Investigating Tax Evaders

The government\'s success in the implementation of the tax amnesty, which was able to attract 965,983 taxpayers and net Rp 4.86 quadrillion in declared assets, as well as Rp 135 trillion in tax revenue from penalty payment, should be appreciated.

The proceeds were still far from the target; the achievement was the outstanding accomplishment of the President Joko “Jokowi” Widodo administration.

What is the government’s agenda after the tax amnesty? Some parties suggested that the Finance Minister, particularly the Directorate General of Taxation, should focus on processing data obtained from the tax amnesty to support the planned tax reform.

The editorial of Kompas, "Evaluating Tax Amnesty", suggested that the tax office focus on law enforcement for tax evaders and supervise the participants\' tax commitment. The government is also expected to create a more conducive climate for investment and fund placement to withdraw citizens’ funds abroad.

In general, I support the proposal. However, I propose that priority should be given to the investigation of tax evaders. This article focuses on tax evaders who hide their assets abroad and tax evasion conducted by foreign companies (foreign investors under PMA scheme).

The success in carrying out such an agenda would generate trillions of rupiah in state revenue. The priority to investigate tax evaders who did not participate in the tax amnesty in period I, II and III is important for tax justice and compliance of taxpayers.

Tax amnesty data released by the tax office showed the participation of tax payers who kept their assets in tax haven countries, such as Singapore, Hong Kong, the Cayman Islands, the British Virgin Islands, China and Australia, was low.

For example, the declared assets overseas totaled Rp 1.02 quadrillion and the funds being repatriated totaled Rp 146 trillion (as of March 30). Of the total, Rp 836 trillion (71.21 percent) came from Singapore. In fact, in September 2016, Finance Minister Sri Mulyani Indrawati said assets kept by Indonesians in Singapore reached Rp 2.6 trillion. It means the tax amnesty participation of the taxpayers who hide their assets in Singapore was only 32.15 percent.

The participation of taxpayers who hide their assets in other countries was much lower than Singapore. Data released by the tax office did not indicate the number of taxpayers keeping assets in other tax haven countries, such as Switzerland, the United States, Luxembourg, Bahrain, Dubai, Panama, Bermuda, New Zealand and Macau, who participated in tax amnesty. These countries have become a safe place for Indonesia’s taxpayers to keep their assets abroad.

The tax office did not reveal the number of taxpayers whose names were included in the Panama Document who participated in the tax amnesty.

When the Panama document leaked to the public at the beginning of April 2016, there were 2,961 names of Indonesian citizens mentioned. The value of the hidden assets reached Rp 1.60 quadrillion.

Overall, the effectiveness of the tax amnesty in attracting tax evaders who hide their assets abroad was very low. If the government claimed in April 2016 that the amount of assets kept by wealthy Indonesian overseas reached Rp 11.20 quadrillion was true, then the success rate of the tax amnesty only reached 10.52 percent. Therefore, the government’s main agenda should be to investigate recalcitrant taxpayers. They should be forced to declare or repatriate their assets with higher penalty rates, which would ensure justice among taxpayers and increase the government’s credibility.

Foreign companies

The second priority should be to investigate allegations of tax evasion by foreign companies or PMA. As revealed by the Finance Ministry recently, thousands of PMA companies were allegedly involved in tax evasion.

However, it was not clear whether or not the tax office had investigated the case. In November 2005, Finance Minister Jusuf Anwar reported to the Parliament that about 750 foreign companies had allegedly been involved in tax evasion, which caused losses of approximately Rp 250 trillion to the state by a technique to report losses for five consecutive years. No investigation was made on the allegation. It instead brought a backfire to Jusuf, who was then immediately replaced by Sri Mulyani.

In November 2013, Director General of Taxation Fuad Rahmani also revealed about 4,000 companies from 7,000 foreign companies allegedly involved in tax evasion by way of reporting financial loss from year to year (Kompas).

No investigation was made on the allegations of the limited tax inspectors.

Finally, in March through June 2016, the then finance minister Bambang Brodjonegoro revealed that as many as 2,000 foreign companies were suspected of tax evasion by reporting a loss for 10 consecutive years. This caused the country to suffer loses of Rp 500 trillion.

No investigation was made on the allegation because Bambang was replaced by Sri Mulyani, who was not interested in following up the allegation.

From such reports, it appears tax evasion conducted by thousands of foreign companies using “decreasing income techniques” is systematic and wide-spread.

I suspect, in addition to thousands of foreign companies, which used income decreasing techniques to report financial losses, there are thousands of foreign companies involved in tax evasion by using income smoothing techniques. This technique is widely used because it is considered “smooth” in manipulating earnings, with the amount of financial loss relatively the same from year to year. This technique is used so that the tax office will not suspect them.

If these allegations were true, state losses due to corporate tax evasion conducted by foreign companies in the last 20 years could reach thousands of trillions of rupiah. During the period of the tax amnesty, the Directorate General of Taxes did not reveal the participation of the foreign companies. Apparently, no PMA companies have participated in the tax amnesty. Therefore, I propose that the government should also focus the investigation of the allegations of tax evasion by thousands of foreign companies.

The government needs to form a special team of competent auditors to conduct an investigative audit or forensic audit of the financial statements of all foreign companies. If it is found there is a financial engineering technique made to evade taxes, they must receive a heavy penalty. They also have to pay the financial losses suffered by the state.

I am sure, if the government seriously carries out the two main agendas, thousands of trillions of rupiah will go into the state coffer. The measures will also bring a positive impact on tax compliance and tax revenues, as well as on economic performance and development progress, as well as the improvement of the prosperity of the people.

ANDREAS LAKO

Professor of Accounting at the Faculty of Economics and Business, Unika Soegijapranata, Semarang.