The Urgency of the Tax Information Perppu
Taxpayers queue up to take part in the third stage of the tax amnesty program at the office of the Directorate General of Taxation in Jakarta in March (31/3).
The government has just issued its Regulation in Lieu of Law (Perppu) No. 1/2017 on financial information access for taxation purposes. The perppu exists to accommodate the Automatic Exchange of Information (AEoI) agreement that will come into effect starting in 2018.
Based on Article 22 Point 1 of the 1945 Constitution, the president can issue a perppu “should exigencies compel” or, in other words, in emergency situations. The question is just how much of an emergency the current situation is? Is the President justified in issuing this perppu?
The Automatic Exchange of Information (AEoI) is a cooperation agreement between 139 countries (as of Jan. 17, 2017) in the Global Forum to open up financial data to reduce the possibility of tax evasion. With an open data access, countries can trace their taxpayers with money stored in foreign lands. The problem is that many do not realize that Indonesia may potentially fail to fulfill some of the agreement’s prerequisites by June 30, 2017.
Theoretically, the AEoI’s presence is important as it can increase the probability of arresting tax evaders. Taxpayers will continuously be in the position to decide whether or not they will pay taxes and, if they do, how much income they will report. Based on the economic model developed by Bayer, Oberhofer and Winner (2015), two factors influence taxpayers’ decisions in reporting their wealth.
The first is the severity of the punishment for a legal violation (not paying taxes) and the magnitude of the chance of getting arrested. This indicates that the amount of fines for not paying taxes and the government’s ability to enforce the law and monitor taxpayers are points of consideration in paying taxes. With light punishment and a small chance of getting arrested for violating the law, citizens will tend to report lower amounts of wealth (and therefore, evade taxes).
The second is detection shock. The model developed by Bayer, Oberhofer and Winner is interesting as it includes this variable. Detection shock is an abrupt incident that significantly increases the possibility for tax evaders to get arrested. They cite the data leakage in Germany as an example. They argue that, the bigger the detection shock, the more compliant individuals will be in paying their taxes and declaring larger amounts of income in the first place.
Within the context of AEoI, 16 members of the cooperation agreement reported a 17 percent increase in foreign wealth declaration from 2011 to 2015.
Emergency situation
Before the AEoI is implemented simultaneously, some of its member countries have signed international exchange of information (EoI) agreements to fight tax evasion. For instance, from 2010 to 2014, Sweden created 396 EoI requests with a total tax effect of 330 million euros (US$368.29 million). Australia also submitted 400 EoI requests in 2013 and recovered 326 million euros of tax (OECD, 2015). This data shows that international exchange of information is highly effective in boosting state tax revenue. Therefore, the existence of AEoI is highly important.
AEoI gives a new hope for taxation. In order to support its implementation, in 2014, the OECD prepared what it calls the Common Reporting Standard (CRS), something that countries committed to implementing the AEoI must prepare.
Of the 101 countries committed to implementing the AEoI in 2017-2018, only 12 countries, including Indonesia, have yet to fulfill all the prerequisites. In a recent report, the status of Indonesia is listed as “partially compliant” as Indonesia’s legal system is deemed to be not fully supportive of the implementation of AEoI. For AEoI to run smoothly in Indonesia, a number of laws must be revised. There are at least four laws that need revision, including the General Taxation System (KUP) Law, the Banking Law, the Sharia Banking Law and the Capital Market Law. Revisions to these four laws are necessary to ensure the smooth exchange of information between the Directorate General of Taxation and financial institutions.
The problem is that all AEoI member countries are expected to fulfill all requirements by June 30, 2017, and it seems to be impossible to revise these four laws within such a short timeframe. Of the four laws, only the KUP Law is included in this year’s priority legislation list. The Capital Market Law is in the longlist for the 2014-2019 National Legislation Program (Prolegnas) while the Sharia Banking Law is not even on the Prolegnas longlist. Moreover, based on information that I have obtained, there are not yet any draft revisions for the Capital Market Law and Sharia Banking Law.
Impact of delay
Indonesia’s lack of adherence to the deadline could have adverse effects in the future. The Global Forum has prepared defensive measures for countries that fail to fulfill this commitment.
There are at least two implications that arise from a delay in fulfilling the commitment. First, Indonesia’s rating in the Global Forum will take a hit. This is surely not a good thing as it may obstruct ongoing improvements in the investment climate. A number of global financial institutions use the ratings issued by the Global Forum as a basis for their investment policies, including the European Investment Bank and the International Finance Corporation (OECD, 2016).
Second is the opportunity loss from a delay in implementing the AEoI in Indonesia. World Bank data shows that Indonesians have Rp 4 quadrillion (US$300 billion) of illicit funds. The tax amnesty policy was not effective in bringing all of this money home, and the presence of the AEoI is expected to do that.
Under the assumption that the AEoI has a success probability of 0.5, then we can expect a return of Rp 2,000 trillion in illicit funds. From here, we can calculate the potential amount of at least three types of lost revenue, namely: (1) potential tax fines, (2) potential tax revenue and (3) liquidity. First, the average amount of tax fine is 20 percent and therefore, the government can expect additional tax revenues of Rp 400 trillion from fines.
Second is potential tax revenue. The repatriated funds will be part of the national economy and can create potential new taxes (thereby increasing the tax ratio). In order to find out the potential amount of tax from such a huge amount of money, a simple simulation is needed. Assume that repatriated money is put into a time deposit with 5 percent annual interest, resulting in annual interest of Rp 100 trillion. With a time deposit interest of 20 percent, the potential for tax revenue is Rp 20 trillion per year.
Third is liquidity. In order to boost economic growth, Indonesia needs to encourage investment. Currently, the ratio of domestic savings to gross domestic product (GDP) is still lower than the investment-to-GDP ratio. This means that in order to encourage investment, Indonesia needs capital flows to cover the shortage of savings. Funds are needed to cover this shortage. Apart from that, with liquidity, interest rates can be reduced and investment costs can be decreased, which will eventually encourage national economic growth.
The government must pay for these three funds if the implementation of the AEoI is delayed. It will not be cheap. Therefore, the government and the House of Representatives must work together to ensure Indonesia’s participation. If not, the effects will be just too harmful.
MUHAMMAD SYARIF HIDAYATULLAH
Researcher, Wiratama Institute
