Bill Guerin, Jakarta – Indonesia's director general of taxation, Hadi Purnomo, under strong pressure to increase income tax receipts, has responded by using gijzeling – the Dutch term for detention without trial used in the Indonesian legal system – to jail foreigners, and his approach is sending a serious shudder through Jakarta's expatriate business community.
Purnomo was responding to a July 25 joint decree by the ministers of finance and justice that stipulated that tax evaders owing more than Rp100 million (US$11,500) to the central government or any regional government could be subject to detention for up to one year without trial. Purnomo warned that if recalcitrant taxpayers evaded their dues, or asked for a postponement and then refused to pay, they would face gijzeling.
By the end of last month, the blacklist tax evaders forbidden to leave the country had grown to 68 people who collectively owe Rp674 billion in unpaid taxes. Restraining orders have been slapped on them. Their initials, although not their full names, have been publicized in the press and they have been repeatedly threatened with gijzeling. Tax officials said that 18 foreign nationals from Japan, South Korea, the UK and the US additionally owed a combined Rp388 billion ($45.76 million) in unpaid taxes at the end of last month.
Although things have increasingly tightened lately, it was a practice for decades for foreigners to skip paying their Indonesian taxes. When one major multinational corporation went to tax authorities in the mid-1980s to ask about paying Indonesian income taxes for its local expatriate employees, the company's representative was met with a look of utter astonishment. On November 10, however, Briton Mark M Greenwood became the first victim of gijzeling, and of the new tough stance, when he was detained in East Jakarta's notorious Cipinang jail for alleged failure to pay Rp45.8 billion ($5.4 million) in personal and corporate income taxes. It is unknown at this point if Greenwood has been released.
Nonetheless, the message has been sent. Greenwood was unfortunate in more ways than one. Not only did he achieve unwanted fame as the first foreigner ever to be jailed for alleged tax offences, but also according to the law, his name should not have surfaced in public. Admittedly tax officials declined to reveal the Briton's name, identifying him only by his initials of MMG, but intrepid reporters easily persuaded the chief warden at Cipinang jail to disclose his name.
They then moved quickly to suss out the fact that Greenwood is managing director of Indo-Pacific Resources (Java) Ltd, an oil company owned by Canada-based Fortune Oil & Gas Inc that operates two oil blocks in Indonesia. The cat was out of the bag.
The International Monetary Fund, whose umbrella Indonesia will leave next month, has consistently called for reform and overhaul of the country's tax office and legal system. The Large Taxpayers Office, (LTO) set up last year with the agreement of the IMF, focuses on collecting taxes from the country's biggest businesses. Its primary function is to put the screws on delinquent taxpayers and take strong measures to reduce tax arrears. However, it is not yet operational.
Technically, tax officials are not allowed to disclose any information regarding taxpayers. The existing tax law on procedures includes a stipulation on taxpayer secrecy that forbids the disclosure of names or details of amounts owed in taxes.
This same clause prevented the tax directorate from going ahead in September last year with a threat to go public with the names of the country's largest corporate tax evaders if they continued to be uncooperative in settling their tax obligations.
The chairman of Indonesian Corruption Watch (ICW), Teten Masduki, highlighted the ambiguity inherent in this cop out when pointing out that publishing the names of the tax evaders would not necessarily violate the taxpayer secrecy code as the government frequently publishes lists of the names of good taxpayers.
Under the previous system, the income tax of an individual, local or foreign, with only one source of income was processed by his or her employer. But a new income tax ruling on foreigners working or living in the country came into effect in January 2001. Tax consultants and foreign businessmen immediately raised concerns that the new ruling would not be conducive to wooing foreign investment back to the country. Under the ruling, foreign taxpayers, just like Indonesians, have to apply for a tax identification number, locally known as a NPWP, report their income to their local tax authority and pay the taxes.
Annual incomes of up to Rp25 million ($2,688) are subject to a 5 percent income tax. Annual income of Rp25 million to Rp50 million is subject to a 10 percent tax; Rp50 million to Rp100 million, a 15 percent tax; Rp100 million to Rp200 million, a 25 percent tax; and above Rp200 million, 35 percent.
Purnomo's predecessor as director general of taxation, Machfud Sidik, said at the time that the tax office would not be "too aggressive" at first in enforcing the new law as tax officials needed time to sort out tax-treaty issues with foreign tax authorities.
The income tax directorate assured foreign businesses that it would cooperate closely with tax consultants and foreign chambers of commerce to ensure smooth implementation of the ruling. Indonesia has signed tax treaties with 47 countries.
Tax officials also assured expatriates that audits on individual taxpayers would be conducted only on a selective basis and would be limited in number, to avoid any unreasonable demands or pressure on individuals.
A taxation manual for foreigners was produced and Purnomo said "they" would no longer have the excuse that they didn't understand the regulations.
According to the tax laws, resident taxpayers are subject to taxation on their worldwide income, regardless of geographic origin. That particular ruling was introduced in 1984, but in the past, the ruling had not been seriously enforced. The laws also stipulate that any individuals, including foreigners, residing in Indonesia for more than 183 days during a 12-month period shall be treated as resident taxpayers.
Tax audits have, historically, resulted in arbitrary assessments imposed by tax officials who have discretionary power to interpret tax rulings. There is little difference then from the approaches, tactics and powers common to tax authorities elsewhere, especially in the US and Western Europe. But what seems to have spooked the foreign taxpaying community in Indonesia is the way Greenwood was whisked off to jail without trial.
"Tax evaders are criminals. If the tax officials protect them from the public it means they are protecting criminals," Teten said.
Most would agree with that point, but the foreign business community believes it is the wrong time and the wrong place to demonstrate the power to jail foreigners over tax arrears.
The chairman of the International Business Chambers, Peter G Fanning, said the move would further undermine Indonesia's investment image, pointing out that "bad news travels much faster than good news".
Japan is Indonesia's biggest investor. The chairman of the Jakarta Japan Club Foundation, Takafumi Sone, commented that the detention of foreigners without prior trial was "too much".
"We are not comfortable because we have already been facing hard times here," Sone said. "If there is a problem, we usually file an objection with the tax office and settle it at the tax court."
A Japanese national was reported to be among 16 other expatriates facing the same fate if they continue to refuse to pay up. However, he had agreed to settle his tax arrears and the detention threat was postponed.
Expatriates owing large tax arrears will be barred from leaving the country until they square their tax obligations to the government, the tax authorities said.
Tax experts make another point on the issue, saying that more extortion and collusion could stem from the power to detain tax evaders without prior trial given unscrupulous tax officials who can now intimidate taxpayers with the threat of gijzeling.
Sofjan Wanandi, chairman of the National Economic Recovery Committee (KPEN), said last week that there had already been several complaints from businessmen, and "cooperative" taxpayers that tax officials had threatened them with the full force of the new and powerful sanction.
It is common for many Indonesian taxpayers to evade their tax obligations by conspiring with tax officials, although both parties see it as more of a "negotiation" process than a criminal act, which denies vast sums of tax revenue to the country.
Greenwood should have had the company of one convicted tax evader, Indonesian national Jasman alias A Ciongis. An order to arrest Jasman was issued by Minister of Finance Boediono on October 23 for alleged non-payment of tax on his company, amounting to Rp11 billion ($1.29 million).
However, local media reports say that he fled before being arrested and his family has now appointed someone to "negotiate" with the tax directorate.
At the end of October, Purnomo announced that state revenue from taxes had increased by 112 percent to Rp155.7 trillion ($132 billion) from the same period last year, on improved tax compliance. Taxes this year are expected to contribute around 75 percent of revenue. By the end of the year, 49.1 percent of the tax revenue target is expected to come from income tax, 31.8 percent from value-added and luxury taxes, and the rest from other taxes. The 2004 state budget draft predicts tax revenue increasing by 6.6 percent to Rp271.02 trillion to finance next year's budget of around Rp368.80 trillion.
But well-known Jakarta lawyer Todung Mulya Lubis points out that similar action should be taken against debtors who owe large sums to the state consequent on Bank Indonesia's emergency liquidity support (BLBI). Enormous amounts of money were dished out to troubled banks at the peak of the financial crisis in an operation once dubbed the biggest heist in Indonesia's history.
Others question, why the threat, if gijzeling has not been adopted as a shock tactic by the Indonesian Bank Restructuring Agency (IBRA) in dealing with scores of recalcitrant debtors.
The tax procedure law is to be reviewed, and KPEN has proposed that an "equal treatment policy" be included in the draft law, whereby corrupt tax officials could be jailed without trial, in the same way as tax evaders. The tax directorate has, hardly surprisingly, rejected the novel idea. As Wanandi puts it, "They still want to make the regulation, execute it and, at the same time, become the judge."