The death of tax evasion?

Graham Garven of VDB Loi in Indonesia looks at recent developments in dealing with tax evasion

“In this world nothing can be said to be certain, except death….. and taxes”

So said Benjamin Franklin a few years back. But was he right?

Most of us would agree that death, at least, is a near certainty, but the release of the Panama Papers has brought the ‘certainty’ of the latter into sharp focus. The leaks have created an unprecedented level of discussion on tax evasion and avoidance and highlighted more than ever the extent and prevalence of practices which are increasingly seen as immoral, at best. Those who have been paying attention. i.e. those who don’t switch off/yawn at the first mention of the word tax, are not surprised. Richard Murphy and the Tax Justice Network from the UK for example have been campaigning for years against aggressive tax avoidance, principally by multinationals, and the effect the practices have on developing nations and the poorest in society.

Whether considered a certainty or not there is nothing as permanent as change (so said Heraclitus – a few years before Franklin) and the times they are certainly a-changing. The G20 and the OECD finally addressed the issue of tackling unfair tax practices, issuing 15 action plans last year, agreed by 60 countries, under the so called BEPS project. Whilst the Tax Justice Network amongst others claim these are insufficient there is no denying that they will have a significant impact. An estimated 70% of cross border trade takes place between related parties – the transfer pricing between these entities is a main area of concern - and in one example of the impact it is reported that the BEPS project has already led to 80% of UK based multinationals re-thinking their tax strategies. Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, one of the most influential figures in the global tax field, has said “Playtime is over”.

What does this mean for Indonesia and the readers of this publication? Well, to start with, Indonesia is amongst the 60 signatories to the agreed action plans, she was an enthusiastic participant and has been an early adopter of some of the proposed changes.

Those in charge of multinationals here (or the finances thereof) are likely to find that, at the very least, additional or alternative reporting will be required. In many cases the business model may change over time and this will impact on KPIs and bonus schemes. I am reminded of an occasion when, having completed the transfer pricing study of the subsidiary of a multinational here (defending the profits reported locally), at a house party I overheard the CEO of the same company bemoaning the fact that he could not meet his targets as head office kept sucking all the money out!

But the trend is more important and the bigger news in Indonesia is the impending tax amnesty – a grand plan to tackle tax evasion locally by offering lower rates on previously undeclared assets and income sources. The idea is that this will bring in an estimated $4.5 billion in immediate tax funds (already allocated to projects within the State Budget) and also assist in increasing the level of compliance and the tax to GDP ratio. This is currently sitting around or below 12% - the lowest in the G20, with the exception of Saudi Arabia(!), and is quite frankly unsustainable.

As it stands the amnesty will affect expatriates as well as locals. It is acknowledged that expats are not the targets and would in any case account for only a very small percentage of the targeted funds, but there is currently no distinction in treatment between different types of tax residents based on citizenship.

Many locals may be looking at the tax amnesty as an opportunity to wipe the tax slate clean at minimal cost but others are not so sure, as evidenced by the delays in passing the bill through parliament. Pause for effect.

Much of the concern from certain sectors regarding implementation may stem from the resulting enforcement of taxes on the newly declared wealth. It is not yet clear the basis on which the concessionary penalty rates will be payable and how this will impact future taxation on the same assets or income streams. Should resources permit, the Indonesian Tax Office is intent on enforcing compliance and raising the tax to GDP ratio and within two years will also have in their armory the ability to call upon automatic exchange of information, meaning there will be less and less places to hide undeclared assets.

This uncertainty also applies to expatriates, who may have the added complication of interactions with different tax rules in their home country and who will in most cases have less flexibility in what can be done to comply or take advantage of the concessionary rates, but who may be similarly affected by the subsequent enforcement of compliance and the automatic exchange of information.

In the early years of my time in Indonesia, a frequent response to hearing that I was a tax advisor was “in Indonesia – no-one pays taxes here, do they?”. Well the fact is that, as noted above, too few have been paying their share but the trend, and the resolve to maintain this trend, is clear.

What the limited compliance means is that too few pay too much. Whether the amnesty will succeed in redressing this imbalance or not, all taxpayers should ensure that they are in a position to comply.

Tax evasion has always been wrong and should be eliminated. Tax avoidance is legal but has been tainted by artificial constructs. Tax planning is both legal and ethical and encourages efficient compliance – it could mean the difference between paying zero tax and paying tax far in excess of published rates.

One thing is clear, if not certain - Taxpayers should be aware, not only of their obligations but also their rights to allow both alignment with the changing dynamics of global taxation and, locally, to participate in fulfilling Indonesia’s potential.