Jokowi's Push for 2016 Tax Amnesty Plan Kick-Off Seen as Flawed

Indonesia Prepares For Joko Widodo Inauguration.

Indonesian President Joko Widodo. Jokowi, as the president is known, is under pressure to increase government spending on public works and boost faltering growth, which languished below 5 percent for much of his first year in office.

Photographer: Oscar Siagian/Getty Images
  • Indonesia had originally planned to implement amnesty in 2015
  • OECD: Amnesty will be harmful for long-term compliance

Indonesian President Joko Widodo’s government will start 2016 trying to get lawmakers to approve the country’s fourth tax amnesty since independence, a plan it says will lure back money stashed overseas to net an extra $4.4 billion of revenue this year.

QuickTake Indonesia’s Nationalism

Bad move, say tax analysts, anti-corruption activists and the Organisation for Economic Cooperation and Development. The quest for a short-term budget boost risks missing its mark and exacerbating the country’s perennial tax evasion, they say.

"Indonesia should avoid the repeat of the tax amnesty,” OECD Deputy Secretary General Rintaro Tamaki said in a November interview. "People start to have an expectation that another tax amnesty can come, and think ‘this time we won’t file a return, but perhaps we will in two or three years time,’" which is quite harmful to tax compliance, he said.

Jokowi, as the president is known, is under pressure to increase government spending on public works and boost faltering growth, which languished below 5 percent for much of his first year in office. The windfall he expects from tycoons bringing their overseas fortunes home is equivalent to about a fifth of his infrastructure budget for 2016. Such a revenue boost would help keep the budget deficit within a legally-mandated limit.

Parliament Priority

Parliament will prioritize the tax amnesty when it reopens mid-January, said Johnny Plate, a member of the finance commission at the legislature. There is enough support from lawmakers to pass the law needed to implement in the first quarter of 2016, he said.

The proposed amnesty, which the government had planned to implement in 2015, would allow people to declare previously unreported assets and benefit from tax rates as low as 2 percent. That compares with the corporate tax rate of 25 percent and the top rate of 30 percent for personal income.

“In normal conditions, it’s true, this would wound the sense of justice," Finance Minister Bambang Brodjonegoro told reporters in Bali in December. “But the issue now in Indonesia is that there are massive amounts of people who aren’t paying. An amnesty is an innovation to break the deadlock.”

Indonesia joins countries such as India in turning to tax amnesties to encourage better compliance. The finance ministry’s base estimate is that the amnesty will bring in about 60 trillion rupiah ($4.4 billion) of revenue in 2016, said Ekoputro Adijayanto, a special adviser to the finance minister.

Enticing Tycoons

The move will encourage Indonesians with money abroad to bring it home, said Brodjonegoro, saying Indonesians had an estimated 2,700 trillion rupiah of assets in Singapore alone. Under the latest draft of the law, those promising to buy government bonds with repatriated funds will pay even less tax than the rates proposed for the amnesty, he said.

Banking billionaire Tahir is responding. The tycoon, who goes by one name, said he intends to bring some of his fortune home under the amnesty, and he expects others to join him. Indonesia is attractive because the rupiah is undervalued and interest rates are higher than in Singapore, he said.

“Maybe they won’t repatriate all their money, but I’m sure a significant amount will do so,” said Tahir, who was given a top civilian award by the president in 2015 . “The president has explained that no one is going to start investigating where the money comes from. If this money is brought to Indonesia it could be used productively, could be invested, so the economy gets going, creates jobs. ”

Yet the country lacks the monitoring mechanisms to ensure people who don’t take up the amnesty get punished, or that those who do so submit all their assets, some anti-graft activists say.

“The impression is that the amnesty is being rushed through,” said Firdaus Ilyas, coordinator of the budget monitoring and evaluation division at Indonesia Corruption Watch. “We have no real database on tax payers and not enough tax officers to chase people up. If this is just about patching a hole in our finances, there are better ways to do this. ”

Jokowi wants to increase Indonesia’s tax-to-gross domestic product ratio to 16 percent, up from about 12 percent in 2012, which is below the Asia-Pacific region’s average. Out of a population of 250 million, only about 900,000 Indonesians submitted a tax return in 2014.

Brodjonegoro had set a target of 1,294 trillion rupiah of tax for last year, about 30 percent more than the actual amount collected in 2014. He predicts he will fall short, amid slumping oil and gas revenue and slower growth.

The head of the tax office resigned in December, citing disappointing revenue collection. The finance ministry estimates the 2015 budget deficit will skirt close to the 3 percent of GDP cap imposed by parliament.

It’s far from certain that much money will be repatriated under the amnesty, as Indonesians park their cash in Singapore because of its transparent investment climate and legal certainty, two things which Indonesia lacks, said Yustinus Prastowo, head of the Center for Indonesia Taxation Analysis. The amnesty would be the country’s fourth since independence in 1945, he said, calling the move “legalized money laundering.”

“From the government side they need the additional income next year, but this amnesty can only be a one-off occurrence,” said David Sumual, chief economist at Bank Central Asia, speaking Dec. 30. “Hitting 60 trillion will need a good publicity campaign and preparation by tax officials.”

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