Tax Justice and Compliance
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In the space of just a few days, the Finance Ministry revised the minimum balance of individual bank accounts that must be reported to the Directorate General of Taxation from Rp 200 million to Rp 1 billion (US$75,188).
This provision is a follow-up of the government\'s plan to ratify the Automatic Exchange of Information (AEOI), which is the exchange of financial account information among G20 member countries. For that purpose, the government is proposing a Government Regulation in Lieu of Law (Perppu) No. 1/2017 to the House of Representatives for approval.
This policy is actually a logical consequence of the end of the era of bank secrecy, as a way to address tax evasion as well as money laundering. Both these issues are common enemies throughout the world, and have received special attention from the G20 member countries.
Three years ago in August 2014, the Swiss government for the first time handed over the names of 4,500 American tax evaders to the US Congress. This action marked the end of the bank secrecy era around the world.
A study carried out by Niels Johannesen and Gabriel Zucman in "The End of Bank Secrecy – An Evaluation of the G20 Tax Haven Crackdown", published in the American Economic Journal: Economic Policy 6 (1), 2014, states that G20 efforts to end the bank secrecy era began after the sub-prime mortgage crisis of 2008, which then opened the option to enact bilateral treaties. However, the treaties were deemed unlikely to be effective if it was not followed by a broader agreement involving many countries, giving rise to the AEOI.
Bilateral agreements would only result in the flow of funds from one safe haven country to another, so money laundering could continue unchecked. Therefore, a larger initiative in the form of automatic financial information exchange was eventually approved as a collective motion from G20 countries, including Indonesia.
Urgency of tax justice
The urgency for the disclosure of individual accounts to the tax office is fundamentally related to the need to promote tax fairness and compliance in making tax payments.
We have long known that the latest ratio of tax revenues to our gross domestic product (tax-to-GDP ratio, or tax ratio) stands just under 11 percent. This is the lowest level compared to our neighboring countries (Malaysia, Singapore, the Philippines and Vietnam), which have rates of around 13-14 percent. In fact, Thailand has maintained a tax-to-GDP ratio of 16-17 percent.
A tax ratio reflects the level of public compliance with tax obligations. The higher the ratio, the higher the public fulfillment of tax compliance standards. This is the reason why developed countries generally have high tax ratios, such as the US and Australia (both 26 percent), Switzerland (30 percent), New Zealand (35 percent), Netherlands and Germany (40 percent), Italy (43 percent), and France (48 percent). Meanwhile, Scandinavian countries are also known to have very high tax compliance levels: Norway and Finland (44 percent), Sweden (46 percent), and Denmark (51 percent).
Our finance ministers to date have all set a higher tax ratio target, at least to match our neighboring countries at 13-14 percent. However, history has shown it is very difficult to increase the tax ratio from the current level of 11 percent.
The government has failed to raise the tax ratio even by 1 percent a year. With a current GDP of about Rp 12 quadrillion, in order to increase the tax ratio by 1 percent, Indonesia will need to raise Rp 120 trillion in additional tax revenues a year. Such an amount is difficult to achieve. To illustrate, excise tax revenue from our tobacco industry is currently around Rp 140 trillion a year.
The government\'s initiative to introduce the tax amnesty program is part of a strategy to expand the tax base so that future tax revenues will increase significantly. In 2016, the government raised Rp 107 trillion from penalty payments through the tax amnesty program. The amount raised is large enough because it nearly reaches 1 percent of GDP.
Unfortunately, however, the worsening economic condition due to a decline in primary commodity prices have led to lower tax revenues. Although additional tax revenues were generated from the tax amnesty, our tax ratio is still only 10.7 percent, and has been unable to move from the average of 11 percent.
Tony Prasetiantono
Therefore, while awaiting the impact of tax base increases in the future, the initiative to require taxpayers to report their bank accounts to the tax office is an important breakthrough. It will enable the tax office to assess whether the account balance and the transactions of account holders are in accordance with their tax and wealth profiles. If not, the tax office may ask account holders about the shortage in their tax payment.
The idea is logical and indeed applicable. However, the problem is, what is the ideal minimum threshold? When setting a minimum account balance of Rp 200 million, I suspect the government wanted to find the maximum amount of potential taxpayers among bank customers. However, in reality, it instead raised concerns among the middle- and low-income customers.
The new initiative is based on a good intention to improve the structure of tax revenues so as to reduce a portion of government debt in the state budget.
Even so, the strategy should be well considered. In its initial stage, the government should first target the "big fish". It is important for us to prioritize high-income tax evaders first, rather than the income groups below them. Why? We must take a disciplinary measure against the rich first, then those who are not rich. Don’t be too ambitious to discipline everyone all at once with a single slap. This is illogical.
Raising the tax-to-GDP ratio from 11 percent to 13-14 percent is not easy and cannot be carried out instantly. It should be done so gradually, such as to 12 percent, then 13 percent, and so on. Therefore, raising the minimum balance of accounts to be reported to the tax office from Rp 200 million to Rp 1 billion is the correct decision and one that is more acceptable to the public. The people’s concerns can be alleviated.
Based on data from the Deposit Insurance Agency (LPS), 496,867 accounts have a minimum balance of Rp 1 billion. Their value accounts for 64.22 percent of all third-party funds (DPK) in local banks.
This data is "simpler" to manage, compared to the 2.31 million accounts that meet the Rp 200 million minimum balance criteria. These account for only 1.14 percent of all customer accounts in our banking industry.
Thus, the new criterion is easier to administer, both for banks and tax offices. Furthermore, if the publicist already familiar with this policy, the government can gradually create wider criteria, for example, by raising the minimum balance to at least Rp 500 million per account. I am sure that all levels of society will be able to gradually increase their compliance with the tax rules.
At this early stage, however, the government should first target the high-income bank customers; in this case, those with a minimum balance of Rp 1 billion. The government should be more patient to achieve its tax ratio target of above 11 percent.
2017 tax prospects
In the first four months of 2017, the government raised only Rp 339 trillion in tax revenues, or about 25.9 percent of this year\'s total target of Rp 1.30 quadrillion. This is still below the target, because the percentage during the four-month period should be 33 percent.
The highest tax revenue comes from the income tax (PPh) of the oil and gas sector at 48 percent, but the value is small (Rp 17.4 trillion), while the tax revenue from income tax in the non-oil and gas sector only reached Rp 200 trillion, or only 27 percent of the targeted Rp 751 trillion.
According to the tax cycle, our tax revenues are usually higher in the months toward the end of the year. Meanwhile, we are still hoping for two things. First, that an increase in the tax base as a result of the tax amnesty program will begin to bring a positive impact in the second half of the year.
Secondly, if its administration is done well, that the requirement to report accounts with a Rp 1 billion minimum balance might also bring a positive impact to the state budget.
Like paddling a canoe, the government is now working hard to reach two islands at once. One is to promote tax justice and the other, to achieve its tax revenue target. Both are possible if the fiscal stimulus can be maintained to achieve economic growth of at least 5.1 percent by the end of this year.
A TONY PRASETIANTONO
Head of the Center for Economic and Public Policy Studies at Gadjah Mada University; Faculty Member of Bank Indonesia Institute
