Last month the Indonesian government began the implementation of a tax amnesty to boost state revenue and investment, and ease pressure on the nation’s current account.
Under the terms of the amnesty, repatriated assets will enjoy a reduced tax rate ranging from 2% to 10%, depending on how quickly participants sign up to the programme and whether they repatriate just funds or assets as well. This compares to a standard corporate tax rate of 25% and a maximum personal tax rate of 30%.
Repatriated funds must stay within Indonesia for at least three years and be invested via several dozen appointed banks, investment managers and securities companies. Eight permissible investment instruments have been introduced, with a minimum three-year maturity, including government and state-owned enterprise bonds and real estate investment trusts.
According to President Joko Widodo, the tax amnesty programme is expected to generate some Rp165trn ($12.4bn) in additional government revenue in the first nine months, stemming from the close to $900bn currently thought to be housed offshore, as per government estimates.
While just $53m was collected in the first month – equivalent to less than 1% of the target – Sri Mulyani Indrawati, the newly appointed minister of finance, expects repatriation to increase in September, as firms make the necessary legal adjustments to participate in the programme, local media reported.
Tax collection is a perennial issue in Indonesia. Despite having a population of 255m, just 27m Indonesians are registered taxpayers, and in 2014 less than 1m of these paid what they owed, Bambang Brodjonegoro, then-minister of finance, told media.
Last year, tax collections fell short of the government’s Rp1294.3trn ($97.5bn) target by Rp234trn ($17.6bn), or 18%.
Indeed, by regional standards, the country’s tax-to-GDP ratio – around 11-12% – is also quite low. The South-east Asian average is between 13% and 15%, while OECD countries are typically around 35%.
The Widodo administration, which pledged to boost Indonesia’s ratio to 16% during the presidential campaign, will be looking for the amnesty programme to go some way towards broadening the tax base, though other tax reforms are also being considered.
The government is taking steps to improve tax collection through a move towards a single taxpayer number for individuals and is also mulling the use of third-party data – for example, credit card, property or auto sales records – to identify cases of tax evasion.
The largest priority is bringing more citizens into the tax base. In 2012 some 54% of Indonesia’s 118.1m workers were employed in the informal sector, according to Statistics Indonesia, and many of those who are formally employed still do not pay tax.
The most expedient method of accomplishing this may be the expansion of the value-added tax, which is currently subject to many exemptions, and raising rates.
On the corporate side, however, the government has announced plans to cut rates to encourage companies to book their profits in Indonesia, rather than neighbouring countries with lower tax rates like Singapore.
In August Widodo signalled that the corporate income tax rate could be revised to as low as 20% or 17%, though this may be unlikely to happen until after the amnesty programme expires in March 2017, according to local media reports.
"The thinking is simple. If Singapore's corporate income tax is 17% and ours is 25%, everybody will go there," he told a tax amnesty roadshow.
The cuts should help reduce the incentive for Indonesian companies to engage in transfer pricing, whereby goods are transferred to an overseas parent company before being sold internationally in order to qualify for a lower tax rate abroad.
If the amnesty programme and other tax reforms succeed, it could also help take pressure off the country’s widening budget deficit and provide funding for large-scale infrastructure projects.
With prices of key commodities like gold and coal not yet recovered and infrastructure investment on the rise, the deficit is expected to reach 2.5% of GDP this year, nearing the legally mandated limit of 3%.
Widodo has said that up to $400bn needs to be invested in Indonesia’s infrastructure by 2020 – a significant proportion of which will likely be financed by the government.
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