on October 7, 2016. Photo: AFP/ Zach Gibson

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.

A worker removes bundles of rupiah banknote in the state owned Bank Negara Indonesia (BNI) headquarters in Jakarta May 5, 2010. The departure of Finance Minister Sri Mulyani Indrawati, who will join the World Bank, raised doubts that the pace of reforms in Southeast Asia's biggest economy could slow, traders said. REUTERS/Supri (INDONESIA - Tags: BUSINESS) - RTR2DHBF
Hidden wealth: Indonesia’s tax amnesty program recovered a world record US$352 billion in hidden assets. Photo: Reuters/Supri

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.

In this photograph taken on September 30, 2016, Indonesians report their tax figures on the last day of the tax amnesty first round program in Jakarta.Indonesia has hailed a tax amnesty as a major success after it raised more than 7 billion USD in its first few months, but criticism is mounting that the controversial scheme lets the super-rich off the hook. / AFP PHOTO / STR / TO GO WITH Indonesia-taxation-politics-economy,FOCUS by Sam Reeves and Kiki Siregar
Above ground: Over 800,000 Indonesian participated in the government’s tax amnesty. Photo: AFP

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.

Indonesian billionaire businessman and chairman of Golkar Aburizal Bakrie (R) sits in a train in Jakarta May 10, 2012. Bakrie is chairman of Golkar, the second biggest party in the ruling coalition which was the political vehicle of former strongman President Suharto who ruled the archipelago for over three decades until 1998. He is eyeing the presidential seat in the 2014 election. Picture taken May 10, 2012. To match insight INDONESIA-BAKRIE/ REUTERS/Matthew Bigg (INDONESIA - Tags: POLITICS BUSINESS) - RTR32DFO
Free-rider: Indonesian billionaire businessman and Golkar party chairman Aburizal Bakrie (R) sits on a train. Photo: Reuters/Matthew Bigg

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.

Indonesian union workers protesting against a government tax amnesty march towards the presidential palace in Jakarta, Indonesia September 29, 2016. REUTERS/Darren Whiteside - RTSPYZT
Eat the rich: Indonesian union workers protest against the tax amnesty Photo: Reuters/Darren Whiteside

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.

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