New Taxation Era
Thirty years ago, Charles Adams, a renowned tax historian, concluded that taxpayers throughout the history of civilization had three types of behavior: fight, fraud and flight. If there is room for discussion, taxpayers will try to negotiate their tax obligations with the authorities. However, if there is no room for negotiation -- either because of the system, regulations or tax officials -- taxpayers will tend to cheat to save on taxes. The final choice, when cheating is not possible, is to move tax objects to other countries. Ultimately, tax is a game of information, about "who does what."
What was highlighted by Charles Adams does not seem to be excessive and can even find context in present times. What is being formulated by developed and developing countries at the Organization for Economic Cooperation and Development (OECD) and G20 is a response to deep concern over aggressive tax evasion practices.
Multinational companies not only take shelter in tax havens, often referred to as a regime of secrecy, by also spuriously design highly sophisticated tax evasion schemes that ultimately undermine the rights of the state and the people to income tax. These globally troubling symptoms are called stateless income and mark how difficult it is to determine taxation rights and methods.
Automatic exchange of information
The Tax Information Exchange Agreement (TIEA) began in 2000 and was a project to counteract aggressive tax avoidance. However, throughout 2000-2012, the countries engaged in bilateral agreements to exchange financial information did not try to discourage evasion, but rather caused replication and rampant tax evasion. One of the possible causes was the passive and vulnerable request exchange scheme that could be twisted by partner countries.
Therefore, the rage and indignation of the United States was understandable when, in 2010, it unilaterally announced the Foreign Account Tax Compliance Act (FATCA), which required all financial institutions, wherever they were, to report the financial data of US citizens. Eventually the OECD followed in the footsteps of the US and declared war against undermining the tax basis and shifting of multinational company profits. In 2013, they issued an initiative called the base erosion and profit shifting (BEPS) action plan, the main spirit of which is to strengthen regulations, improve administrative capacity and strengthen cooperation.
In a tit for tat, the 15 action plans initiated by OECD and endorsed by G20 included digital economy, transfer pricing and especially automatic exchange of information (AEOI) in which over 100 countries are interested. The majority of countries, including the tax havens, agreed that the practice of tax evasion was very detrimental and harmful for countries and their citizens.
Of course, this was the marker for the start of a new taxation era. Moreover, the extent of active participation in the global initiative marks a new chapter in mutual taxation cooperation.
Specifically for Indonesia, according to the Tax Justice Network (2010), no less than US$331 billion (equivalent to Rp 4,500 trillion) of citizens\' assets are held in tax havens, while there was a flow of Rp 1,000 trillion in illicit funds out of the country between 2011 and 2014. Amid pressures on the global economy, gaping inequality and a weak taxation system, the government eventually chose the middle road with a tax amnesty.
The program is expected to repatriate funds into the country, expand the tax base, increase short-term revenues and bridge the birth of a new taxation system. One of the key success factors of the tax amnesty is Indonesia\'s participation in the automatic information exchange program in 2018, thus not providing any option for taxpayers other than honest and obedient behavior.
AEOI has several advantages compared to TIEA and other initiatives, namely its common reporting standard and automatic nature, not being on request. State sources have to actively, systematically and periodically submit financial data to the countries where taxpayers are registered. Another advantage, this global initiative is being followed by the majority of the world.
Even though it will continue to be improved and will include information about dividends, interest, royalties, salaries, pensions, change of nationality, tax refunds and other matters, in the initial stage what will be exchanged is financial data in the form of taxpayer identity, depository financial institutions and account numbers, as well as financial information such as savings, interest and other incomes.
AEOI effectiveness
The relationship between the tax amnesty and AEOI is very close. The AEOI is frequently referred to as a bridge for comprehensive tax reform that will break the deadlock of data access and stagnant political process thus far. Until the beginning of March 2017, or the end of the third period of the tax amnesty, up to 695,857 taxpayers had participated. About Rp 4,434 trillion in assets were declared, with penalty payments reaching Rp 105 trillion.
This achievement in asset declaration and penalty payments is considered successful and is among the best in the world. However, repatriation, which was the main goal of this program, has not gone as well as expected. Only about Rp 143 trillion has been repatriated, far below the target of Rp 1,000 trillion.
The low level of achievement for repatriation affects the low addition of new liquidity, even though asset declaration is expected to act as leverage for the economy. The composition of reported assets also needs to be reviewed as it is dominated by assets that have been taxed but not reported. Examining the tax amnesty data, two things are disclosed.
First, the weakness of our tax administration system, very large domestic assets have not been reported and are not reachable.
Second, the problem of inequality is also confirmed because 2.5 percent of the tax amnesty participants reflect 60 percent of asset ownership. This requires work to optimize the tax function as an effective instrument of redistributing wealth and income. Overall, the fact of the tax amnesty’s achievements challenges the government to immediately prepare an appropriate strategy to significantly raise tax revenues after the amnesty.
The challenges are really not easy. The effectiveness of the AEOI as a new weapon will be tested by several challenges. Given the reciprocal nature, Indonesia can obtain data only if it provides data; revisions of the Taxation Law, Banking Law and Investment Law undoubtedly are needed. However, looking at the political agenda and priorities of the House of Representatives, we doubt the revision of these laws can be completed on time with good results.
In the race against time, the government\'s plan to issue a government regulation in lieu of the law (Perppu) should be appreciated and fully supported. The Perppu, which will effectively change the articles that hinder the implementation of the AEOI, lays a new foundation for the development of adequate infrastructure. In parallel, the move has to be accompanied by improvements to financial institution infrastructure to support the exchange of information, including an integrated information technology-based system and the implementation of single identification numbers.
No less important, the other side of the demand for transparency is accountability. There must be a guarantee to the public that their privacy is guaranteed, especially if they have already complied with taxes. A high integrity accountability system has to be established and all kinds of data irregularities must be severely punished for the sake of upholding public trust. This concern is certainly justified and understandable.
Amid the efforts to reform into a credible institution, the Directorate General of Taxation is still undermined by the behavior of unscrupulous employees who abuse their authority. Nevertheless, we believe that most of the employees are tax reformers of integrity and strong dedication.
Entering this new era of taxation, a paradigm change is needed for all elements of the nation, including state officials, tax officials, financial sector employees, law enforcers and taxpayers. As a global initiative, the AEOI also demands changes in the domestic style of openness to optimize tax payments, so domestic banks should not become the new hiding place for the country’s taxpayers. The era of openness is an effective way to increase tax revenues by enforcing the principle of the ability to pay, in which the wealthier pay more. Borrowing from Thomas Piketty, the taxation system must be capable of detecting who owns what as a basis for fair taxation.
Now, there is no longer an option to seek tax havens to evade tax. While there is still time, let us prepare to take advantage of the tax amnesty and clean up by familiarizing ourselves with the slogan, "Honest people have no fear of being destroyed; with obedience, there is no need for awkwardness."
YUSTINUS PRASTOWO
Executive Director of CITA (Center for Indonesia Taxation Analysis)