Wednesday, June 29, 2016

Indonesia acts to bring home billions in tax dollars parked overseas

JAKARTA — Indonesia is launching a tax amnesty programme that the government, facing a sizable Budget shortfall, is counting on to bring home billions of dollars citizens have parked overseas.
The nine-month programme, approved yesterday by Parliament, offers citizens low rates for paying some penalties on assets at home or abroad that have not been previously declared.
The central bank forecasts the tax plan will help draw 560 trillion rupiah (S$57.6 billion) of funds back to the country. Almost 30 per cent, or 165 trillion rupiah, will flow to the government, said Finance Minister Bambang Brodjonegoro yesterday, a figure many analysts feel is overly optimistic.
Under the amnesty, there is a scale of payments that gives the lowest penalty rates for people who pay the quickest, and to those who do not just declare foreign assets but bring the money home. The government is offering 2 per cent to 5 per cent rates for assets repatriated by March.
Those assets must be kept in Indonesia for three years in banks appointed as managers, and can be invested in several ways, including government and corporate bonds.
For individuals joining the amnesty, the government will pardon their unpaid income tax, value-added tax and luxury tax. The amnesty Bill also sets a penalty of 4 per cent to 10 per cent on those who report assets held abroad but decline to repatriate the funds.
“(With slowing growth) all countries are in a race to attract more capital,” said Mr Brodjonegoro. “(The amnesty law) will reduce economic activity undeclared to the tax authority, thus it will ignite a sense of justice.
“The first benefit from the tax amnesty would be the potential for capital inflows, which will really help the economy, (which is) currently seeking new sources of growth after a period of low commodity prices. We hope this will boost growth.”
Jakarta markets welcomed the development. The rupiah, up 0.6 per cent at midday, rose 1.2 per cent up to 13,170, its highest since May 3. Shares rose on hopes some of the money coming home will be invested in them.
President Joko Widodo is banking on the tax amnesty to help plug a widening Budget deficit and enable South-east Asia’s largest economy to win a long-awaited upgrade from S&P Global Ratings.
In a country of 255 million people, Indonesia only has 27 million registered taxpayers, according to the government. Billions in Indonesian money is thought to be parked overseas, including in Singapore, which has thrived as a banking hub due to its stability, low taxes and rule of law. The Republic manages US$470 billion (S$637 billion) of private client assets, shows data from Deloitte.
A senior private banker at a European bank in Singapore said he did not think the amnesty would have a major impact on private banking business.
“(The rates offered in the amnesty) are not excessive, so I feel that smaller clients will take it. Larger clients will only opt for repatriation if they feel that investment opportunity will outweigh the cost differential,” he said.
The Indonesian government has been lobbying for an amnesty programme because slow economic growth has meant tax revenue this year is well below the target.
It has also threatened those it suspected of evading tax with action, claiming that under the Automatic Exchange of Information pact signed by more than 50 countries, Jakarta will be able to get information on undeclared funds parked in low-tax countries. The reality, however, is that any data exchange by countries must first meet stringent criteria, including a robust legal framework to maintain information confidentiality.
After the amnesty was approved, Parliament passed a 2016 revised Budget that sees the fiscal deficit at 2.35 per cent of GDP, instead of the originally planned 2.15 per cent.
The tax amnesty was seen as a test of political support for Mr Widodo. His administration earned a majority in Parliament when Golkar, the second-largest party, left the opposition to support him last month. A majority of parties at the parliamentary finance commission agreed to approve the Bill.
“Empirically, the success rate is minimal and countries that do this are seeking to plug shortfalls,” said Mr Kardaya Warnika from Gerindra party. “If the country isn’t in a revenue crisis, then Gerindra would reject this Bill, but because the country is in a crisis, then Gerindra accepts.” AGENCIES