Ay-Tjhing Phan, Tax Leader, PwC Indonesia, on balancing government and investor interests: Viewpoint

In order to finance Indonesia’s development, the government aims to achieve a 16% tax-to-GDP ratio by 2019. Armed with a five-year plan, the Directorate General of Taxation (DGT) faces a challenging, but not impossible, task in reaching this aspiration. Indonesia’s tax system is largely based on self-assessment, and despite the DGT’s efforts to widen the tax net, the current level of tax compliance is generally low. The DGT is thus conscious that further reforms are necessary if tax collections are to be improved.

Over the past few years, the DGT has progressively rolled out reforms to facilitate tax payments. With a more than 30% increase between actual tax revenue collections in 2015 and the collection target in 2016, intense pressure on the DGT, international tax developments and media scrutiny have accelerated the pace of change. In 2015 alone over 260 tax and Customs regulations were released or updated. E-billing, e-payment and e-value-added tax (VAT) systems were enhanced and will be made mandatory nationwide in 2016-17. The widely anticipated tax amnesty law was approved on June 28, 2016. Socialisations have been conducted across Indonesia to encourage take-up by taxpayers and a series of implementing regulations issued to improve clarity, demonstrating the government’s commitment to the success of the tax amnesty. Furthermore, the DGT is undergoing a structural transformation that will equate to more targeted information and better deployment of limited resources and enforcement.

Concurrently, tax has been used as a policy tool to attract foreign direct investment (FDI). Enhancements of high-profile tax holidays and tax allowance schemes have been announced. The regulatory ease with which new companies can be established has improved with the Investment Coordination Board’s one-stop-shop service. The new Negative List of Investments has been touted as a major step towards liberalising foreign shareholding restrictions and was announced in mid-2016, ahead of its usual three-year cycle. These developments are closely watched by industry players and prospective investors alike.

In today’s competitive global landscape, tax costs and risks increasingly feature as an important consideration for decision making. Understandably, businesses want certainty regarding their tax obligations, burdens and risks before making investments. This is particularly key in industries requiring substantial long-term investments, such as infrastructure and manufacturing, which are priority areas for Indonesia. Tax reform efforts would be counterproductive to Indonesia’s efforts to attract FDI if they increased uncertainty, dampening both existing and new investors’ confidence in the stability of the system.

With 2015 being a year of coaching for taxpayers, a multitude of new laws were announced in that year, which may not be representative of the DGT’s pace of reform in a typical year. To maximise the effectiveness of tax reforms and facilitate revenue growth, more paced-out changes would likely facilitate greater adoption by the business community.

Concurrently, tax audits on existing taxpayers have intensified. Although the increased quality of tax audits has been encouraging, adjustments by the DGT have, at times, still been focused on form over substance. Heavy penalties can be imposed for administrative errors. Many tax disputes are eventually resolved at the tax court level, but only after two to three years. Such cases may unnecessarily dampen investor confidence and the commercial attractiveness of potential projects.

As such, we welcome the government’s plan to debate changes to Indonesia’s tax framework over the next five years. Ultimately, a balanced approach is necessary to maximise effectiveness of the government’s two-pronged goal of increasing sustainable tax revenues while also encouraging growth. Only with stability can the economy continue to flourish.