Indonesia set to dangle tax amnesty before rich citizens

Bid to get tax evaders to come clean over onshore and offshore assets could boost govt revenue

Indonesian lawmakers are expected to pass a new tax amnesty aimed at encouraging wealthy citizens with billions of dollars in assets abroad to come clean with the taxman.

The Bill is likely to be pushed through with little resistance in Parliament in the weeks ahead, given that the Golkar party - the chief proponent of the legislation - has recently left the opposition and declared its support for the ruling coalition.

Unlike a previous scheme introduced in 2008 aimed at undeclared onshore assets and which maintained an errant taxpayer's liability for the principal sum of taxes, the new law under the Joko Widodo presidency will cover both onshore and offshore assets. It will also offer legal amnesty for repentant tax evaders as well as a variety of discounted tax rates.

Economists said that if it succeeds, the government could increase tax revenue and help balance the Budget after years of weak economic growth and falling commodity prices.

Current personal income tax rates in Indonesia range from 5 per cent to as high as 30 per cent, while corporates are taxed at a rate of up to 25 per cent.

A government official confirmed with The Straits Times yesterday that under the proposed tax amnesty, the rates will range from 1 per cent to 6 per cent, depending on how quickly a taxpayer declares his assets and whether the assets are repatriated. Even if the assets stay offshore, the government would still earn tax on them.

OCBC Bank economist Wellian Wiranto says that apart from boosting tax revenues, the move could potentially have far-reaching implications for Indonesia's financial market development.

"Not all of the US$150 billion (S$209 billion) that the government thinks would be repatriated will come home," he said. "However, even if only some of the money returns, it could make quite a lot of difference because of the relatively undeveloped financial sector (of Indonesia)."

The sector contributes just 4 per cent to growth - not a surprise, considering Indonesia's wealth management industry manages only about US$20 billion in assets.

Singapore, the preferred money destination of wealthy Indonesians, has US$1.8 trillion in assets under management, according to the Economist Intelligence Unit.

With about US$200 billion in Indonesian wealth thought to be stashed in Singapore, private bankers and wealth managers to the rich initially feared the amnesty might trigger an outflow of money.

Indonesia's Coordinating Minister for Political, Legal and Security Affairs Luhut Pandjaitan, however, said the government will not require taxpayers to repatriate their money under the new regime.

The government is banking on the amnesty to boost tax income by as much as US$4.4 billion, said Mr Wiranto.

There is, however, the risk of moral hazard, he added. "If you are an Indonesian who has been dutifully paying the full sum of taxes on all the assets you have declared without fail, you are probably left with a bitter taste in your mouth and must be thinking you should have waited for such sweet deals," he said.

"Thankfully, it appears that very few Indonesians belong in that category. Going by figures from the tax authority, only 10 million Indonesians bother to file tax returns every year... Among them, only 10 per cent are said to have filed them truthfully. That is a dismal 0.4 per cent of Indonesia's total population of 250 million."

A version of this article appeared in the print edition of The Straits Times on February 12, 2016, with the headline 'Indonesia set to dangle tax amnesty before rich citizens'. Print Edition | Subscribe