Bill Guerin, 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.]