Taxing questions

Simon Butt

Taxation revenue comprises only around 13 per cent of Indonesia’s Gross Domestic Product (GDP) and only 14 per cent of Indonesians are registered to pay tax. In comparison, Australian tax revenue runs at 30 per cent of GDP and in Sweden it is 48 per cent; nearly all adults are registered taxpayers in both countries. Though Indonesia’s low figures can be partly attributed to its very large informal economy, significant revenue is lost through tax evasion by the rich. Simon Butt spoke about some of Indonesia’s tax problems with Yanuar Rizky, analyst and managing partner of Aspirasi Indonesia Research Institute (AIR Inti) and advisor with Indonesia Corruption Watch.

Why is tax revenue so low in Indonesia?

Indonesia’s tax revenue has not increased at the same rate as its economic growth, which shows that the system does not work properly. There are several reasons for this. One is that the system requires self-assessment and many people and businesses underreport their tax liabilities. Another reason for the failure of the system is that the tax office often fails to detect tax evasion, so lost tax revenue is very rarely identified, let alone recovered.

The tax office often fails to detect tax evasion, so lost tax revenue is very rarely identified, let alone recovered

All this creates few incentives to comply with tax laws. A critical factor is that Indonesia’s informal economy makes up 70 per cent of Indonesia’s national economy. In this informal economy, very few financial records are kept, making taxable income difficult to estimate among the millions of ordinary Indonesians who make their livings there. But there is leakage even when detection should be easier. For example, the export and import of goods incurs 10 per cent value-added tax (Pajak Pertambahan Nilai, or PPN), but you just need to look at the volume of imports and exports to see that this tax is not being collected properly.

What are some of the main modus operandi for tax evasion, particularly amongst the rich?

There are many – too numerous to mention. Most involve financial engineering, ‘cooking the books’, so that income is underreported and excessive tax deductions and refunds are claimed. One of the most significant problems to emerge in recent years has been transfer pricing. [Transfer pricing involves companies reducing their tax liability by shifting profits to related entities, such as subsidiaries, located in jurisdictions with lower tax rates]. Lots of companies are doing this.

The technique received significant publicity in 2010 in a case involving Aburizal Bakrie, businessman and Golkar chairperson. The case involved PT Kaltim Prima Coal (KPC) and PT Indocoal Resource Limited in the Cayman Islands, both subsidiaries of PT Bumi Resources, controlled by the Bakrie Group. KPC sold coal at a heavily discounted price (the ‘transfer price’) to PT Indocoal, which then on-sold the coal to a buyer at market price. The idea was to accrue the profit from the market-price sale of the coal in the Cayman Islands rather than in Indonesia, because company tax rates are lower in the Cayman Islands. Obviously, Indonesia lost its cut of tax revenue from the profit that KPC would have obtained had it sold the coal in Indonesia at the market price.

KPC then attempted to claim back around Rp 30 billion in overpaid taxes for the 2007 financial year, pointing to its smaller than expected taxable profits in Indonesia. This triggered a tax office audit, which uncovered that KPC in fact owed around Rp 1.5 trillion in unpaid taxes from 2007, and revealed that KPC had manipulated the price of the coal – a criminal act. Bakrie complained to the taxation court, which found that the tax office had violated some of its own procedures during the audit. The Supreme Court upheld this decision on final review. The tax office is still pursuing the case, but Bakrie’s success has encouraged lots of other companies to try the same thing as KPC.

The recent infamous case involving Gayus Tambunan exposed corruption in the tax office. What are the entry points for corruption there?

There are, of course, significant corruption problems in the tax office. Gayus Tambunan worked in the Appeals Directorate at the Taxation Office and made millions of US dollars in return for giving favourable tax treatment to many companies. But Indonesia’s Tax Court (Peradilan Perpajakan) presents bigger problems. In this court, taxpayers can appeal tax office decisions and rulings. Actually, it is not really a ‘court’, but rather a tribunal because, unlike other Indonesian courts, it falls under the administrative authority of the Finance Ministry, not the Supreme Court. [In 2004 the constitutionality of the Tax Court was challenged in the Constitutional Court on the grounds that it exercises judicial powers and that therefore the Supreme Court should administer it in the interests of judicial independence. The challenge failed.]

The tax court provides a forum for many games – the judicial mafia is alive and well there

Many disputes between taxpayers and the tax office are appealed to the tax court these days. And the tax court provides a forum for many games (permainan) to be played – the judicial mafia (mafia peradilan)is alive and well there. The court actually has a lot of power because its decisions are not subject to the appeals process of the ordinary courts. Its decisions are final and binding. There is a right to a Supreme Court review but this is limited.

Indonesian income tax rates are around 10 per cent for most Indonesian citizens. This is low, at least compared to developed countries. Why do you think the rate is so low?

The cost of living for many Indonesians is still too high. To live adequately in Jakarta, in my opinion, one needs Rp 3 million per month. Yet the minimum wage in Jakarta is around Rp 1.3 million. That’s a pretty big gap. So, if tax rates were to increase, people would undoubtedly complain that they no longer had economic freedom. In developed countries such as Australia, there is more likely to be a correlation between the taxes citizens and businesses pay and the government services they receive. In Indonesia, we have none of these services. If you get sick or become unemployed, the government doesn’t help you out. There are no unemployment benefits as in developed countries; there’s no government health fund.

The Indonesian government wants to increase the ratio of tax income to GDP from 13 per cent to 19 per cent within five years and is aiming to increase its tax revenue to about $US90 billion in 2011. How can the government encourage more Indonesians to pay tax?

Fix the system first. Simply reminding people to pay tax, or trying to build awareness about paying tax, will not change anything. The government needs to give taxpayers something in return for paying their taxes.

Paying tax proves we love our country    KPP (Kantor Pelayanan Pajak) Pratama Jakarta Jatinegara

In Indonesia there is a social security net, but the government doesn’t contribute to it – employees do. Tax revenue is used to pay the salaries of public servants and to repay debts. Indonesians hear about leaks in the tax system and about big companies evading their tax obligations and getting big refunds. They also read about the Gayus case. Citizens don’t want to pay tax when they hear these stories.

There’s a difference between the rich and middle and lower classes in their respective approaches to tax. Many rich people play the system by using transfer pricing or by seeking a refund exceeding their entitlements. For them, it is certainly not a matter of a lack of awareness about tax. Politicians don’t set the best example. In fact, they are amongst the worst offenders in using the tax mafia. They are not disciplined. When the very rich see this, they have little motivation to pay tax themselves. On the other hand, many rich people actually want to help the nation. If they saw that their taxes were used to fund public services, they would be much more likely to pay them. Increasing overall prosperity also helps the rich because it increases their customers.

The state forcing citizens to pay tax without keeping its end of the bargain is tantamount to extortion

As for the middle and lower classes, many know they are obliged to pay tax, but are reluctant because they lack purchasing power and they don’t see what they will get out of it. All they see is government money being spent on new government cars and ministerial salaries. There is no such thing as a free lunch, but many in the middle and lower classes ask what they’d get for lunch if they did pay tax. The state forcing citizens to pay tax without keeping its end of the bargain is tantamount to extortion. In this context, attempts to encourage more people to obtain a tax file number and to lodge tax returns will have little or no effect. The government needs to provide more services and give more incentives. If, for example, the government allowed everyone who had registered to pay tax to leave the country without paying fiscal tax, or to receive particular public services, then more ordinary people would pay tax.

Simon Butt (simon.butt@sydney.edu.au) teaches at Sydney University Law School. The views expressed by Yanuar Rizki (rizky.elrizky@gmail.com) in this interview are his own, and are not necessarily the official position of Indonesia Corruption Watch (www.antikorupsi.org).

This article is part of The Rich in Indonesia feature edition.

Inside Indonesia 104: Apr-Jun 2011