After the Tax Amnesty

The tax amnesty officially ended on March 31, 2017. Throughout the nine months in the program’s implementation, a time filled with stories of joy and sorrow and of approvals and protests, here are the program’s achievements – and a set of notes about the work left to do.

Now, the sun of mercy has set and a new dawn of law enforcement awaits. Just how clear a picture can we gain from the implementation of this tax amnesty that is useful for our collective pledge in the new era of taxation?

Achievements and challenges

Making an objective assessment of a program as terribly complex as a tax amnesty is never an easy matter in terms of politics, legality, economics and technical administration. There are at least four indicators we can use to assess the program: wealth declaration, repatriation, redemption money and participation.

Up to the last second of March 31, 2017, participants declared wealth of at least Rp 4.866 quadrillion (US$365 billion), consisting of Rp 3.687 quadrillion held domestically and Rp 1,032 trillion held abroad. There was also a total repatriation commitment of Rp 147 trillion. The wealth declaration surpassed the target of Rp 4 quadrillion, while the repatriation was only 15 percent of the targeted Rp 1 quadrillion. The collected redemption money totaled Rp 135 trillion, 82 percent of the targeted Rp 165 trillion.

Despite the missed target, the actual amount of collected redemption money was beyond the predictions of all experts and institutions, who had been skeptical since the program’s beginning. Throughout its implementation, almost a million taxpayers participated in the program, consisting of individuals, corporations and small and medium enterprises (SMEs).

Based on the four indicators above, it can be said that the tax amnesty was a success. Tracing back, let’s remind ourselves that the government made relatively no preparations before the program was executed. There were heated debates regarding the interpretation of relevant regulations and exactly how the program would be rolled out. The issuance of relevant technical regulations was delayed and people protested over the possibility that the program could be misdirected. Singapore resisted the program, the Constitutional Court conducted a judicial review of the relevant regulations and political tensions arose in the past few months.

Amid all of these hurdles, it has to be acknowledged that, based on the achievements around wealth declaration and collected redemption money, Indonesia’s tax amnesty has been one of the most successful in the world. However, we must not fall into the trap of complacency and instead have to observe and analyze the statistics of these achievements carefully. This way, the government can immediately formulate the proper policies and strategies to achieve a higher and more sustainable level of tax collection. A thorough evaluation is a necessary starting point to avoid getting lost in devising the proper path for taxation reform.

First, the fact that several elements, especially wealth repatriation and program participation, did not reach their full potential must reflect that coordination, integration and synergy are still out of reach.

This program was often seen as merely a Finance Ministry project instead of a national program that should be supported by all, despite President Joko Widodo having gone all out in providing his support. The government made no apparent effort to create concrete and attractively packaged investment products and we heard no reports of regional governments urging local small and medium businesses to participate.

Second, the tax amnesty\'s main goal was to repatriate assets held abroad. The fact now is that, with the total repatriated assets of Rp 147 trillion – of which the repatriation of Rp 29 trillion might be cancelled – there are difficulties in injecting liquidity into the domestic economy. The redemption of Rp 135 trillion was in fact a shift of liquidity from banks to the state coffers. In other words, the situation of banking liquidity and the finance sector after the amnesty is still equal.

However, there are still opportunities and good news to be found. All throughout the program, some Rp 800 million of the wealth declared abroad are financial assets, the owners of which can be persuaded to invest in Indonesia in the future. At a minimum, the repatriation reflects the lack of confidence in political stability, legal certainty and ease of investment – all three of which are being pursued by the Jokowi administration.

Third, the low numbers who participated in the amnesty participation are indeed disheartening. A program that offers amnesty, reconciliation and taxation reform has instead revealed a paradoxical face. On the one hand, there was enthusiasm and fanfare in the public response to the amnesty. However, on the other hand, the program had less than 1 million participants, far fewer than the 30 million registered taxpayers and 20 million additional citizens eligible as new taxpayers.

In other words, the publicity effort was a success but there was no internalization. The public knew about the program was not convinced that they needed it. Mitigation of these facts must be well-prepared so that the post-amnesty law enforcement will not create new uproar.

Fourth is the details of the declared wealth. Some 60 percent of the wealth declared was financial assets that were already taxed but never reported, which means that it cannot be ascertained that there will be additional tax revenues in the short term. Assets in the form of land and buildings – which will create new tax revenues if sold or rented – amount to 20 percent of the wealth declarations. The amnesty also exposed the issue of a massive gap, as 2.5 percent of the participants own 60 percent of the declared assets and 15 percent of the participants own 95 percent of the assets.

The accumulation of wealth in a handful of taxpayers clearly complicates the efforts to discover the true taxation potential, especially if these taxpayers are in the influential group of people who can easily seek protection and preferential treatment.

What’s next?

The four important notes above should not be seen as hurdles, but rather as challenges, so that the task of ensuring tax reform becomes a vitalizing endeavor. Regardless of these notes and other perceived weaknesses, the program has successfully mainstreamed tax as an important part of the nation’s livelihood. New social capital has been sowed, namely the tax awareness that will be a valuable asset.

It is the government’s job, through the Finance Ministry and the Directorate General of Taxation, to formulate proper policies and strategies packaged in a clear and measurable road map so that the tax revenues will be maintained in the short term and will sustainably rise in the long term.

Therefore, the following are proposed as considerations. First, a grand design of taxation reform must be formulated with a thorough road map, a clear vision (an equitable taxation system), a clear aim (wealthy individuals), a measurable target (a tax revenue structure adjusted to the taxpayers’ ability to pay taxes) and a detailed and sensible action plan (measurable and able to be monitored and evaluated). Three realms must be covered simultaneously: taxation policy, regulation and administration.

Second, the fruit of the tax amnesty is a growing sense of trust between taxpayers and tax authorities. This must be capitalized on as momentum to build a transparent, credible and accountable taxation system. In the context of relational dialectics, the various demands of openness must be consistently carried out and supported by all state and political institutions, followed by the improvement of state apparatus’ integrity and competence.

Agendas such as revision of the Taxation Law, the government regulation in lieu of law (Perppu) on the automatic exchange of information to expand access to banking data, the strengthening of regulations to fight tax evasion, the implementation of a single identity number and an easy and cheap administrative reform, must be carried out.

Third, firm post-amnesty law enforcement. The consequence of the Tax Amnesty Law is law enforcement involving those who did not participate and were not honest and those who participated and were not entirely honest. Law enforcement would be important to maintain the government’s dignity. However, it must be done in a certain measure, hitting the right target and be based on accurate data. Mapping, profiling and audits should be done soon.

Without proper law enforcement, the public may increasingly perceive the government as surrendering to the whims of tax evaders. The government should target someone big, famous and influential to create a snowball effect that urges obedience through a good compliance risk management.

Fourth, protection of taxpayers’ rights, including a breather for compliant taxpayers and taxpayers in the lower-middle economy. The government must ensure clarity, certainty and consistency in the implementation of the Taxation Law, as reflected in its impartiality and objectivity in all policies and rulings. The administration should move toward standardization and simplification and aim to create a best practice that is simple and with good communications and services.

After the amnesty, we are encouraged to go into a new era of taxation, which – to borrow Peter Essers’ term – is “less Machiavellian and more Habermasian”, that is, which reduces repression and expands discourse. This way, taxation will turn into an art form, as Aristides said 2,000 years ago that proper tax collection must not only be fair and uncorrupted, but must also make everyone happy.

In order to realize this, we need leaders with integrity who are subservient to the will of the people. Fortunately we have leaders like Jokowi and Sri Mulyani Indrawati, two of the best sons and daughters of the nation who we hope can guide and inspire us to work together in carrying out taxation responsibilities properly for the good and the welfare of all.

YUSTINUS PRASTOWO

Executive Director of Center for Indonesia Taxation Analysis (CITA)