The $367 Billion Haul That May Boost Tax Amnesty: QuickTake Q&ABy
It’s a popular, if not foolproof, way for countries to boost their coffers without raising taxes: Declare an amnesty to give tax offenders a chance to come clean. Indonesia collected more than $11 billion in penalty payments from such a program, and other Asian nations may follow suit. An amnesty provides citizens with a window of opportunity to declare assets previously undisclosed to tax authorities. They typically pay a lower rate than they would normally owe and avoid legal prosecution. The strategy doesn’t come without risks.
1. How did Indonesia’s amnesty work?
Individuals and companies were charged between 2 percent and 10 percent in penalty interest, depending on how soon they joined the program and whether they only declare funds or repatriate assets as well. (They will keep paying regular taxes on repatriated assets going forward.) The nine-month amnesty period began in July 2016.
2. How successful was it?
It attracted more than 970,000 participants who declared 4,881 trillion rupiah ($367 billion) of hidden assets. That was a strong-enough result that may help Indonesia shed its junk status with credit rating company, S&P Global Ratings. An investment grade would boost the country’s appeal among conservative Japanese institutional investors, potentially boosting inflows by $3 billion to $5 billion over the next year, Goldman Sachs Group Inc. estimated in March.
3. How big a problem is tax compliance in Indonesia?
In a country of 260 million people, only about 12 million filed a tax return last year. Most Indonesians, especially those in rural areas or the informal economy, including the self-employed, fall outside the tax net, so taxation relies on the salaried middle class. Wealthy ethnic Chinese, in particular, have kept assets overseas for years. As a result, the country has a tax-to-GDP ratio of about 12 percent, far lower than in the developed world, where ratios from 25 percent to 50 percent are common.
4. Are there still untaxed assets out there?
Lots of them, according to Indonesia’s finance minister, Sri Mulyani Indrawati, who said many individuals and businesses did not participate in the amnesty. Authorities are now setting their sights on those tax evaders.
5. What’s the risk in offering amnesty?
Among the common complaints is that tax amnesties benefit law-breakers, raise expectations for future amnesties -- thus reducing the incentive for people to file taxes on time -- and do little to broaden the tax base over the long term. Much of that criticism has come up regarding Indonesia’s amnesty. The Organisation for Economic Cooperation and Development called it too generous and unfair to law-abiding taxpayers, and warned it could hamper future tax collection. The amount of assets actually repatriated to Indonesia -- estimated at 147 trillion rupiah -- was below expectations, with trillions more remaining in Singapore, the British Virgin Islands, Hong Kong, the Cayman Islands, Australia and elsewhere, according to the finance ministry.
6. Is there a trick to getting a tax amnesty right?
Signing up for an international tax disclosure agreement sponsored by the OECD helps a lot, says Evrard Bordier, chief executive officer of private banking firm Bordier & Cie in Singapore. The agreements, known as Standard for Automatic Exchange of Information, currently includes some 100 countries and becomes effective between this year and 2018. It creates a credible threat that your foreign bank account details will be automatically shared with your national tax authorities, whether or not a specific request is made.
7. Which other countries are considering a tax amnesty?
The Philippines is looking into one, but may struggle to secure many takers since it’s not yet part of the OECD’s AEOI standard, said Michael Wan, a Singapore-based Credit Suisse economist. That may explain why Manila is considering a more targeted approach -- focused on those avoiding paying taxes on property, estates and income -- and only plan to adopt it once authorities beef up tax compliance. Pakistan, also not in AEOI, is considering a tax amnesty as well.
8. What about the rest of the world?
Asia is not alone in having a problem with tax evasion, and multiple European countries have conducted amnesties before; the Panama Papers show the problem is not over. Argentina’s own amnesty was a source of inspiration for Pakistan’s. The South American country attracted almost six times more than it expected from an amnesty. Turkey is considering an extension of a tax amnesty announced after last year’s failed coup attempt. Kenya’s government said last month locals holding undisclosed funds abroad have until June 2018 to declare the money and repatriate it to remain eligible for a government tax amnesty. Uganda has proposed a three-year tax amnesty for companies prior to listing on an exchange.
The Reference Shelf
- An earlier QuickTake Q&A Indonesia’s tax amnesty.
- A QuickTake explainer on how secret Swiss bank accounts stopped being secret.
- Indonesia hopes to attract $200 billion in investments in unexplored oil and gas blocks.
- An OECD overview of the AEOI program, and a list of the countries that signed up.
— With assistance by Karlis Salna