Indonesia's Tax Amnesty Program: Calls for Celebration or Pessimism?

In total, participants of the tax amnesty program have declared IDR 4,017.2 trillion of previously undeclared assets per Thursday 15 December 2016, above the government's initial target of IDR 4,000 trillion, and way before the final deadline of the nine-month program (31 March 2017).

Nearly 75 percent of the assets that have been declared under the tax amnesty program are assets that are located domestically. And this is actually reason for pessimism as Indonesians are estimated to have more than USD $850 billion worth of undeclared assets stashed away abroad, mostly in the so-called tax havens like Singapore or Panama.

Also the amount of asset repatriations into Indonesia under the program is disappointing and still far below the government's initial target of IDR 1,000 trillion. Up to Thursday 15 December 2016 a total of IDR 143.8 trillion had been repatriated, only about 14.4 percent of the full target, and given the first phase of the program ended on 30 September 2016 (when the most attractive tax rates were offered for fund repatriations), there is little hope that people will transfer their offshore funds to Indonesia in the second or third phase of the program.

Apparently, most taxpayers who have assets abroad find it unattractive to repatriate their offshore assets into Indonesia. It is assumed because they are required to keep the assets in Indonesia for at least three years in specific investment instruments that were determined by the Indonesian government and financial authorities. Another unappealing matter is that tax incentives under Indonesia's tax amnesty program only apply to past tax liabilities. Meanwhile, new income is to be taxed at the normal rates (that are significantly higher compared to the rates in tax havens).

It is also clear that the tax amnesty program lost its momentum in the second phase of the program (October-December 2016). In the first phase (July-September 2016) taxpayers reported IDR 3,785.8 trillion worth of previously undeclared assets. However, in the following 2.5 months total asset declarations only grew modestly to IDR 4,017.2 trillion. Earlier, Indonesian President Joko Widodo also commented on the fruits of the tax amnesty program so far. He said the number of people joining the program (approx. 481,000 people) is too small.

Tax Amnesty Program Indonesia - Score So Far:

	Target (in IDR trillion)	Per 15 Dec '16  (in IDR trillion)	Achieved
State Income	165.0	96.0	58.2%
Declaration of Funds	4,000.0	4,017.2	100.4%
Repatriation of Funds	1,000.0	143.7	14.4%

^{Source: www.pajak.go.id/statistik-amnesti}

Meanwhile, Indonesia's Constitutional Court confirmed that the tax amnesty program does not violate the nation's constitution. In July 2016 a group of legal activists had filed for a judicial review of the amnesty program on claims that the program would turn money laundering into a legal practice, would protect criminals, would teach Indonesian citizens not to pay taxes, and would generally constitute an unfair program from a social point of view.

The Constitutional Court regards the tax amnesty program a positive matter for Indonesia as it aims to broaden the country's tax base as well as to raise tax revenue. The Court's verdict is final and cannot be appealed.

Indonesia's Tax Amnesty Program

Positive developments:

• Asset declarations have surpassed the government target
• Indonesia's Constitutional Court confirms that the amnesty program is "constitutional"
• In 2017 the amnesty funds (especially fund repatriations into Indonesia) will enter Indonesia's capital market, hence boosting the economy
• The program already is the world's most successful tax amnesty program in terms of additional government tax revenue

Negative developments:

• Weak amount of offshore fund repatriations into Indonesia
• Weak amount of taxpayers who join the program
• Great momentum in the first phase (July-September), but few progress made in the second phase (October-December 2016)

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