Indonesia Plans Tax Amnesty to Lure Cash Back From Singapore

President Joko Widodo is planning a tax amnesty in a bid to convince Indonesians to bring back funds held offshore as he seeks to narrow the current-account deficit.

The government will revise rules so people repatriating money won’t have to pay tax on it and will also give companies a tax break to keep funds onshore, Finance Minister Bambang Brodjonegoro told lawmakers in Jakarta on Thursday. The changes, which will need parliamentary approval, are the ministry’s top priority for 2015, he said.

Many wealthy Chinese Indonesians moved funds to Singapore after ethnic riots in 1998, and the city-state’s private banks also offer a wider range of financial products than Indonesian lenders. The president, known as Jokowi, wants to revive an economy growing at its slowest pace in five years and narrow a current-account deficit that is weighing on the rupiah.

“It is a very good move, but we need to wait and see on whether this will really be effective in attracting the money back to Indonesia,” said Eric Sugandi, an economist at Standard Chartered Plc in Jakarta. “The Indonesian savers in Singapore will also take other considerations, such as the safety of their money, choices of investment instruments, and relationships with local fund managers.”

The number of high net worth individuals in Indonesia rose 7.5 percent in 2013 to 40,000 people, who have a combined wealth of $134 billion, according to Capgemini and RBC Wealth Management’s World Wealth Report. UBS AG, Credit Suisse Group AG and DBS Group Holdings Ltd. are among the biggest private wealth managers in Singapore.

Tax Receipts

In a bid to retain staff and improve collection, the government will also raise the salaries of tax officials, Finance Minister Brodjonegoro told reporters in Jakarta on Friday. As an example, the head of the tax office’s monthly pay will be increased by two-thirds to 100 million rupiah ($7,928), more than for any cabinet minister, he said. The pay increases have already been approved by the legislature.

Jokowi also wants to lift tax revenues at home, and has set a goal to boost them to 16 percent of gross domestic product from 12 percent within five years. Only 4 million Indonesians pay tax and that needs to be increased to 20 million, he said in an interview in Jakarta this week. Indonesia has a population of around 250 million.

The rupiah has weakened 4.7 percent against the dollar since Jokowi took office Oct. 20 as the prospect of higher interest rates in the U.S. spurred outflows from emerging markets. It plunged 21 percent in 2013 when Morgan Stanley dubbed it one of the ‘fragile five’ developing-nation currencies because of Indonesia’s large external deficit.

Capital Outflows

The country’s central bank sees a current-account shortfall of 3 percent to 3.5 percent of GDP this year, compared with an estimated 3 percent in 2014.

Capital outflows caused by changes to Federal Reserve policy may disturb macroeconomic stability and economic growth this year, Brodjonegoro has said.

“A tax amnesty is to bring money back to Indonesia,” he said in parliament Thursday. “And a tax allowance will give more incentives for companies if they don’t send dividends out of Indonesia.”

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