Global Business Guide Indonesia

Sign up for the GBG Indonesia Quarterly Business Intelligence Report for the latest news on your sector.
Sign Up
Business Updates | Indonesian Government Banking on Tax Amnesty to Plug Tax Shortfall

Following prolonged debate and deliberation in the Indonesian parliament over the urgency of a tax amnesty programme, Indonesia’s cash-strapped government has finally seen the bill approved by lawmakers (See What You Need to Know about Indonesia’s New Tax Amnesty Law). Despite a disappointing start, the Indonesian government, who believes that the policy can attract up to 200 trillion IDR in state revenue, remains optimistic that the programme will be a success despite efforts to scupper it and a sluggish uptake resulting in just 0.4% of targeted revenues being realised to date.

The tax amnesty programme offers special tax rates for tax-evading Indonesians who are willing to either repatriate or declare their assets. The policy imposes a rate of between 2 – 5% on repatriated assets during the July 2016 — March 2017 period, while those who declare their offshore funds are subject to slightly higher rates of between 6 – 10% tax tariff.

To further appeal to (former) tax evaders, the programme offers tax incentives and prosecution impunity to all of its participants. Furthermore, the government and Indonesia's financial authorities have prepared nine prospective instruments, including government bonds, mutual funds and a Real Estate Investment Trust (REIT) in which the repatriated funds can be safely invested in.

The Indonesian government is confident that the incentives offered in the amnesty programme will convince Indonesian taxpayers, particularly those with assets parked abroad to avoid tax, to come forward and declare their assets and bring them back home. Another push factor towards compliance that is being imposed is the fear of the upcoming rollout of the global Automatic Exchange of Information (AEOI) initiative in 2018.

Under the AEOI, financial institutions will be required to report information on accounts held by all foreign individuals and entities to their respective tax administrations. This information will then be safely sent to the account holders’ countries of residence annually. The system is part of a global effort to crack down on tax evasion, which more than 90 jurisdictions have agreed to implement, including Singapore.

Plugging the tax deficit

The government is counting heavily on the tax amnesty to be successful in order to make up for the shortfall in tax revenues recorded over 2015. Indonesia suffered a 234 trillion IDR tax revenue deficit last year from its target of 1.29 quadrillion IDR. This equates to an 18% tax revenue shortfall; the worst in at least a decade. While the sluggish economy is one of the reasons behind the low revenue levels, Indonesia’s weak and inefficient tax authorities are also to blame. According to the Indonesian government, thousands of companies have never paid income tax since commencing business activities. In fact, out of the 1.2 million companies that have taxpayer identification cards (NPWPs), less than half have submitted tax returns.

Fixing this problem is a long-term endeavour that requires time – something Joko Widodo’s government does not really have on its side. The nine-month tax amnesty programme is seen as a quick fix to expand the narrow tax base, receive additional tax revenue and stimulate the economy. The government is optimistic that the tax amnesty has the potential to attract 11.4 quadrillion IDR ($867.25 billion USD) in assets owned by Indonesians that are currently parked abroad. It is expecting to attract 4 quadrillion IDR in declared assets and 1 quadrillion IDR in repatriated assets from overseas. Revenue from imposed penalties is expected to reach up to 200 trillion IDR; a welcome addition to the state budget.

Not the best of starts

There was early optimism leading up to and into the first weeks of the tax amnesty implementation, with tax and wealth management consultants reporting a surge in clients asking about and showing interest in the amnesty programme. However, coming into the second month of the programme, the mood has somewhat deflated after the Finance Ministry announced that the number of programme participants has been far below the government’s target.

The total amount of declared and repatriated assets stood at 26.7 trillion IDR from 4,203 taxpayers. The total amount of declared assets reached 25.67 trillion IDR, while the total repatriated assets stood at only 1.03 trillion IDR. Redemption, meanwhile, had amounted to only 0.4 % of the government's target of 165 trillion IDR.

However, the government remains optimistic that the programme will witness a surge in participants before the end of September 2016, as it is within this period that participants will be able to obtain the lowest tax tariff to redeem their assets. To attract and further facilitate potential participants, the Finance Ministry under newly appointed Minister Ms Sri Mulyani is working to provide additional programme staff, offices and posts such as a hotline for answering enquiries that would also be available on the weekends.

In its attempt to step up its efforts, the government will receive support from state institutions in the financial sector. The Financial Services Authority (OJK) for example has formed a special task unit comprised of representatives from three financial sector industries: banking, the capital market (See Indonesian Capital Markets – Local Funds in Prime Position) and the non-bank financial industry. The job of the task unit will be to cooperate with related institutions such as the Finance Ministry and the Coordinating Economic Ministry to quickly address problems that may hinder the tax amnesty programme.

Bright outlook

Observers and analysts have noted that a successful tax amnesty programme will provide more benefits to Indonesia other than a mere tax revenue increase.  A successful repatriation scheme, for example, would mean the conversion of assets into rupiah, consequently strengthening the rupiah possibly beyond 10,000 per US dollar, far from the current level of around 13,000 and enabling it to make up the significant losses experienced over the past two years (See Indonesia is Behind the Global Curve on Monetary Policy).

In fact, it has also been projected that each quadrillion IDR in repatriated assets through the tax amnesty programme will result in 4 quadrillion IDR worth of economic benefits for the country, leading to a considerable tax ratio increase from the current level of around 12%.

The banking sector, which will be directly involved and impacted by the tax amnesty programme (See Indonesia’s Banking Sector; Under Pressure But Staying Strong), is anticipating to be positively impacted by a successful tax amnesty programme. As many as nine banks, comprising of four state banks, three private banks and two shariah banks, have been mandated by the government to manage repatriated funds and facilitate its investment (See Consolidation of State-Owned Banks in Indonesia: A Recipe for AEC Success?).

The nine banks, dubbed the “perception banks”, will work by facilitating investment within instruments predetermined by the Tax Amnesty Law, such as government bonds, listed companies’ bonds and investment in certain infrastructure projects. Banks have designed a number of investment products to attract and facilitate investment.

Another sector expecting to be boosted by the tax amnesty is the property sector (See Indonesia’s Commercial Property Sector in Temporary Slowdown). Of the eight tax amnesty investment instruments specified by the Indonesian government, two are property-related: The Real Estate Investment Trust and property investment through a private equity scheme, which are bound to receive a substantial amount of investment.  Tax amnesty is also expected to spur a high demand in mortgages, as an inflow of funds into the country would add to banking liquidity, which is likely to result in banks lowering their interest rates, including those for mortgages.

However, analysts have warned that the effects of the tax amnesty will only be short-lived if the Indonesian government does not make serious efforts to improve the investment environment in the country (See Indonesia’s Economic Outlook in 2016 and Beyond). The tax amnesty law requires repatriated funds to be kept in the country for three years. Unless the government finds ways to make sure that the money stays in the country beyond those three years, former tax evaders may return to their old ways.

Global Business Guide Indonesia - 19th August 2016

icone share

Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)