Tax Director General Ken Dwijugiasteadi, left, and former finance minister Bambang Brodjonegoro, center, during a press conference on the government's tax amnesty proposal at the State Palace in Jakarta on April 25. (Antara Photo/Widodo S. Jusuf)

Tax Amnesty: What is It and Why Does It Matter?


MAY 09, 2016

Jakarta. President Joko Widodo's administration has been trying for almost six months now to get lawmakers to pass a tax amnesty bill into law.

The bill has already overcome a bout of political hand-wringing early this year that almost cost the country its powerful anti-corruption agency. And just recently, it found an unexpected driving momentum from the so-called Panama Papers, an international data leak that has linked some of Indonesia's rich and powerful with tax-dodging.


The government pinned its hope on the tax amnesty to repatriate trillions of rupiah now stashed abroad and, in the process, score additional tax revenue to keep the state budget deficit from widening.

But though the finish line now seems to appear within the government's grasp, a consensus on the tax amnesty bill from the different political factions in the parliament remains evasive. The House of Representatives went into their three-week recess on April 29, without reaching an agreement on the bill.

Still, House leaders and the government remain optimistic they can resolve their differences once the lawmakers start discussing the bill again on May 17.

In the meantime, here are the things we know about the current tax amnesty bill.

What is tax amnesty?

According to the latest version of the bill, tax amnesty is a free-pass for taxpayers to disclose incomplete or unreported income in their previous tax periods without having to face prosecution by the tax court or pay any penalty.

During this period, the taxpayers only need to pay a special tax in exchange for a government pardon on their tax liability.

Similar tax amnesty programs were offered back in 1964 and 1984. They did not have much success due to low participation, according to a scholarly article published by the Finance Ministry.

Why does Indonesia need the tax amnesty?

The government hopes the tax amnesty will increase tax revenue, improve taxpayers' compliance rate and pull more offshore assets back into the country.

Indonesia is targeting a 30 percent increase in tax revenue this year to help finance massive infrastructure constructions all across the country, an ambitious target amid sluggish economic growth and low taxpayer compliance.

Tax revenue had only reached Rp 188 trillion ($14 billion) by the end of March or just 14 percent of this year's target of Rp 1,360 trillion.

Why now?

Indonesia is set to implement the Automatic Exchange of Information (AEOI) framework with tax haven countries by 2018, which will allow its tax office to have greater access to its citizens' financial records in countries like Singapore, Mauritius or the British Virgin Islands.

The last two countries are consistently among the top foreign direct investment sources for Indonesia in the past two years, despite having little direct trade or economic links with Indonesia, leading to government suspicion that the investment may have come from Indonesians who stash their gains abroad.

The tax amnesty, scheduled for this year, will be the last chance for tax-dodgers to come clean, or they will have to face the full force of the government's tax regime chasing after their wealth in the next two years.

Who will be Eligible for the tax amnesty?

According to Ken Dwijugiasteadi, the director general of tax at the Finance Ministry, the tax amnesty is offered to everyone, those who already possess a tax identification number and those who have not.

Ken said the tax amnesty program will have a positive impact on the economy. The repatriated assets will create new tax objects and new job opportunities.

How much the taxpayers will have to pay under the proposed tax amnesty?

According to the latest known draft, taxpayers only need to pay between 1 percent and 3 percent of tax on their net wealth increase, if they agree to repatriate their money.

Normally, taxpayers in the highest income bracket have to pay a 30 percent tax on their annual income. There is also a 200 percent fine on back taxes.

How long will the program last?

The initial plan was to offer the tax amnesty until Dec 31, 2016. Some businesses and lawmakers think the government should extend the amnesty period to allow more people to learn about the program, and thus increase the chance of taxpayers wanting to repatriate their assets.

Mardiasmo, the deputy Finance Minister, said the government is considering all options.

How do you sign up for the program?

Individual taxpayers and corporate taxpayers can send an application letter to the Finance Minister signed by themselves or the company's representatives.

How much money will Indonesia get from the program?

Tax chief Ken has repeatedly avoided this question by saying he needs to know who the taxpayers are and which of their assets would become potential taxable goods before giving any estimation.

However, Finance Minister Bambang Brodjonegoro and Bank Indonesia Governor Agus Martowardojo had already mentioned a host of figures.

Bambang estimated Indonesian taxpayers have around Rp 11,000 trillion in assets stashed abroad. This is about the size of Indonesia's current gross domestic product.

Agus meanwhile said at a hearing session with the House of Representatives' Commission XI, which oversees banking and finance, that the tax amnesty program could bring home Rp 560 trillion in assets stashed abroad and could increase tax revenue by between Rp 40 trillion and Rp 100 trillion.

What do we do with so much money coming into the country?

Muliaman D. Hadad, chairman of the Financial Services Authority, or OJK, suggested the repatriated funds should be used to finance government housing programs, as well as agriculture, maritime and infrastructure projects, or support the development of venture capital in the country.

Bank Indonesia said around half of the estimated repatriated funds can be placed in government-issued debt notes.

Finance Minister Bambang Brodjonegoro said the government is considering a plan to have state-owned construction companies issue infrastructure bonds to help absorb the repatriated funds.

Is there any risk?

The OJK has warned that a sudden massive liquidity coming into the country could strain the local banking sector, further  reducing its profitability.

Muliaman meanwhile argued the failure to distribute the repatriated funds into productive assets will result in an increase in the cost of funds. Banks will be piling up liabilities without return and this will soon increase cost of funds.

In the longer run, too much liquidity in the banking sector may also lead to reckless loan disbursement and push inflation higher.

What are the other cons against tax amnesty?

Yustinus Prastowo, executive director of the Center for Indonesian Taxation Analysis (CITA), said the program will hurt existing, compliant taxpayers the most, as they get no benefit whatsoever from it. The government offer may even discourage them from continuing to comply with their tax obligations, he said.

Darussalam, a managing partner at tax consultancy firm Danny Darussalam Tax Center, said a tax amnesty should be offered as part of a bigger tax reform program in the country, instead of as a standalone offer, to avoid complications in its implementation.

Darussalam also said the success of the tax amnesty will depend on the government's ability to use and manage the data earned from the program and from the upcoming Automatic Exchange of Information.

Other experts have also said implementing the tax amnesty now means Indonesia will miss out on larger tax-dodger catches in 2018, when the AEOI is fully implemented.

Some fund managers also said the initiative will have less impact now, as the deliberation on the bill had already stretched for months. This to them reflects the government's unpreparedness to carry out such a massive program. Tax-dodgers with assets stashed offshore will probably have moved their wealth elsewhere to avoid being caught, they said.

What's the latest update on the tax amnesty bill?

House Commission XI is currently in recess, but will continue its deliberation on the bill when parliament reopens on May 17. The Commission had formed a special team to discuss and investigate the pros and cons of tax amnesty.

At the earliest, the House can approve the bill later in May. If this happens, the government can start rolling out the program in July.