Indonesia to Join International Harmonization of Tax Regulations
Director for International Taxation Poltak Hutagaol spoke about the strategic direction of the current Indonesian taxation regime
By Christ Ponderosa
Monday, June 11, 2018
Indonesia’s strategic direction for taxation is guided by the global movement toward international harmonization of tax regulations, said Ministry of Finance Director for International Taxation Poltak Hutagaol at the Forum Group Discussion on Tax held by the Indonesian French Chamber of Commerce and Industry (IFCCI) on March 28.
He explained there were four elements of the global context that needed to be understood as the pretext to Indonesia’s current taxation regime: globalization, advances in information and communications technology (ICT), the underground economy and global economic growth.
With the nature of economic activities today characterized by interdependence and borderlessness, universal norms and values have increased in importance, especially for global business players. The movement toward the convergence of taxation policies at the global level thus becomes necessary to facilitate transnational business activities. With increased interdependency between world economies, the impacts of crises are often felt across national borders. More taxation revenue to finance economic recovery programs — fiscal stimulus, government expenditure and public-private partnership projects — during crises would be helpful.
Advances in ICT create disruptions, especially with the emergence of new business models and arrangements. Policy making needs to keep up with technological advances, so as to enable governments to capture the revenue generated using these new business models.
When underground economic activities — which can range between 1 to 20 percent in all economies in the world — remain unrecorded, countries suffer from asymmetric information and low tax compliance. Multiple sources have estimated that the size of Indonesia’s underground economy is 20 percent, and that its tax revenue potential is estimated at 2 percent of the country’s GDP.
Given those four elements of the global economy, international tax cooperation and collaboration brings about tax certainty, and helps promotes transparency. Hutagaol said that coherence at the international level could be achieved through the “harmonization of multi-country diversity in tax policies,” and that Indonesia’s strategic goal for taxation policy was to “meet international norms.” He further emphasized that “universal values should be converging into domestic policies.”
In line with the global Forum on Tax Administration (FTA), which was established to enable the sharing of information and experience to identify international good practices for resolving particular administrative issues, and to allow for a more constructive engagement with taxpayers, Indonesia’s Law No. 9 Year 2017 incorporated a universal framework derived from the Automatic Exchange of Information Agreement. The Law strengthened the right of the Directorate General of Taxation (DGT) to gain access to financial information from financial services institutions, with the purpose of reducing tax evasion and increasing tax compliance. Hutagaol said the DGT guaranteed the confidentiality of the data submitted.
During a productive Q&A session, Hutagaol spoke about his evaluation of the tax amnesty and other issues, including the adoption of digital signatures, the Advanced Pricing Agreement (APA), and tax incentives for foreign investors.
On the tax amnesty, which concluded in March 2017, Hutagaol said there were 57,000-110,000 new participants, which contributed to a total of 33 million registered taxpayers. He said that moving forward, the government would take the soft approach by continuing providing alternatives, such as implementing minor amnesties and waiving sanctions, to encourage more taxpayers to register. He also attributed the low registration rate of taxpayers to the low public trust level toward the government.
Hutagaol said there was a plan for Indonesia to start accepting electronic signatures, to replace stamp duty (materai). The digitalization of processes would help to ensure compliance, but he also acknowledged the necessary paradigm shift and mindset change for a smooth adoption of digital signatures by taxpayers, especially local companies and individual taxpayers.
On the APA, Hutagaol said that tax transparency and preserving the rights of taxpayers to have equality were two sides of the same coin, and thus, a delicate balance to maintain.
Foreign investors are welcome in the country, said Hutagaol, and double taxation is avoided by not collecting taxes on income taxed in other countries. To foster innovation and research and development (R&D) activities in Indonesia, provisions outlining tax incentives for foreign investors that place their R&D activities in the country are currently being drafted. The incentives could take the form of tax deductions, with an up to 200-300 percent deduction rate.
Hutagaol concluded by saying the following laws were being amended: general provisions and procedures for taxation, value-added tax (VAT) for luxury goods and services, income tax, land and building tax, and stamp duty.