WITH the presentation of the Department of Finance’s promised tax reform package to Congress at the end of last month, the efforts of the Philippines’ neighbor and friendly rival Indonesia to come to grips with its own revenue issues are worth watching carefully.
Last month, the Indonesian government began a tax amnesty program that is scheduled to run through March 2017, and will, President Joko Widodo is hoping, boost government revenue and private investment in the country and relieve pressure on Indonesia’s current account.
As of the end of the second quarter, Indonesia had a $4.679 billion current account deficit, which was a slight improvement from the $4.762 billion deficit in the first quarter of the year; the deficit is currently equivalent to about two percent of the nation’s GDP.
The thrust of the tax amnesty program is to encourage Indonesians—mainly business conglomerates and the people behind them—to repatriate funds and assets. The standard corporate tax rate in Indonesia is 25 percent and the maximum personal income tax rate is 30 percent, but under the amnesty program, repatriated assets will only be taxed in a range of two percent to 10 percent; the percentage varies depending how quickly participants sign up for it, and whether they are repatriating cash alone or assets as well.
The country has imposed some fairly stringent conditions on the repatriated funds to make them eligible for the amnesty tax rate. The repatriated funds must remain in Indonesia for at least three years, and must be invested through approved banks, securities companies, or investment managers. The repatriated funds can be invested in one or more of eight new investment instruments created for the program, all of which have a minimum three-year maturity, and include government bonds, bonds from state-owned enterprises, and real estate investment trusts (Reits).
According to President Widodo, the tax amnesty program, if it works as planned, will generate about $12.4 billion in new government revenue over nine months, based on the nearly $900 billion the government believes has been moved offshore.
The program has gotten off to a slow start, however; in its first month, just $53 million was collected, which was less than one percent of the government’s target. So far, though, the government is remaining optimistic; in comments to Indonesian media, Sri Mulyani Indrawati, the recently appointed minister of finance, said she expects repatriation to increase as companies make the necessary legal arrangements to bring assets back to the country.
Indonesia plans other tax reforms as well, such as lowering the tax rate to 17 to 20 percent, although that won’t happen before the end of the amnesty program in March, and administrative reforms such as using third-party data—for example, credit card, property or auto sales records—to identify cases of tax evasion, and either raising the value-added tax or removing some of its current exemptions.
The Widodo government, however, has evidently put many of its eggs in the basket represented by the amnesty program, and its success or failure may determine the outcome of the entire tax reform effort.
Expatriated assets represent a large part of the tax base Indonesia can’t seem to effectively tap. In a sense they are also the lowest-hanging fruit the government can grasp in tax reform efforts, because most of its other reform plans are likely to meet with some resistance, just as many of the proposals made by the Philippines’ own Department of Finance are being critically questioned now.
Perhaps the biggest impetus for Indonesia’s current tax reform ambitions is something that will sound very familiar to the Philippines: President Widodo has made infrastructure development a key policy priority, and has estimated that the country will need to spend about $400 billion by 2020 if it is to develop as he thinks it should, most of which will come from government investment. Current tax collections are pathetic; out of a population of 255 million, only 27 million Indonesians are registered taxpayers, and Oxford Business Group estimated only about one million of those actually paid the correct taxes in the past year. Last year, the government fell short of its tax collection target by 18 percent, or about $17.6 billion; at least two-thirds of which could be made up by the new tax amnesty program. Without more revenues and more efficient collections, Indonesia will not even come close to developing the infrastructure it is planning.
With the Philippines on a similar road in terms of the government’s development aspirations and the challenges it faces in funding them, the experience of Indonesia over the near term will provide a valuable lesson, no matter how it turns out.