MLA and Our Taxation

Another step forward has just been taken. Indonesia and Switzerland have recently signed a Mutual Legal Assistance (MLA) agreement. The agreement deserves a warm welcome as strong commitment to transparency; especially given that Switzerland is symbolically a stronghold of financial secrecy.

Although opening opportunities for solving tax cases and hunting for Indonesian assets kept overseas, this achievement is an important challenge in managing the future, especially in taxation. So, what is the implication of the MLA for Indonesian taxation after the tax amnesty, especially with regard to Law No. 9/2017 on financial information for tax purposes?

Substance and context

Provisions in the MLA stipulate comprehensive procedures and conditions that can be requested for mutual assistance. According to Law No. 1/2006 on reciprocal assistance in criminal problems, the mutual assistance includes the request for assistance.

This request for assistance relates to investigations, prosecutions and examinations in court according to provisions of the law, including identifying and looking for people, carrying out searches and seizure requests, seizure of the proceeds of crime, obtaining financial penalties in the form of criminal offenses, prohibit wealth transactions, freeze assets that can be released or confiscated and seek wealth that can be released in connection with crimes.

As the Indonesian-Swiss MLA is based on a retroactive principle, it is possible to use it for criminal acts that occurred before the agreement was signed. So what are the implications?

It is commonly known that tax avoidance is a global problem. Various efforts have been taken, ranging from cooperation with other countries, initiatives through international and regional institutions, to unilateral measures that often confuse the international tax system.

After all, tax havens are still attractive. Gabriel Zucman, an expert on tax havens, revealed that at least US$5.6 trillion or 10 percent of global gross domestic product (GDP) was kept in tax havens. The Organization for Economic Cooperation and Development also estimates that between $5 trillion and $7 trillion in household wealth is kept abroad. About 10-19 percent is in tax havens in America, 20-32 percent in tax havens in Asia and 32-39 percent in tax havens in Europe.

Switzerland is a popular destination because it receives no less than $2.6 trillion or 45 percent of offshore funds, even though the amount has continued to decline after several tax avoidance scandals in Swiss banks since 2001, to around 28 percent.

Furthermore, Zucman noted that countries whose citizens keep the largest stocks of offshore assets in Switzerland are Saudi Arabia, the United Arab Emirates, Spain, France, Belgium, Argentina, Venezuela, Egypt and Jordan. Denmark, Norway, Sweden, Japan, Korea, India and China have relatively smaller portions. Citizens outside these countries tend to use tax havens outside Switzerland, especially in America, Europe and Asia.

For Indonesia, at least as confirmed by tax amnesty data, offshore assets that have been declared and repatriated reached Rp 1.1 quadrillion. Singapore had the largest amount with Rp 825 trillion, followed by the British Virgin Islands with Rp 82 trillion, Hong Kong with Rp 73 trillion, Cayman Islands with Rp 70 trillion and Australia with Rp 43 trillion.

Surprisingly enough, Switzerland was not in the top five countries of origin of the assets being declared and repatriated. Leaked data on the Panama Papers and Paradise Papers also show that most Indonesians kept their funds in the Bahamas, British Virgin Islands and Cayman Islands. Swissleaks, leaked data of HSBC clients, revealed deposits worth $143 million belonging to 74 Indonesian citizens.

Purpose

Then, what is the importance of the MLA with Switzerland for Indonesian taxation and what actions should be taken? The retroactive principle in the MLA is closely related to Law No. 11/2016 on the tax amnesty that opens access to assets obtained from Jan. 1, 1985. So, some concrete actions must be taken immediately. First, ensuring accuracy. The accuracy of the wealth of Indonesians in Switzerland needs to be confirmed first in order to avoid excessive confusion and optimism. Moreover not all assets kept in tax havens are a criminal acts.

According to the Tax Justice Network study, the total wealth of Indonesian people abroad reached $331 billion. If reduced by Rp 1.1 quadrillion in assets declared in the tax amnesty, it means that there are still around Rp 3.5 quadrillion assets abroad.

Indicatively, if you use Zucman’s estimate, it could reach around Rp 980 trillion. Global Financial Integrity, a financial investigation agency, suggests that at least $10.9 billion of illegal funds flowed out of Indonesia every year. This calculation can be used as a starting point for mapping and follow-up actions.

Secondly, the Directorate General of Taxation should also compare data and profiling sourced from the Panama Papers, Paradise Papers, Swissleaks and information from Automatic Exchange of Information with data on tax amnesty and Taxpayer\'s Tax Returns.

If there is a difference, the tax office can use Article 18 of the Tax Extermination Law and Finance Ministerial Regulation N0. 165/2017 to follow up. Taxpayers can be encouraged to use a voluntary disclosure of assets with the final tax rate (PAS Final). If they don’t make use of it, the tax office can conduct an examination of the initial evidence and investigate. At this point the MLA will be relevant and significant because it will only be effective if there is a violation of criminal law and a legal process.

Third, it can strengthen law enforcement. As soon as the MLA is ratified into a law by the House of Representatives, it can be utilized by forging cooperation with the Swiss government. Coordination and institutional synergy are important from the start, especially to identify other criminal acts, such as corruption or money laundering, even if there is already a court ruling that has the legal right to facilitate the follow-up. These three types of criminal acts are closely related and have the tendency to use the same mode, namely utilizing the existence of a tax haven.

An effective task force should be formed immediately. The MLA between Indonesia and Switzerland is certainly a step forward even though to hunt for illegal assets is not as easy as turning your palm around.

The most important thing is to place it as a milestone for the commitment to transparency. The entire structure of policies, rules and administrative systems are based on transparency and accountability.

Tax avoidance that ignores public ethics and violates the law is a public enemy because it undermines the power to achieve progress. Furthermore, this MLA is a test case of a series of synergy barriers in the past. It should not become a stumbling block by further adding a new bureaucracy and ghost called coordination.

Although it must be proven, it is very likely that Switzerland is still a storehouse for the accumulation of assets of Indonesians who may experience a dilemma in repatriating their assets during the tax amnesty for fear that there will be no guarantee of future protection.

The war has just begun, and we have two new weapons: the Automatic Exchange of Information (AEOI) agreement and MLA. Instead of complacency with the signing of the MLA, the consistency and commitment of the government are tested so that the initial steps will run as expected. Not just falling in the rhetoric of numbers, the real test of courage is the willingness to abandon the sectoral ego to work together for the benefit of all the people of Indonesia. It seems that this will be the long nightmare for the tax avoiders and the “illegal passengers” of development.

Yustinus Prastowo, Executive Director of the Center for Indonesia Taxation Analysis (CITA) Jakarta