JAKARTA - Foreign businesses say a planned new
policy on taxation, still winding its way through the
corridors of power, coupled with high corporate tax
rates, currently at 35%, has scared off investors and
made it uncompetitive for those businesses already in
Indonesia.
Taxation has always been a major
concern of foreign investors, and both foreign and local
businesses, as well as tax consultants, warn that what
is needed is not so much tax policy reform but rather
administrative reform.
This, in their view,
would improve certainty in the enforcement of tax laws,
and above all, help minimize corruption within the
taxation system.
President Megawati Sukarnoputri
promised last week that she would reform the taxation
system if she wins the second round of presidential
elections in September.
"The reforms will be
carried out for the sake of the country's economic
stability and to safeguard the state from financial
bankruptcy due to the monetary crisis," Megawati said
during a dialogue with local and foreign business
leaders hosted by the Indonesian Chamber of Commerce and
Industry (Kadin).
"During the stabilization
period, it was difficult for the government to carry out
reform in the taxation sector because, if it was done,
it would have posed difficulties to the government's
budget," she said.
The tax ratio (the percentage
of gross domestic product gained in revenue from taxes),
at around 13%, is much less than the 17-20% common in
other Association of Southeast Asian Nations (ASEAN)
countries, yet it was left to State Enterprises Minister
Laksamana Sukardi, who also addressed the forum, to pick
up on the few positive aspects.
Sukardi pointed
out that despite lower tax ratios than its neighbors,
the Megawati administration had already achieved
increased revenue from taxes. Sukardi said that last
year, for the first time ever, the government had
collected more tax revenue than it had budgeted for.
In 2003 the government obtained Rp240
trillion (US$26 billion) in tax revenues, well above the
routine budget figure of Rp190 trillion.
However, there
was no word at all from Megawati on what action she
proposes to take against corrupt officials in the
taxation office.
International and national
opinion polls on corruption in Indonesia have invariably
rated the Directorate General of Taxation as among the
most corrupt public institutions in the country. The
institution is widely perceived as offering some of the
greatest opportunities in the government for officials
seeking to enrich themselves from corruption.
Though the old adage that the only two
certainties in life are death and the need to pay taxes
may be true elsewhere, many well-heeled Indonesian
business owners are able to evade their tax obligations
by conspiring with corrupt tax officials. And though the
widespread collusion denies vast sums of tax revenue to
the country, both parties see it more as a "negotiation"
process than a criminal act.
Thanks to reforms
made under Megawati's watch, the taxman now has
wide-reaching power. Under a decree passed last year,
people can be jailed for up to a year if the tax
department says they owe more than Rp100 million
($9,250) in unpaid taxes. The rub is, of course, that
such power gives the collectors an excellent opportunity
to negotiate even more lucrative under-the-table
settlements.
The two most contentious issues
concern tax audits and tax refunds - the two areas most
vulnerable to corrupt tax officials.
While
corporate taxpayers have to submit to comprehensive tax
audits, they are not eligible for an automatic refund of
tax overpayments, the excess sums demanded by the taxman
over and above the actual taxes due - these have to be
"negotiated". The high incidence of arbitrary tax
audits, which are often proven to be unjustified by the
tax courts, suggests that the law has led to extortion,
with businesses preferring to pay bribes to corrupt
officials rather than go through an audit or be jailed.
Megawati's track record on combating corruption
is extremely weak, but she has at least acknowledged the
problem within the taxation office. Speaking earlier at
a ceremony to mark the filing of annual tax returns
(SPT) by top politicians and state officials, she said,
"We are still hearing of taxpayers who meet with tax
officials to negotiate [illegal] settlements of their
taxes."
In the end, when the reforms have been
implemented, the president said, "people can rest
assured that the taxes they have paid are turned over to
the state and are used for the benefit of the public at
large".
However, although the planned fourth
major tax reform since 1983 includes policy moves
designed to increase tax receipts through broadening the
tax base, the greatest concern of corporate taxpayers -
the general rules and procedures for taxation - is not
addressed in the draft bills.
Business leaders
and economists have criticized the draft reforms in the
pipeline as being slanted in favor of the tax office
over taxpayers and as having several loopholes that
would allow further corruption and misuse of power.
Sofjan Wanandi, chairman of the National
Economic Recovery Committee (KPEN) and the Indonesian
Employers Association (Apindo), has described the drafts
as little more than legal instruments to enable the tax
directorate to continue fleecing taxpayers.
This
is hardly surprising as the Directorate General of
Taxation drafted its own amendments to the three earlier
tax laws: Law No 16/2000 on general taxation
arrangements and procedures, Law No 17/2000 on income
tax, and Law No 18/2000 on value-added tax on goods and
services and luxury sales tax. The revisions include
restructuring of tax bands and measures designed to
improve taxpayer compliance.
Under existing
laws, the directorate can only order police to arrest
anyone accused of flouting tax laws.
After protests from government
agencies and business leaders that it would hurt
business confidence, the government earlier revoked the
most controversial article in the draft revisions, one
which would have given the tax office even greater
powers to investigate alleged tax crimes without police
assistance and to seize the assets of "uncooperative"
people without a police warrant.
Though the time schedule is laid out in a
government White Paper highlighting key reform programs
in the post International Monetary Fund (IMF) era,
analysts say that the extended delay in completing the
drafts and debating the bills in the House of
Representatives shows the Megawati government lacks the
commitment to implement action plans included in the
White Paper.
The reasons for the delay may lie
elsewhere. Top officials from the Directorate General of
Taxation are said to have lobbied the president to
endorse their controversial plan to split away from the
Ministry of Finance.
Their argument is that
giving full attention to the main task of collecting
taxes and enforcing tax laws is hampered by the need to
deal with other jobs that should be carried out by other
agencies, such as making policies and drafting tax laws.
Officials from the directorate also claim that
as a unit under the Ministry of Finance, rather than as
an independent agency, it is difficult for them to wire
into other ministries and government agencies because of
the need to go through masses of red tape before
reaching those agencies.
Director General of
Taxation Hadi Purnomo has said that his office is
determined to raise tax revenue by increasing the number
of taxpayers by an average of 100,000 per year.
Currently, a mere 2 million individual income taxpayers
are registered, other than state and private sector
employees whose income taxes are withheld by the
employers.
"We will also continue to take
resolute legal action against tax evaders, including
detaining them if necessary, and imposing sanctions on
corrupt tax officials," Purnomo said.
Corrupt
tax officials have also targeted international
companies, in a move that cynics say is aimed at
boosting the taxation office's image in the eyes of the
local media, but which the taxation office claims is
part of its campaign to step up pressure on tax evaders.
In June, the House of
Representatives' State Budget Commission approved a proposal by
the government to raise the target for taxation receipts from
Rp209 trillion this year to Rp232 trillion ($25 billion) in
2005.
Purnomo said last week that
some Rp120.7 trillion ($13 billion) in tax revenues
had been collected in the first seven months of this year,
or 46% of the full-year target, But in the same period,
the tax office collected around Rp7.2 trillion, just a fifth
of the total Rp36 trillion in tax arrears.
Almost
a third of state revenue goes on serving domestic and
foreign debt, as well as fuel subsidies and
poverty-alleviation programs.
Increasing tax
receipts will help plug the budget deficit and alleviate
the need to fully finance the state budget without
having to resort to even more foreign borrowing. But at
the end of the day, it's investment that is desperately
needed.
"Businesses are already going to China,
Vietnam and one of the main problems is our tax policy.
Even Indonesian businesses are investing elsewhere," KPEN
chairman Wanandi pointed out.
In the meantime, it's
business as usual. Last year, under strong pressure to
increase income tax receipts, Purnomo responded by using
gijzeling - the Dutch term for detention without
trial used in the Indonesian legal system - to jail two
tax evaders, one of them a foreigner.
On Monday,
tax office officials announced that an unnamed
businessman from Bali will also be jailed for alleged
non-cooperation in settling tax arrears.
Bill Guerin has worked for 19 years in
Indonesia as a journalist and editor. He specializes in
business/economy issues and political analysis. He has
been a Jakarta correspondent for Asia Times Online since
2000 and has also been published by the BBC on East
Timor. He can be reached at softsell@prima.net.id.
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