Indonesia Plans Crackdown on Tax Evaders to Boost Revenue

Indonesia plans to crack down on tax evaders, boost the number of collectors and is studying new debt rules to shore up state revenue as slower global growth hurts its budget, the nation’s tax chief said.

The tax office will conduct a “massive scale” inspection of labor-intensive companies in the first half of this year, said Ahmad Fuad Rahmany, the director general of tax at the Finance Ministry. The potential additional revenue from this operation may be as much as 30 trillion rupiah ($3.1 billion), he said in an interview on Feb. 26.

President Susilo Bambang Yudhoyono, whose second term ends in 2014, aims to boost tax revenue by more than 24 percent this year to 1,042 trillion rupiah to help fund more roads, bridges and ports in the world’s biggest archipelago. Below-target state income in recent years has constrained the government’s scope to spend on infrastructure needed to spur growth, which cooled to the slowest pace in more than two years last quarter.

“The logical way out is to chase the taxable population who aren’t paying yet,” Rahmany, 58, said. “Tax revenue is the backbone of the Indonesian budget and that’s why we need to increase the capacity of the tax office, we need more people, infrastructure needs to be strengthened.”

Targeted Companies

Many companies in the palm oil industries, mostly small to mid-sized ones, aren’t paying taxes yet and these are the ones the government will be targeting, the tax chief said. It will also target property, banking, infrastructure and insurance firms, he said, adding his office has monitored various methods many real-estate companies use to avoid taxes.

“Broadening the tax base will go a long way towards ensuring a more consistent revenue stream,” said Eugene Leow, an economist at DBS Group Holdings Ltd. in Singapore. “In this regard, Indonesia still lags. For example, only a small proportion of its workforce is paying income taxes.”

The rupiah rose 0.2 percent to 9,667 a dollar as of 1:56 p.m. in Jakarta today.

Indonesia’s tax-to-gross domestic product ratio was 10.9 percent in 2010, according to data posted on the World Bank’s website. That’s lower than Thailand’s 16 percent, Malaysia’s 13.8 percent, Singapore’s 13.5 percent and the Philippines’ 12.1 percent, the data show.

The ratio for Indonesia in 2012 was 11.9 percent, and the government’s target for this year is 12.87 percent, according to the tax office.

Debt Ratios

The tax office may also impose a threshold on companies’ debt-to-equity ratios, limiting it at about four to eight times, above which interest payments will no longer be tax deductible, Rahmany said. The ratio measures a company’s total liability against its equity.

Some foreign companies depress their profits by reporting capital injection from their parents as debt, Rahmany said. Of the about 7,000 foreign companies in Indonesia, 4,000 haven’t been paying taxes for the past five years as they’re reporting losses, he said. Some of the losses were attributed to high interest payments even if the debt was actually capital injection from the parent company, he said.

Some people don’t want to pay taxes because they think the government hasn’t done its job of building good infrastructure, said Edimon Ginting, a deputy country director at the Asian Development Bank in Jakarta. Jakarta commuters were delayed for hours on Feb. 6 after heavy rains inundated the capital’s roads and railways, bringing traffic to a halt.

Finance Minister

“Indonesia has room to boost tax collection,” Ginting said by telephone yesterday. “There’s a potential increase in the middle-income class, which means these people will fall into the tax bracket.”

Yudhoyono and Finance Minister Agus Martowardojo have struggled to reduce fuel subsidies, underlining the importance of boosting revenue so that Indonesia can allocate more spending to infrastructure. The president last week nominated Martowardojo to succeed Darmin Nasution as central bank governor.

The Parliament’s finance committee will decide next week on a date for the fit-and-proper test on the finance minister’s suitability for the Bank Indonesia job, Zulkieflimansyah, vice chairman of Commission XI, said in Jakarta today. The president’s office said Yudhoyono will name a replacement for Martowardojo after the parliament committee’s test.

Tax Officials

The tax office aims to almost double the number of employees to 62,000 people within five years, Rahmany said. The department would need an additional 100,000 employees over the next 10 years to boost the nation’s tax ratio, said Rahmany, who has a doctorate in economics from Vanderbilt University and a Masters degree from Duke University. The government approved adding 5,000 tax employees this year, he said.

Indonesia is the world’s fourth-most populous nation. The country missed its tax revenue target last year as the global economic slowdown curbed exports of commodities such as minerals, tin, nickel and palm oil, Rahmany said.

The Thomson Reuters/Jefferies CRB Index of raw materials has fallen more than 9 percent over the past year as Europe’s debt crisis and slowing growth in China cut demand.

Growth in Indonesia, Southeast Asia’s largest economy, slowed to 6.11 percent last quarter. Tax and excise revenue reached 96.5 percent of the government’s target last year compared with a realization of 99.2 percent in 2011, Rahmany said. Tax revenue excluding excise takings reached 94.5 percent of 2012’s target.

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