Foreign firms targeted for tax

The tax office plans to deploy a special unit and team up with the Investment Coordinating Board (BKPM) to probe thousands of foreign firms allegedly failing to pay their due taxes.

Finance Ministry taxation director general Ken Dwijugiasteadi said around 2,000 foreign investment companies in various sectors, from industry and trade to automotives, had not paid their corporate income taxes properly over the past 10 years based on purported financial losses.

The government previously reported that this alleged tax evasion had caused around Rp 500 trillion (US$37.53 billion) in state losses, as each firm should have paid on average Rp 25 billion during the period in question.

Tax office spokesperson Mekar Satria Utama said the tax office had designated a unit to scrutinize on the foreign firms’ tax receipts and was planning to team up with the BKPM, which was expected to provide data on the firms’ operations.

“The taxation directorate general has formed a special team, namely the sub-directorate on special transaction investigation,” Mekar said. “We will coordinate with the BKPM, so that when [the foreign companies] report to the BKPM, we can get all the data, so we know whether we can renew their permits or not.”

The firms are suspected of carrying out “transfer pricing” with their parent companies abroad — mostly in low-tax countries — leading to transactions between the two entities where all costs were borne by the firms in Indonesia, resulting in lower profits or even losses, while they were actually “indebted” to their own parent companies.

As firms suffer from losses, they are not required to pay monthly and annual income taxes (PPh) regulated by Articles 25 and 29, respectively, of Law No. 7/1983 on income tax. Non-listed firms are supposed to pay income tax of 25 percent on their profits, while publicly listed firms are obliged to pay 20 percent.

“The transfer pricing mechanism is just one way to avoid paying taxes,” Mekar said, adding that some firms had deliberately bankrupted themselves using other ways.

The tax office suspects that foreign firms that had obtained tax allowances deliberately marked up their expenses as well. By the time the tax allowance period ended, the accumulated expenses were so high that they “ate away” these firms’ profitability.

“They also changed identities to be eligible for another tax allowance facility,” he said. The cycle then went on and on.

The tax office provided no details on the suspected firms’ names or their countries of origin.

Representatives of the American Chamber of Commerce, the European Chamber of Commerce and the Korean Chamber of Commerce and Industry declined to comment on the issue, saying they did not know whether or not their member companies were included on the tax office’s list of foreign investment companies (PMA).

The tax office plans to work with the BKPM to check whether or not the firms are still registered as PMA. “It will be up to the BKPM to follow up on their status, but there must be consequences for their tax avoidance,” Finance Minister Bambang Brodjonegoro said. The BKPM did not respond to requests for comment.

The case once again highlights the country’s tax woes, which include a low tax base, low tax to gross domestic product (GDP) ratio and a lack of compliance.

There are only 27 million registered taxpayers from a 250 million population, and the country’s tax ratio stands at 12 percent of GDP, a figure that President Joko “Jokowi” Widodo wants to see climbing to at least 14 percent in the coming years.

University of Indonesia tax expert Gunadi said the government could implement an “alternative minimum tax” on these foreign firms to ensure obedience. “The rate may be based on assets, profits or sales,” he added.

Yustinus Prastowo, the executive director of the Center of Indonesian Taxation Analysis (CITA), proposed that the government use a safe-harbor rule to estimate firms’ tax debts, which would be simpler than the one used at present.

Jokowi’s administration is aiming to boost tax collection, with the revenues to be used for productive spending such as on infrastructure, but so far realization has been sluggish, with only around 80 percent of last year’s target met. The tax office will also team up with the Financial Transaction Reports and Analysis Centre and the customs and excise director general to crack down on tax evaders