The year 2018 is predicted to be the new era of open information on taxation globally. Automatic Exchange of Information (AEoI) has become the commitment of the world’s leaders to stop the acts of tax avoidance and track the actors’ financial transactions.
The practice seems challenging. Yet, ready or not, Indonesia shall participate in AEoI if not wanting to be isolated from global community. To dig further into AEoI conduct as well as the government readiness for AEoI in June 2018, MUC Tax Guide has the opportunity to discuss the issue with the Director of International Taxation of the Directorate General of Taxes (DGT), Prof. Poltak Maruli John Liberty Hutagaol. The following is the excerpt of conversation:
What is the background of AEoI establishment and how is Indonesia’s participation in AEoI?
We realize that the change of variables in international environment, where Indonesia gets involved in, is very dynamic. For example, the development of information technology, or financial and banking products that are very sophisticated. We also know some countries whom we give label to as the financial centers. They are not only providing the sophisticated financial facility, but also offering the confidentiality of information as well as low tax rate. In addition to that, the tax structure and rate in every country varies that they become loopholes. Furthermore, global investment is very limited, each country or jurisdiction races to use tax instruments as a magnet of investment. And, the condition will become a race to the bottom, which is very dangerous.
From that condition, we have seen the risks that are potential to occur. First is transfer pricing, then thin capitalization, harmful tax, competition, and lots of issues in the field of taxation, including profit shifting. All of those will undermine the taxation base in each country. According to the calculation of International Monetary Fund (IMF), there is potential tax income of USD200 billion that is lost every year in developing countries due to profit shifting. Surely the potential lost tax from Indonesia is also high. Realizing all of those risks, in G-20 leader summit in London in 2009, the world’s leaders declared that the bank secrecy has come to an end.
What do you mean that it has come to an end? Is the warranty of customer’s secrecy are no longer needed?
What I meant to say is, bank secrecy is still important, (and) shall be maintained. Yet, for the taxation purpose, there is exception. This is due to the fact that to all countries, including Indonesia and even the United States, the moneymaker of the State Budget and Expenditure (Anggaran Pendapatan dan Belanja Negara/APBN) is the taxation. This is why those countries exclude the secrecy for tax purpose, while still maintaining it in other purposes. Imagine if it is open for all sectors, the banking industry will surely be collapsed because of the loss of trust (from the customers). These matters encourage Indonesia and many countries to join the information exchange. Indonesia and 100 countries or other jurisdictions have been committed to conducting this information exchange.
What is the main purpose of this taxation information exchange?
To stimulate the global financial information exchange for taxation purpose, (so that) it is faster. The advantages are: Firstly, the Taxpayer in Indonesia will be more obedient voluntarily since all (information) has been opened. Secondly, this will make higher tax base. We can see the declaration of assets in overseas. The amount stated in the tax amnesty program is only IDR1,000 trillion. Meanwhile the potential amount is bigger, reaching up to IDR3,600 trillion.
What if there are countries not willing to be committed to AEoI?
Surely for those not willing to commit themselves, there will be moral sanction. Those countries will be isolated from international community. In addition, the international community will not trust them. It will hinder them from obtaining foreign loans from international organizations. Moreover, they will face the world’s problems alone. If participating (in AEoI), we can face those problems together (with the other countries).
What kind of data and information to be exchanged in AEoI?
The customers’ data in banking, capital market, insurance, and other financial institutions. The data may be in the form of the taxpayer’s identity such as name, address, account number, balance and income gained and reported in the account. For corporates, the shareholders or the controllers shall also be opened. The data and information will be obtained from the Financial Service Authority (Otoritas Jasa Keuangan/OJK) and exchanged by the Tax Office to other parties.
What are the requirements for Indonesia to conduct AEoI in 2018?
To be able to conduct AEoI, every committed country shall have the same level of ‘playing field’. If one of the countries or the jurisdiction does not fulfil the requirements, the country will not be included in this program.
Firstly, the country shall be committed to international community by signing all international agreements required, among others are Tax Treaty or Tax Information Exchange Agreement, Mutual Administrative Assistance in Tax Matters (MAC), and Mutual Competent Authority Agreement (MCAA). Secondly, the country has to sign Bilateral Competent Authority Agreement. Until now, Indonesia has signed only MAC and has entered into agreement in the form of Tax Treaty, while MCAA has not been executed.
Other requirements are all domestic requirements, starting from laws to its technical regulations shall meet the requirements in order to conduct global information exchange. In other words, the information may not be constrained by the existing regulations. Every tax authority in every country shall have the power to access the exchange of information. Any information shall be automatically accessible without any condition for tax purpose. Particularly for this case, those are financial information, either from bank or other financial institutions and capital market.
Does it mean that some laws shall be revised?
Yes, ideally the General Tax Provisions and Procedure, the Banking Laws, the Sharia Banking Laws, and the Income Tax Laws shall be amended.
What about the president’s plan to issue the government regulation in lieu of legislation?
The Government Regulation in lieu of Legislation (Peraturan Pemerintah Pengganti Undang-Undang/Perppu) may be a solution, but ideally, it is the amendment of the existing laws. However, the time is very limited, because on 30 July 2017 we should have the primary legislation, regulations that are equal with laws and that may accommodate the information exchange. The Perppu is still being discussed. And, it is designed so that Indonesia can conduct the information exchange. This Perppu will make us stronger in legislation.
Is the Perppu only designed to open the foreign customers’ data or all customers in Indonesia?
Indeed, it is only foreign customers’ data to be included in AEoI, because the data will be exchanged to fulfil the needs of other countries’ tax authority in need to inquire the financial information of their citizens in Indonesia. Similarly, Indonesia will request for financial data of Indonesian citizens staying overseas. Meanwhile, the opening of customers’ accounts data of the entire citizen is a different thing, not (related to) AEoI.
In Banking Laws, the mechanism has actually been regulated, but it is voluntary. Bank shall not wait for the customers’ willingness since commonly, the bank officer has informed the candidate of (foreign) customer at the time of the form filling—that to start an account, the customer shall make a statement letter that they shall be ready to open their account data.
How does the government guarantee the customers’ data confidentiality and ensure that the taxpayer’s financial data is not leaked to unauthorized parties?
From all of the data and information, the system of transmission shall be regulated, (and) shall be qualified. We have heard that OJK has prepared the information system to control the information flow from financial institutions to OJK and DGT. The system designed by OJK is called Sistem Penyampaian Informasi Nasabah Asing (System for Foreign Customer Information Delivery/SIPINA). Meanwhile, the system designed between DGT and tax authority in other countries is called Common Transmission System (CTS). Every country has been committed to maintaining the information confidentiality. The society shall not be panic since this is an international commitment. Thus, there is no excuse of capital flight because both Singapore and Hong Kong shall also apply the same policy.
Who will be leading the AEoI conduct? Is it DGT or OJK?
OJK is the partner whom we seek support from together with the other financial institutions and industries. Meanwhile, who conducts the exchange shall be the competent authority. It is DGT, the Ministry of Finance.
For what purposes the data and information obtained will be processed? Is there any limitation of allotment?
Of course, the data is for the exchange purpose. In addition, the data will strengthen the taxation database. The data will be used for taxation according to the regulations, not only for the tax audit. Imagine that in 2019 and the following years, the Tax Office will receive data and information about the Indonesian people who place their assets overseas, not to mention the corporates. How it will be hard for DGT to face a flood of data of the Indonesian people’s assets overseas.
What is the sanction for the Taxpayer with suspicious asset data and an indication for tax avoidance?
There will be an audit to check whether the assets are stated in the Tax Return or not. If not, the audit will be conducted. For Individual Taxpayers, the assets not stated will be subject to 30% (fine). There will be sanctions: criminal or administrative sanction. If it is intentionally, the criminal sanction is in the form of 400% or 200% (fine). Meanwhile, the administrative sanction is 2% per month.
Other than AEoI, what are other policies that will be applied by the government to prevent the tax avoidance?
To overcome the tax avoidance, either in domestic or offshore, we combine all international standards. First is AEoI. For domestic, we strengthen Base Erosion Profit Shifting (BEPS) Action 13 by issuing Minister of Finance Number 213 Year 2016. We will introduce three-tier-approach for transfer pricing documentation, by requiring Corporate Taxpayers conducting affiliated transaction to make master file, local file, and CBC (Country by Country) Report in order to confirm the actuality of transaction, whether or not they are arm’s length.
After that, we will issue the regulations on CFC (Controlled Foreign Company) since there are many trust practices overseas, for example a company conducting profit shifting to its subsidiaries overseas. Or, for example by manipulating various financial transactions, such as conducting export, then (the income) is pooled overseas, but the subsidiary does not pay the dividend to Indonesia. It can be shifted (as if shifted to Indonesia).