Business Lobby Urges Tax Amnesty for Reinvestment in Indonesia

Jakarta Globe, Muhamad Al Azhari, Erwida Maulia & Agustiyanti, Dec 22, 2014

By 2016, about $200 billion of assets by high net-worth individuals in Indonesia will
 be held in Singapore in the form of bank deposits, stocks, fixed income and properties,
according to McKinsey & Company. (AFP Photo/Roslan Rahman)

Jakarta. A leading business lobby with strong ties to the administration of President Joko Widodo has called for a tax amnesty, in which the authorities will waive off past taxes and penalties to conglomerates and individuals parking billions of dollars worth of funds overseas, in a bid to reinvest that money in Indonesia.

Hariyadi Sukamdani, the chairman of the Indonesian Employers Association, or Apindo, made the call last week amid recent sharp volatility in the rupiah exchange rate on expectations of a huge outflow of funds from the country once the US Federal Reserve raises its benchmark interest rate.

“It may sound unfair that tax offenders get an amnesty. But the question is, do we want to move forward or keep looking backward?” Hariyadi said.

Among those that would benefit under such an amnesty are conglomerates and banking executives who defaulted on government bailout funds in the wake of the 1998 Asian financial crisis and stashed the money in Singapore.

The government back then spent more than Rp 460 trillion ($37.1 billion) in liquidity to bail out several banks that were devastated by the crisis, which included a sharp fall in the value of the rupiah.

The government still maintains a list of the companies and individuals that fled with the money, and has prosecuted only a handful.

Since the crisis many Indonesian conglomerates continue to park their money in Singapore in a bid to keep it beyond the reach of the Indonesian authorities and to take advantage of the city-state’s position as a global financial services hub.

“Why am I raising this issue?” Hariyadi went on.

“We all know billions of dollars of money parked in Singapore is the money of Indonesian tycoons. This money has been used by financial corporations there to speculate and even buy assets in our country. Isn’t that silly?

“Just look at Italy; it is a country of mafia [sic], yet they managed to bring back more than $100 billion to their country from a tax amnesty program.”

Italy’s tax amnesty program was introduced in 2001, and by 2009 had yielded some 80 billion euros ($97.8 billion) of the 500 billion euros that the country’s central bank estimated was held by its citizens in undeclared funds overseas.

So-called high-net-worth individuals in Indonesia, with assets of at least $1 million, will hold a projected $250 billion overseas by 2016, according to management consulting firm McKinsey & Company.

Four-fifths of that amount, or approximately $200 billion, will be held in Singapore in the form of bank deposits, stocks, fixed income and properties.

The figures, released last week, come from McKinsey’s survey of 60 high-net-worth individuals, 83 percent of whom said they had foreign bank accounts and kept 40 percent to 50 percent of their financial assets overseas.

McKinsey partner Guillame de Gantes said the funds could benefit Indonesia’s financial markets if kept inside the country.

Citing the findings from the survey, de Gantes named business considerations as the main factor for keeping money overseas, followed by the availability of banking products, tax advantages, immigration issues, risks avoidance and, lastly, security and privacy.

Finance Minister Bambang Brodjonegoro said his ministry was considering some tax incentives, including a tax amnesty and the omission of double taxation, to lure wealthy Indonesians to withdraw their assets from abroad and deposit them at home.

“If we want the money to quickly come in, tax amnesty is the choice. We’re considering [the option], but will need legislation for that. The tax law must be amended,” Bambang said.

A lighter version of a tax amnesty was implemented by the administration of the former president, Susilo Bambang Yudhoyono, in 2008, through the so-called sunset policy.

This policy allows taxpayers to pay unreported or back taxes without the penalty of interest charges. The purpose of the program is to boost the number of registered taxpayers.

Bambang said that eliminating double taxation may also have instant results in terms of repatriating money to Indonesia. “We must implement those policies slowly, though, because we have to examine each option,” he said.

Earlier, a deputy commissioner for banking supervision at Indonesia’s Financial Service Authority (OJK), Mulya Siregar, said as many as 40,450 Indonesians were currently classified as high-net-worth individuals with a combined wealth inside the country totaling $143 billion. The number of these individuals grows by around 7.5 percent annually.

“That exceeds the growth rate in Singapore, at 4.5 percent, and India, which is 2 percent,” Mulya said.

Ragimun, a researcher with the Finance Ministry’s fiscal policy office, said that although a tax amnesty was an option worthy of consideration, it should not be implemented in the near future.

“One of the flaws of a tax amnesty, if implemented in Indonesia, is that it may lead to a range of violations and moral hazards, because access to information here and other facilities needed as prerequisites for a tax amnesty are not yet adequate,” he said in an analysis published on the Finance Ministry’s website.

“A tax amnesty [plan] must be delayed pending [...] legal tools to support implementation of the policy.”

Ragimun added that public resistance to a tax amnesty remained high, suggesting that alternatives like the sunset policy and tax holidays would make taxpayers more compliant with the law and subsequently boost Indonesia’s tax revenue.

Revrisond Baswir, a political economist at Yogyakarta’s Gadjah Mada University, was quick to slam Apindo’s suggestion.

“Apindo was among those that pushed strongly for the [subsidized] fuel price hike, which is certainly burdening the people, from the higher price of fuel to other things,” he said.

“Now they’re asking for a tax amnesty. So there’s an impression here that while people at large are made to bear a greater burdens, the rich will enjoy a lighter burden.”

Revrisond added there was no guarantee that a tax amnesty would lure wealthy Indonesians to keep most of their funds inside the country, saying concerns over domestic political stability were the main factor driving them to look overseas.

“Even Indonesia’s high interest rate is proven to have no effect [to lure them to keep their money here]. There are many other factors to consider, the most important being political stability,” he said.

Revrisond added that with most of Indonesian high-net-worth individuals being of ethnic Chinese descent, the issue of social and income gaps between them and “native” Indonesians might also become an issue once again, citing the May 1998 riots that targeted Chinese-Indonesians and their businesses.

The rioting, reportedly instigated by elements in the military, also included the rape of hundreds of Chinese-Indonesian women, and resulted in countless Chinese-Indonesians fleeing the country and not returning.

“The problem is, we’ve never been open about this wide income and social gap in our society, which has caused the feeling of insecurity to linger [among ‘native’ Indonesians] and the wealthy Chinese-Indonesians to remain on guard,” Revrisond said.

This is what has kept wealthy Chinese-Indonesians putting a considerable amount of their money abroad rather than leaving it in the country, he added.

Further Coverage

Editorial: Tax Amnesty Without Trust Is Not Enough

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