For tax evaders tax amnesty could be bad news and good news

The push for a tax amnesty has attracted a fair amount of criticism and even rebuke from analysts, the International Monetary Fund, the Organization for Economic Cooperation and Development (OECD), the World Bank and even the Corruption Eradication Commission (KPK). Yustinus Prastowo, a respectable tax analyst, went so far as to call the move “legalized money laundering” in his Jan. 4 Bloomberg article called “Jokowi’s push for 2016 tax amnesty plan kick-off seen as flawed”.

The government countered by claiming that the tax amnesty plan aims not only to provide a short-term boost to revenues, but also to expand the country’s tax base, and despite evidence to the contrary from the past experiences of Indonesia and other countries offering amnesties, the Jokowi administration is quite confident that the plan is highly likely to achieve its objectives. This time it is different, the government seems to say: This time we have the automatic exchange of information (AEOI).

So what is AEOI? AEOI is a part of a coordinated global effort against tax evasion. For as long as there have been taxes, there has been the problem of tax evasion.

This problem is made worse with the increased ease and abilities of individuals and businesses to transact and establish bank and financial accounts across national borders.

Income tax evasion, the most common form of tax evasion, involves taxpayers underreporting income by understating their incomes, overstating deductions, hiding their incomes in secret accounts overseas, typically in tax haven jurisdictions, or a combination of the above. AEOI tackles the third method of tax evasion by allowing countries to share information regarding financial accounts.

AEOI has been hailed as a major step against tax evasion and it is rightly so. To understand why, let us consider the case of AEOI between Indonesia as country of residence (the country where the individual is resident for tax purposes) and Singapore as the source country (the country where the individual generates income).

Under the AEOI framework, financial institutions including banks, investment firms and insurance companies in Singapore are required to collect certain information from both existing clients and from individuals and entities opening new accounts.

The information is required from all account holders, Singaporean and non-Singaporean alike.

So any Indonesian who has existing accounts in Singapore or planning to open a new one will be asked to disclose certain information including name, address, date and place of birth, tax residency status and tax identification number.

The financial institutions will then report to the Inland Revenue Authority of Singapore (IRAS) the information about the identity of the account holders together with details of their account, including account number, account balance or value and the gross amount of interest, dividends and other income paid to the account.

The IRAS will then pass on to Indonesian Directorate General of Taxes (DGT) the information it receives from Singaporean financial institutions concerning Indonesian account holders.

The significant thing about this whole information exchange process is that it happens without any particular trigger such as indication of criminal activities.

The automatic exchange of financial information between tax authorities is done automatically on a regular basis, hence the name.

At this point, it is easy to see how AEOI can defeat tax evasion: Once the DGT received your financial information from its counterparts around the world, it will then be able to ensure tax compliance by comparing your tax returns against this information.

In short, if you lied to the DGT by hiding your money and income in overseas bank accounts, you will be caught. (Or at least that is the plan. The success of the plan hinges on several factors including the legal, IT infrastructure and administrative capabilities of the DGT).

So, to all tax evaders out there: Understand that you can run, but you cannot hide anymore.

AEOI itself is a blanket term that actually comprises the European Union Savings Directive, the US Foreign Account Tax Compliance Act and the OECD Standard for Automatic Exchange of Financial Information in Tax Matters, which builds upon the previous two initiatives and expands the scope to a truly global reach.

The OECD Standard has been endorsed by the G20 (of which Indonesia is a member), was legally adopted by the European Union and received support from the majority of countries in the OECD Global Forum.

As of December 2015, a total of 97 jurisdictions, including tax havens and traditional guardians of bank secrecy, have committed to implementing the Standard, therefore rendering income tax evasion practically impossible.

Indonesia plans to implement the Standard by 2018.

So, to all tax evaders out there: Understand that you can run, but you cannot hide anymore. AEOI is the death of international banking secrecy.

Therefore, rather than hiring an army of clever and expensive accountants and tax attorneys for devising complex evil schemes to somehow circumvent the AEOI and living in the shadows with a troubled conscience and fear of being caught and prosecuted, just step into the light and come clean.

Stop running and come home. Under the AEOI regime, it is a much better strategy to be a compliant taxpayer and plan to pay your taxes within the law. The tax amnesty program currently being developed is a golden chance that all tax evaders should promptly take once it is signed into law.

Will the tax amnesty plan defy history and achieve its objectives of producing a much larger tax base and lasting increase in tax revenues? Only time will tell, but one thing is certain.

The success of the tax amnesty program is only a derivative of how the program is designed and how the larger tax administration system is reformed.

Create an amnesty plan with super low penalty rates and it will severely damage any perception of fairness and trust left with compliant taxpayers and the general public.

Implement slow and piecemeal tax reform measures and it will only encourage former tax evaders who have come into the system and even other taxpayers to cheat and thus create the need for another tax amnesty in the future.

On the other hand, moderate and fair penalty rates coupled with swift and radical improvements in our tax administration system might really change the situation and increase trust and compliance, making the 2016 tax amnesty the last tax amnesty we will ever need.