Does the tax authority really go too far with your bank account?

Tax Regulation Number PER-01/PJ/2015, which is supposed to be effective starting this year, has triggered controversy within the banking industry. This is mainly due to the new obligation for banks to disclose details on every customer’s tax payments on deposits or savings interest.

The Finance Minister needed to postpone indefinitely the enforcement of the regulation, although it might pose another question on Indonesia’s commitment to improving our overall accountability.

We undoubtedly acknowledge the fact that interest revenues people earned on their money in bank deposits are subject to tax, which banks are required to collect.

As of today, banks are only obliged to report the amount of tax they collect in a lump sum. This means that the tax authority does not know the detailed amount of tax that every person pays.

The new regulation was intended to require banks to report details, disclosing each amount for each customer corresponding to the total amount reported.

Banks argue that disclosing details of tax payments will have the same effect as disclosing their customers’ savings and deposits, which violates the banking secrecy provisions that are required to maintain the integrity of the banking industry.

Some banks expressed fear that the regulation could prompt people to send their deposits overseas. Bank secrecy is considered paramount, mostly by bankers, in building the trust that banks need to maintain or attract customers to keep their funds in Indonesia.

The existence of the new tax regulation must not be seen without considering the surrounding business environment or the existing tax or banking laws.

In fact, when taking these factors into account, the newly issued tax regulation can hardly be said to be a new, or possibly, a “game changer” regulation.

Since the enactment of Indonesia’s Banking Law, people should have been aware that bank secrecy has its limits. The banking law explicitly mandates that banking secrecy is exempted for tax purposes.

The G20 Summit even declared that since around five years ago “the era of banking secrecy is over”.

This is a long accepted policy for related reasons. Certainly, banks are required to provide secrecy for their customers.

However, this secrecy protection should only be used to protect their customer’s privacy from parties who don’t have a legitimate interest.

If an investor wants to invest funds in Indonesia, there clearly are several factors to be considered. Yet, banking secrecy or tax policies are way out of the top-five factors an investor looks at in a country.

Unless a country wants to be defined as an offshore financial country, there are less likely significant differences among countries in terms of banking secrecy or tax policy treatments.

Even countries like France, Switzerland or Singapore, which previously were renowned as massive offshore financial centers, have reformed their regulatory frameworks within the Organization for Economic Cooperation and Development (OECD) to prevent international tax evasion.

We also need to look back at the initial reason why most of the countries in the world adopted the self-assessment tax system, which is practiced in Indonesia, as opposed to official-assessment.

In an official-assessment tax regime, people are expected to pay tax based on the tax authority’s assessment or examination.

In effect, what is paid by the taxpayer is considered correct until taxpayers can prove otherwise. This tax regime requires huge effort from tax authorities and has been considered an inefficient tax system because of the high risk of collusion that may arise from intense interactions between taxpayers and tax officers.

Meanwhile, the self-assessment system requires taxpayers to calculate their tax obligations themselves and their tax return filing will be considered correct until the tax authority proves otherwise.

This tax system delegates a huge degree of trust from the government to its people.

The taxpayers will not be required to interact with the tax authority, which means that they are free from direct, and possibly time-consuming, tax examinations.

In exchange, the tax authority is given the required statutory power to interact and gather information from parties that may provide evidence of inaccurate tax payments, including banks.

Therefore, there should be no reason for bank customers to be paranoid about the tax authority looking at their bank accounts, since this policy is part of the system that gives them enormous advantages, unless they are hiding their wealth to avoid tax, in which, under the positive assumption, they are most likely not.

This is certainly a bad time for Indonesia to start being a tax haven country. We are clearly out of date internationally in doing so. The G20 Summit even declared that since around five years ago “the era of banking secrecy is over”.

We, as well, cannot run away from the fact that Indonesia is classified as a high-risk and non-cooperative jurisdiction by the Financial Action Task Force (FATF), an intergovernmental body that sets standards and promotes effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.

Such a classification was attributable mainly to the inability of domestic authorities to scrutinize our banking records and financial transactions in combating money laundering and dealing with counterterrorism.

So, does the tax authority really go too far with your bank account? It is very unlikely. In order for Indonesia to achieve a higher level of accountability, the banking system needs to start being more transparent immediately.

Unless you are a big player who intends to evade taxes, the public should support the implementation of this new regulation.

Even if you are a big player who wants to send your funds overseas, you will soon enough have nowhere to go. The world will just come even closer to end banking secrecy in relation to tax law enforcement.