Chasing tax evaders worldwide
Indonesia is set to join the global treaty on the Automatic Exchange of Information (AEOI) on tax matters this month, and will then have virtually all the “high-caliber weapons” it needs to hunt down tax evaders — not just within the country but anywhere in the world, including tax-haven countries.
Law No. 9/2017 authorizes tax officials to access the financial accounts all of taxpayers. Officials also have a set of other government regulations that require companies, foundations and trusts to disclose their beneficial ownership. Yet, most important to increasing tax revenues within a short time is Government Regulation No. 36/2017, which imposes a maximum penalty of 90 percent income tax on assets discovered since March 2017, when the tax amnesty ended.
Under the AEOI framework tax auditors will soon be able to check with tax authorities in Singapore, Hong Kong and other countries whether Indonesian taxpayers are paying income tax on the US$74 billion in overseas assets that they declared under the tax amnesty, because only $11 billion of this total was eventually repatriated into the country.
The Finance Ministry, which also gathers financial intelligence data, suspects that many high net worth Indonesians have not come clean or have refused to benefit from the tax amnesty and that they still have a large amount of assets overseas. Consulting company McKinsey, for example, reportedly estimated the real amount of assets rich Indonesians park overseas at $250 billion.
The Taxation Directorate General needs to strengthen its intelligence unit to cross-check information with other state ministries and agencies and the tax authorities in those countries suspected of being popular tax havens for Indonesians.
Immediate measures under the AEOI initiative to track down taxpayers still hiding or refusing to declare their overseas assets must be launched, because the regulation authorizing a maximum penalty of 90 percent on undeclared assets will expire by the end of June 2019.
It is now most imperative for tax authorities to step up collection of personal income tax, which is one of the lowest among mid-income countries because of massive tax evasion. The public perceives that high-salaried professionals and high net worth individuals in the country — or the richest Indonesians — have not fully paid their income taxes, and that this massive tax evasion has been possible because of an acute lack of tax audits.
The Center for Indonesia Taxation Analysis (CITA) has estimated that last year’s tax audit coverage was a mere 0.39 percent of the 1.9 million registered individual taxpayers, excluding employees whose income taxes are withheld by their employers. This ratio is far below the 3 to 5 percent the International Monetary Fund has set as the minimum tax audit coverage necessary to enhance voluntary tax compliance and discourage tax evasion.
Catching tax evaders and recovering lost tax revenues will not only deter potential evaders and boost voluntary compliance in the future, but also restore justice for millions of compliant taxpayers.