Indonesia takes the fight to Singapore: can Jokowi win back $12bn of taxes?

Photo: Joko Widodo official Facebook page

Indonesia’s proposed Tax Amnesty Bill tackles the issue of international tax evasion head on by offering businesses and individuals legal and organised shelters from levies. The money raised from new, lower rates will go to investment and driving the economy. 

By Dung Phan

Indonesia’s government is taking radical steps to bring back billions of dollars taken overseas by the country’s business people. Joko Widodo’s proposed Tax Amnesty Bill allows for the set up of legal tax havens with rates as low as 3% off the coast of the mainland in the hope companies will bring assets back into the country. After all, if you can’t beat them, facilitate them?

The country’s new plan will allow both Indonesian and foreign business to set up shell companies in Bintan and Rempang, located about 60km from Singapore. Widodo reasons that as the price of coal and oil fall, the country needs to expand foreign investment and encourage Indonesian companies to enter the formal economy keep money in the country. The president’s idea is to then use the repatriated funds to pay for infrastructure projects and spur economic growth.

A softer approach

It is this urgent need for capital investment that inspired Widodo to lure Finance Minister Sri Mulyani Indrawati back home from the World Bank. During her first turn at the Finance Ministry six years ago she was well-known for chasing down companies which evaded their tax obligations. Her reforms that time around helped boost Indonesia’s tax reform before she resigned amid a probe into the bailout of a failing bank.

Upon her return, Indrawati is choosing a softer approach and trying to build trust. “This is not because we are poor, this is not because we don’t have business people, but it’s because both sides, the taxpayers as well as the government, have not been able to establish a good relationship based on trust, confidence and credibility,” she said. “First, of course, you’re just making sure your policies aren’t going to hamper [potential taxpayers].” But is Indrawati’s goodwill in the right place at the right time?

Global trends

At the core of this issue is the global problem of tax evasion; stunningly unveiled to the world by the publication of the Panama Papers. Following the leak of the documents, many countries are looking to strengthen their domestic fiscal framework. But in contrast, Indonesia is providing tax amnesties and offering incentives by considering setting up these legal tax shelters.

And perhaps this response is the correct one when you consider how deep the problem runs in Indonesian society. The Panama Papers listed 1,010 Indonesian people and 28 firms as having created offshore companies, said Ken Dwijugiasteadi, director general of the Finance Ministry’s tax office. Among these names is Luhut Binsar Panjaitan, coordinating minister for politics, law and security affairs, listed as the director of a Seychelles-based corporation. Another shocking name is James Riady, owner of one of Indonesia’s largest and most powerful conglomerates; he is currently serving as the vice-chairman of the Indonesian Chamber of Commerce and Industry.

A lack of integrity

According to tax records, only 27 million of Indonesia’s 255 million people are registered taxpayers, and just 10.9 million have made contributions. And on top of this abysmal tax compliance rate, Indonesia stands at 107th out of 175 on Transparency International’s global corruption index, placing it in the ranks of highly corrupt nations. Indrawati even admitted that “all the figures in the budget have been decided in a way that created more questions rather than clarity.”

Meanwhile, Indonesia’s former finance minister, Bambang Brodjonegoro said Singapore is holding an estimated $204bn of assets owned by Indonesian companies and individuals. This huge figure puts pressure on the Indonesians to turn the tables. In fact, state officials are looking closely at the numbers, claiming recently that the Singaporean government and its banks were working to prevent Indonesian citizens from moving funds overseas.

To rival its proximate island neighbour Widodo is even considering cutting the corporate tax rate from 25% to 17%. “The thinking is simple,” he explained, “If Singapore’s corporate income tax is 17% and ours is 25%, everybody will go there.” However, many Indonesians believe that Singapore has built a reputation as a stable and secure financial and commercial hub over many decades. Indonesia does not have that prestige. “Clients book their assets offshore not merely due to tax purposes, but also because of the instability of their respective home countries,” said Evrard Bordier, who heads the Singapore unit of Swiss private bank, Bordier & Cie. He is, however, encouraging his clients to take advantage of Jokowi’s proposal.

Human rights

Money aside there are other issues to be considered in the tax evasion equation say human rights activists. “It seems that the law is used to protect tax evaders whose source of wealth is unknown. Meanwhile, the workers always pay income tax every month, and so do small and medium enterprises. That is unfair,” said Said Iqbal, chairman of Confederation of Indonesian Workers Unions.

On September 1, dozens of workers held a rally in front of the Constitutional Court demanding the annulment of the Tax Amnesty Law. “The critical question is whether the government’s tax reform policies are in line with the global human rights agenda on establishing fair and just taxation to maximise the state’s capacity to reduce poverty and to fulfil human rights, especially economic, social and cultural rights,” wrote Nurkholis Hidayat, an Indonesian human rights lawyer.

Of course, there is nothing wrong with Jakarta’s desire to generate more investment. But so far the tax amnesty programme has brought barely 1% of the $12.4 billion the government had hoped for. In the face of such problems, the tax havens could end up benefitting nobody but rich Indonesians and tax evaders. And that is no different from the system that is already in place.