On 8 May 2017, Government Regulation in lieu of Legislation (Peraturan Pemerintah Pengganti Undang-Undang/Perppu) No.1 Year 2017 on Financial Information Access for the purpose of taxation was issued. The government accelerated this Perppu issuance considering that the deadline of Automatic Exchange of Information (AEoI) is getting closer within days.
The guarantee of financial information confidentiality becomes a victim, as the issuance of Perppu No. 1 Year 2017 will automatically nullify the legal force of 10 articles in 5 (five) kinds of laws related to taxation, banking and sharia banking, capital market, and futures exchange.
In the press conference, on Thursday, 18 May 2017, Minister of Finance Sri Mulyani Indrawati explained the urgency of this Perppu issuance. In addition, the Ex-managing Director of World Bank convinced the public that the access of financial information opened for the Tax Authority is not to be used inappropriately for purposes other than taxation. Below is the summary of the explanation:
What is the background of Perppu No.1 Year 2017 issuance?
Countries over the globe, especially G20, have entered into an agreement to make taxation collaboration in order to minimize Base Erosion Profit Shifting (BEPS), which among others related to financial information access owned by taxpayers in all jurisdictions or places. This is triggered by global financial crisis causing many countries to perform intensification of tax income. Therefore, the initiative to increase and formalize the international taxation collaboration to minimize or even abolish spaces or places for tax avoiders (tax haven).
Indonesia as one of G20 country members and being active in international level since 2014 has conveyed its commitment, even has actively shared its views to make BEPS practice as well as the obligation of financial information exchange successfully conducted. This is because Indonesia considers that there are many places and jurisdictions that can be used safely by Taxpayers in avoiding taxation obligation in Indonesia.
Indonesia’s commitment to participate is also caused by national interest, that is (we) as a country want to guarantee that the entire governance of taxation in Indonesia is similar with that of other countries’ authorities, thus we are not in loss position.
The international’s commitment kept by Indonesian government is in the form of Automatic Exchange of Information (AEoI). Until this year, there have been 100 countries or jurisdictions including all G20 countries already participating in AEoI. Fifty of which have committed to participating this year and 50 others will participate in 2018, including Indonesia.
What are the requirements of each country to apply AEoI?
First, the country shall have the guarantee that the tax authority has access towards financial information for the purpose of taxation in all financial institutions. Thus, there should be the law and provisions that guarantee the tax authority the financial information access for the purpose of taxation in every financial institution.
Second, the law and provisions should also regulate the standards of report or transmission system from information exchange. Therefore, the information exchange has standard procedure, as well as from the format or content aspects. As a result, there is no excuse for a company to send information with different format and size from other countries.
The standardization from the aspect of reporting and report content is also needed to be regulated. It should not be stated in Laws, but in the provision that has lower legal force. If the country can’t afford it, in terms of fulfilling the implementation of AEoI, the country will be considered failed to comply or failed in fulfilling the requirements from the aspect of tax provisions.
What are the consequences if Indonesia fails to fulfill the requirements?
The most serious consequence is the country will not have the power to obtain information from its partners. In other words, the country will not have the right to obtain reciprocal information.
In other words, if Indonesia does not join this program, Indonesia will be at loss since (Indonesia) cannot obtain the financial information access from Indonesian taxpayers owning either fund or assets overseas, in other jurisdictions. Clearly, this condition is very critical because we all know from tax amnesty that there are quite many assets to be disclosed. Of the total assets of IDR4,300 trillion or more, around IDR1,000 trillion of which is located overseas, which accounts for almost 25%.
Based on that background, this is actually a national interest for Indonesia not to be in loss position because of being considered failed to comply. Because of the deadline set in the international level, that to get involved in the second stage in 2018, (the tax authority) shall finish the laws before 30 June 2017.
Isn’t the primary legislation required by AEoI is in the form of Law?
The condition is very urgent and considered having a really big consequence from the aspect of our ability either to maintain tax basis, or to maintain Indonesian interest in collecting tax. Thus, the government needs to issue Perppu No. 1 Year 2017.
This Perppu aims at preventing Indonesia from being at loss because of not fulfilling the international requirement in the field of tax provisions, in order to obtain the rights as well as to fulfill its obligation from the commitment of AEoI.
Therefore, Perppu No. 1 Year 2017 is intended to make Indonesia capable to maintain the national interest in international level. We understand that not only information, but also fund and asset can move to all countries in the world. And, (it) may cause erosion from tax basis in Indonesia.
Has the government anticipated the possibility of rejection from House of Representatives or judicial review against Perppu No. 1 Year 2017?
The Perppu was issued by the president as a law, an urgent interest. Therefore in this matter the House of Representatives will approve or reject (it). If it is approved, it may overcome the obstacles of other four laws stating that the bank confidentiality is one of the factors causing the access towards financial information from DGT becomes non-automatic.
Certainly, the government will always make consultation and discussion with the House of Representatives, regarding how crucial the national interest is to be protected together.
Because, in the end, the House of Representatives as the representative of the society will expect the best for their country. The agenda of Perppu is clear, consistent with Tax Laws, with Tax Amnesty Laws that has been approved previously by the House of Representatives, with our wishes to fix the tax income, and with the purpose to protect the national interest in the international agreement, upon which may make us loss if we don’t fulfill.
Thus, we will always communicate, therefore, the law and provisions may still reflect our country’s needs. And at the same time to fulfill the international interest in terms of obtaining information from taxpayers having assets overseas.
But all this time the DGT can obtain information from Financial Service Authority (OJK), can’t they?
Thus far, in terms of tax problem, the protocol is that Minister of Finance conveyed it to the OJK’s Head of Commissioner that there are X, Y, Z customers whose information are requested for the purpose of taxation. Then, the Head will deliver the letter to the financial institutions. Thus, the information access is available but it is based on case by case and not automatic.
Meanwhile, the international expects for—and this is performed by 195 countries—the information access by tax authority that is automatic. Therefore, this Perppu provides financial information access that is automatic. It means that we don’t have to request one by one in case of any taxation interest.
However, it is not that since it is automatic, every time DGT has intention to check one’s account, they will just check it. So, ‘automatic’ does not mean there will be arbitrariness, occasional checking just for pleasure, or irresponsible conduct, or even intimidation. For example, if there is unpleasant person, the account is tracked. No, that is what we actually protect. Automatic means the DGT has the authority based on provisions for the purpose of taxation, not for other agenda.
This Perppu is certainly for institution, not for individual. Thus, if there is an interpretation that this Perppu will be delegated to DGT, it does not means the individual (of DGT).
How about the customers’ confidentiality guarantee?
We think it is important to announce to the society about the trust that this Perppu will not be used inappropriately by tax authority. Therefore, to convince the society, that this is the step taken by the government to protect Indonesian national interest, it will be applied carefully and in accordance with good principles of management and discipline.
I understand that the DGT’s authority in obtaining society’s financial information will cause concern among the society about information misuse. So, the way they (DGT) obtain the information, the procedure and the protocol, as well as in terms of using the information, will be strictly regulated in Minister of Finance Regulation (MoFR) that is the technical provision of this Perppu. Thus, the purpose to obtain the information for the purpose of tax, will not be used inappropriately.
Isn’t there an article of immunity in Perppu that makes the related officials get impunity?
We will clearly fix the procedure, protocol, and management. We will also ensure that all DGT officials having access towards the information will be subject to internal discipline in accordance with law and provisions.
It means that the information will not be used for other purposes or private interest or to intimidate or scare the society or taxpayer. We will also ensure that the information system or the information exchange that we will obtain shall follow the international protocol. So, it won’t be a deed performed individually by tax officer. So, the format, the content or its purposes follow the international standard that is not the subject to be interpretation from the tax officer.
More importantly in this context, I have requested the internal Ministry of Finance to strengthen the whistle blower system. It is the platform for people who feel uncomfortable or get treatment from tax officer.
This whistle blower system will be performed at times when the DGT officials do not fulfill the discipline or the regulations of attitude, then they (the society) may report it in whistle blower system, that is actually available but I suggest that it should be strengthened and socialized that the society has a line to convey their concern if treated unfair by our tax officers.
What will be regulated more specifically in PMK?
For the purpose of international taxation, as mentioned previously, the procedure of documentation obligation submission, the procedure of financial account identification, the procedure on how financial institutions are required to report are regulated in PMK. For the purpose of domestic taxation, we will also submit the balance limit required to be reported, registration procedure, report, procedure on information request, or in this case, the procedure of criminal sanction application will be regulated in PMK, if available. The transition, since this will prevail, for year 2018 has been in accordance with AEoI, yet from the aspect of information access for us, the Perppu has prevailed since 8 May 2017.
How much is the limit of balance value from financial account that is required to be reported in financial service institutions automatically?
From the aspect of international regulation, the limit of balance or financial account value that is required to be reported automatically is of USD250,000. Internationally, in case of any balance above USD250,000, it will be subject to access of information.
Therefore, we use the access in the context of the balance limit of financial account that is required to be automatically reported. Here I emphasize, since this is Automatic Exchange of Information, our compliance shall be equal to that of other countries.
For Indonesia, for the (business) entity, the reporting shall be without minimum balance, while for individual, the minimum balance mandatory to be reported is IDR200 million.
The number of bank accounts with the balance above IDR200 million is now 2.2 million of accounts or 1.14% from the total of depositors. If those accounts come from the regular salary withheld by Income Tax, there is nothing to worry about.
*) To show the partiality to Micro, Small, Medium Enterprise, the Minister of Finance revised the limit of account balance that shall be reported regularly, from previously IDR200 million to IDR1 billion.
When the DGT will start to access the financial information and to ask information access from overseas?
Just wait until the PMK is issued. Even though this Perppu was regulated on 8 May 2017, yet the implementation is still waiting for the technical provisions. The process of information provision from overseas authorities is regulated in AEoI agreement; as what I said before, the format, procedure, and protocol, all of them are stated therein.