Tax Amnesty Program Indonesia Launched: Which Investment Instruments?

The tax amnesty program of Indonesia is designed to run for nine months (from July 2016 to March 2017) and is targeted to cause the repatriation of trillions of rupiah worth of offshore assets into Indonesia, Southeast Asia's largest economy. The Indonesian government stated it would like to see the repatriation of IDR 1,000 trillion (approx. USD $76 billion) that is currently stashed in offshore tax havens by Indonesians. In total, the government assumes that some IDR 4,000 trillion is secretly stashed abroad. As Indonesian markets, government institutions and most businesses are closed for the Idul Fitri holiday (4 - 8 July 2016), Indonesia's tax amnesty program is set to start in the week of 11 July.

According to President Widodo, the tax amnesty program is an important tool to resolve Indonesia's ongoing tax issues (namely low tax revenue) and to boost the economy as a whole as the government is able to generate much-needed funds that can be used to invest in the structural development of Indonesia (such as infrastructure and social development). Infrastructure development, for example, is estimated to require some IDR 4,900 trillion (approx. USD $371 billion) worth of funds in the years ahead.

Widodo added that the program should not be seen as an effort of the government to pardon tax corruptors or those who have been engaged in money laundering. Instead, the government targets to pardon those businessmen who have stashed part of their wealth abroad, in the so-called tax havens. In fact, last month Indonesian Finance Minister Bambang Brodjonegoro said the Indonesian government is considering to create its own tax haven in Indonesia, which would allow residents and non-residents to set up shell companies for their offshore investment in a low-tax jurisdiction.

Although details remain scarce, a Finance Ministry official said the Indonesian tax office will set up information centers at Indonesian embassies in those locations that are frequently used by Indonesians to keep offshore assets, including Singapore, Hong Kong, and London.

Previously, the Indonesian government had already said it was preparing investment instruments to absorb the expected excess liquidity that is caused by the potentially huge inflow of assets into Indonesia. Funds that are repatriated through the tax amnesty program are required to remain in Indonesia for at least three years. The following investment instruments are available:

• Government bonds
• State-owned enterprises' bonds
• Corporate bonds
• Time deposits and savings at designated lenders (probably the big state-controlled banks)
• Mutual funds
• Collective investment contracts
• Real estate investment trust (REIT)
• Property investment through a private equity scheme (RDPT).

Traditionally, Indonesia's tax revenue has disappointed. This is due to problems on the "demand and supply" side: the Indonesian government often sets overly ambitious tax revenue targets in the state budgets, while tax compliance remains low (the country's tax-to-GDP ratio is very low at around 11-12 percent).

Recently, Indonesia's tax income has been plagued by slowing economic growth (curtailing companies' sales and profit) and sliding commodity prices (for example curtailing export taxes). However, there are more structural problems that cause limited state tax income. Firstly, tax compliance in Indonesia is remarkably low. It is estimated that only 27 million Indonesians - out of an adult population that numbers more than 185 million individuals - are registered as taxpayer. However, only 10 million of these registered taxpayers actually fulfilled their tax obligations (while according to information from the Ministry for Economic Affairs, a total of at least 44 million Indonesians should pay taxes). These data signal rampant tax evasion.

It is worth to note that the informal sector - both rural and urban - still plays an exceptionally big role in the Indonesian economy today. Although it is difficult to pinpoint the exact number, it is estimated that between 55 and 65 percent of employment in Indonesia can be labelled 'informal'. Today, around 80 percent of this informal employment is concentrated in the rural areas, particularly in the construction and agriculture sectors.

Secondly, tax evasion in Indonesia is made possible by weak government monitoring and weak law enforcement. Moreover, it is assumed that a significant portion of tax money ends up in the pockets of government officials (which also make Indonesians unwilling to pay taxes). But apart from such (perceived) corruption, there is also a shortage of tax officials due to budget constraints and bureaucratic hurdles. In 2015 there were only 37,000 Indonesian tax officials, implying one tax official for 7,000 Indonesians, an alarmingly weak ratio compared to other countries. Indonesia needs to nearly double the number of tax employees.

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