”Omnibus Law” and Tax Reform

At present we have an omnibus law fever. It is understandable because the governance climate is cloudy due to the so many overlapping regulations and authorities.

As a consequence, the government cannot run effectively and vice versa, bureaucracy is often attributed as a source of economic and investment obstacles. The idea of the omnibus law then becomes a soothing oasis and provides hope for effective breakthroughs. Although it should be appreciated and welcomed, the direction and substance of the omnibus law must be guarded so as not to cause unintended consequences that will be a burden.

Do taxes really inhibit?

It is undeniable that various complaints about taxes come repeatedly from the business community, frequently even recorded on the walls of the palace. Some have been responded by with changes in policies and rules, some others are not taken into consideration because they are simply subjective personal murmers. Regardless of the debate on whether taxes do hamper investment, we should look at various credible study results as a basis for decision-making.

This is important to enable us to have proper identification and understanding of the background of the problem. According to the World Bank’s Global Competitiveness survey (2018), taxation is the fourth factor affecting investment decisions in developing countries, after guaranteeing investment protection, transparency and prediction, and the ease of obtaining permits.

KOMPAS/ALIF ICHWAN

Minister of Finance Sri Mulyani Indrawati, gave directions to all Director General of Taxes in commemoration of the International Anti-Corruption Day held at the Cakti Buddhi Bhakti Auditorium, Directorate General of Tax’s Head Office, Jakarta, on Tuesday (3/12/2019).

In a joint report titled Tax and Certainty (2017), the OECD and the International Monetary Fund (IMF) underlined the importance of tax policy certainty as a condition for attracting investment interest, more important than macroeconomic policy certainty and labor costs, and under corruption and political certainty. According to this survey, important factors related to taxation include effective tax rates, credit neutrality, value added tax (VAT) refunds and the implementation of a tax treaty. Investors also highlight the sources of uncertainty, namely complicated bureaucracy and administration, the unclear legal systems, inconsistent implementation of policies and regulations and ineffective tax dispute resolutions.

Judging from a credible international agency survey, there is no doubt that taxes are important factors that influence investment interest, especially if they are narrowed sectorally. The Fraser Institute survey (2018) showed the poor assessment by oil and gas sector investors for Indonesia’s fiscal term, which is considered uncompetitive and unattractive. The Economist (2018) also made an interesting finding in the digital economy, that tax policy is the third important factor for investors besides digital talent and investment climate.

The fundamental problem is whether we have identified the problem correctly about the factors in the taxation systems that have the potential to hamper the economy and investment, whether related to policies, regulations or administration.

KOMPAS/PRIYOMBODO

The official helps the taxpayer who reports the Annual Tax Return (SPT) for personal income tax in 2018 at the KPP Pratama Jakarta Kebayoran Lama office, South Jakarta, Saturday (30/3/2019).

Focus on change

Based on information from Finance Minister Sri Mulyani Indrawati, the draft tax omnibus law includes a reduction in Corporate Income Tax (PPh) rates and PPh rates on dividends to attract investment and repatriation funds, relaxation of administrative sanctions and recognition of input taxes to encourage fairness and voluntary compliance, limited changes of the worldwide income system to the territorial for tax subjects based on time tests, regulation of trade with electronic system, especially the collection of VAT by companies that do not domicile in Indonesia, redesign the authority to determine local tax rates, and integration of the legal basis for taxation facilities.

However, if we look at the limited scope of significant changes in the draft omnibus law, the public may submit several presumptions, analysis and notes.

As a breakthrough, of course this step should be appreciated because we are faced with situations that need a quick response. However, if we look at the limited scope of significant changes in the draft omnibus law, the public may submit several presumptions, analysis and notes. First, it should be assumed that the momentum of the omnibus law is used to realize the reduction in the PPh tariff that has been promised before, although it has not yet touched the reformulation of the Personal Income Tax rates.

With reference to the normal scheme, changes can only be made through the revision of the Income Tax Law, which will take a long time. The reduction in PPh rates is reasonable, especially if the aim is to maintain competitiveness and attractiveness with other countries. However, short-term risks in the form of the erosion of tax revenue must be watched out. There is no strong empirical evidence that after the reduction in the Corporate Income Tax tariff there will be a flood of investments and followed by an increase in tax revenues. Thus, the expansion of the tax base to patch potential losses must absolutely be done.

KOMPAS/ PRIYOMBODO

The saleswoman offers apartments that are integrated with light rail mass transportation (LRT) offered at the Indonesia Property Expo at the Jakarta Convention Center, Jakarta, Saturday (27/7/2019).

Second, the discourse of transition to the territorial regime had opened the opportunity for the emergence of stowaways who want to apply a purely territorial system. Consequently, all assets and income outside Indonesia are not subject to tax. This means the granting of tax amnesty which is more powerful than the 2016-2017 tax amnesty.

Third, the relaxation of administrative sanctions and recognition of input taxes is quite a relief and reflects a change in the paradigm of the tax authority, that efforts to build tax compliance must begin with the creation of fairness and mutual trust. However, this administrative improvement is still tasteless because it does not at the same time include improving tax dispute governance that has been frequently complained of, such as the administration of tax audits and the shortening of objection and appeal settlement periods. Fourth, efforts to build a level playing field between the conventional and digital domains show progress even though our choices are quite moderate, namely just collecting VAT while waiting for the completion of the OECD and G-20 frameworks to tax the digital economy.

Nevertheless, it still needs to be careful and ensure our readiness to the technical-administrative level so that the ecosystems that are built are maintained.

What needs to be anticipated is the regional rejection of this scenario which could lead to stagnation at the implementation level.

Fifth, the step to include local tax in the omnibus law scheme is very appropriate because the policy and practice of collecting local taxes is one of the factors that many business actors complain about. Lack of rationality in determining tariffs, unprofessional tax collection, incompetence of officers, and poor administration are still common obstacles. What needs to be anticipated is the regional rejection of this scenario which could lead to stagnation at the implementation level.

Sixth, the omnibus law dilemma lies in the tension between the need for rapid breakthroughs and the pile of problems that must be urgently resolved. Too much regulating is feared to be complicated and we lose momentum. Conversely, an eclectic way has the risk of ignoring many important and urgent agendas. In turn, the rapid flow of incentives and decreased state revenues is not matched by an expansion of the tax base and increased state capacity to obtain adequate new sources of financing. If so, beyond the omnibus law scenario, we need a grand design of policies and road maps that are more comprehensive, long-term, and sustainable.

Completing the reform agenda

The uncertainty that overshadows tax sector stakeholders is an implied agenda that the omnibus law scheme will nullify ongoing reform efforts (on/off policy). To be honest, who will guarantee and ensure that they both run on the same rail? This is because the omnibus law is vulnerable to political interruption on the ongoing tax reform process. For this reason, several strategic steps need to be considered.

First, to ensure the tax omnibus law has the same vision with the tax reform, the relationship between these two agendas must be complementary and mutually supportive. The omnibus law agenda focuses on addressing important and pressing challenges and problems, while tax reform focuses on holistic-comprehensive improvement efforts in the medium-long term. Important agendas need to be translated in clear, measurable and binding road maps. The authentic manifestation of this vision is the simultaneous discussion of changes to the Tax Laws (KUP Law, PPh Law, VAT Law, Tax Court Law, Customs Law, Excise Law, PDRD Law, PBB Law, and Tax Consultant Bill), which will become the foundation for a new taxation era.

Second, continued expansion of the tax base, including full support for the follow-up of post-amnesty taxation data and the results of access/information exchange, especially in the context of law enforcement. Coordination and synergy become a necessity because it is no longer a secret in the field of action there will efforts to interlock and compete the authority whose motives are to weaken and undermine the taxation performance. It is a test of the commitment for the authorities and entrepreneurs that behavior in the post-amnesty era must lead to transparency and collaborative compliance. It is no secret, for example, the Levy Eradication Task Force [Saber Pungli] in some regions even becomes an instrument of black taxpayer resistance against tax authorities. Or a judicial institution that often becomes a tax shelter because imposing a mild verdict on tax evaders.

In line with that, efforts to improve tax administration (core tax system) must be supported and completed. Without the support of qualified information technology, we will be increasingly difficult to pursue new tax potential.

Third, the initiation of the use of the population identification number (NIK) as a common identifier (single marker) for all transactions and activities of citizens, including updating the NIK data in the financial sector database. In the short term, NIK must be used as a mandatory identity in the Tax Invoice for every transaction involving an individual. In line with that, efforts to improve tax administration (core tax system) must be supported and completed. Without the support of qualified information technology, we will be increasingly difficult to pursue new tax potential.

Fourth, improving tax administration and governance on key issues which have not yet been covered by the omnibus law. This can be started with a survey of taxpayers perception, identification of problems in the field, and efforts to sit together among the tax authorities, the House of Representatives and the taxpayer community. What has been done in the tax reform program needs to be strengthened and completed, especially the simplification of administration and standardization of tax collection practices in the field.

The last one, a comprehensive evaluation and reorientation of the tax facility scheme that has been poured out, especially the multiplier impact, leverage, accuracy, and efficacy. Without an evaluation and calculation of its impact, the granting of taxation facilities could not be on target and only erode tax revenue, which is detrimental to the sustainability of national development. Incentives should be directed at efforts to encourage exports, strengthen reindustrialization, strengthen MSMEs and cooperatives, increase capital productivity, integrate the economy in the global value chain, encourage employment, support research and development.

Finally, the planned implementation of the omnibus law must still be followed by double vigilance. The public must remind the government and the House, the main attraction of investment is a strong political commitment to clear policy directions (clarity), legal certainty, and harmonious practices (consistency). Going beyond expectations that the omnibus law will be an effective panacea for all ills, requires strong leadership and is always alert to be able to weigh wisely and with virtue the tension between urgency, hidden desires, the intension to avoid taxes, and the need to maintain sustainability.

KOMPAS/IWAN SETIYAWAN

Yustinus Prastowo

Taxes are an artifact of the last remaining nation-state sovereignty. Efforts to build a strong, credible and accountable taxation system are a form of our loyalty to the vision of the founders of the nation, namely Indonesia that is advanced, just and prosperous. Criticism of the omnibus law project is that we should not be too hasty and too far because of brake failure. History records that we must bear many burdens because of past haphazard policies. Borrowing the phrase of Steve A Bank, if in the past taxes were like swords, now taxes are the shield of the future. These days our commitment and consistency are truly tested and awaited.

Yustinus Prastowo, Executive Director of the Center for Indonesia Taxation Analysis