Mutual Trust and Data Integration as the Main Investment of Tax Reform

In the state context, the role of Tax Authority is as important as that of tax payer in funding national development through tax. An effective and efficient service supported with close supervision become the key activity to ensure that the relation between both sides is equivalent and harmonious.

Therefore, the tax Ombudsman role becomes so vital to make sure a tax system management that is transparent and fair. In Indonesia, this function is run by Supervisory Committee of Taxation pursuant to the Law mandate of Tax General Provisions and Procedure.

To find out how the Supervisory Committee works in guiding tax reform over the last decade, MUC Tax Guide had a chance to discuss directly with the Vice Chairman of Tax Supervisory Committee Prof. Dr. Gunadi, M.Sc., Ak. The dialogue script is as follows:

What is the role of Supervisory Committee in tax reform process so far?

Supervisory Committee was formed under Article 36C of KUP. The duty is to help Minister of Finance (MoF) in monitoring tax institutions or agencies consisting of Directorate General of Taxes (DGT) and Director General of Customs and Excise (DGCE). This controlling is conducted to the task implementation of these institutions performing Taxation Laws, (which are) Tax Law and Customs and Excise Law. That’s the beginning. But, then starting from last year’s MoF Regulation, the Supervisory Committee’s responsibilities are broadened to cover the supervision on policy. Therefore, commencing last year, the supervision is not only over the tax administration but also the tax policy.

Basically, this Supervisory Committee is treated similar to some kind of tax Ombudsman. So, we should convey Taxpayers’ aspiration. Then, (we) communicate it with tax institutions (regarding) how the formulation of the policy and the implementation of the laws would be. Thus, their rights are protected. 

How does the Supervisory Committee absorb the public aspiration? 

We do what we call as public communication in which every year there are four times of public communication. Through this public communication, we’d like to know the people’s aspiration regarding the implementation of tax system. It is like Focus Group Discussion (FGD). So, people share their complaints, and then we bring the complaints to the stakeholders, which are DGT and DGCE Regional Office in case of local scope. It is to be confirmed, whether the issue is true. If so, we then ask for the solution so that there are legal certainty and justice for them (Taxpayer). 

What are the recommendations of the Supervisory Committee in national scope, both those already and not yet implemented by the Tax Authority?

There are several recommendations. For those recommendations, we generally conduct a study, we investigate them, collect facts, then we submit the recommendations to the Minister of Finance. We have submitted many recommendations. Some have been done, some have not.

First, it relates to efficiency. This was during the former Minister of Finance Chatib Basri’s era. We conveyed recommendation on Value-Added Tax (VAT) upon Crude Palm Oil (CPO). At that time, CPO was considered as strategic goods to guarantee the availability of cooking oil. That is why the VAT was exempted for consumers. Meanwhile, the entrepreneurs were still subject to VAT and it might not be credited.

However, at that moment there were complicated issues in which upon the new Decree of Supreme Court, when the palm oil plantation was integrated with the CPO plant, it (VAT) could be credited. We gave conditions that we should see what kind of element or substance. When the element or the substance could not be credited, in whatever form, it could not be credited as well. Previously, there was actually MoF Regulation Number 21/PMK.011/2014 that allowed it. In the past, Mr. Chatib Basri asked a dissenting opinion from the Supervisory Committee to strengthen the policy. We explained it to him that this MoF Regulation contradicted the Laws since it returned the unnecessary taxes. It might give loss to the State if it was credited. And, it had been run.

But then, there was legal review to the Supreme Court on Goverment Regulation Number 31 Year 2007. The Supreme Court affirmed that it (the VAT exemption) conflicted with the higher regulation. The impact spread to agricultural products, which in fact were subject to tax so it could be credited again.

Regarding the recommendations that have not been performed, for instance, how to make a tax audit become more efficient. We try to attain an audit that is not causing any problems. It is because appeal and objection processes are time-consuming and costly. It also keeps people so busy with tax matters. We recommend that the selection of the audit should be truly based on data. (We) should have valid and concrete data that the incomes are not reported. So, if there is no data, do not complicate it. The audit are generally supposed to relate with transfer pricing. For that, an Advance Pricing Agreement (APA) is conducted. In APA, it has been discussed from the beginning, how much the profit is. So, entrepreneurs should not be complicated or bothered by the tax matters. Let them make their businesses successful.

What is the Supervisory Committee’s recommendation related to the revision of Taxation Laws package? 

Particularly for KUP Laws, we advise that the self-assesment principles should be maintained. These self-assessment principles should give trust to the people. So put the trust first on anything received, it should be the positive thinking principle. Except, if they are proven wrong, they should be audited. But, the first thing is trust, mutual trust. Through the mutual trust, the audit should be transparent. So that the tax underpayment stipulation does not bind. Since the power is on the people, they should be the one that is right. So when the Tax Office issues the Tax Underpayment Assessment Notice, it should be only as correction. If this correction is approved by the corrected party, they shall pay. However, if they disagree, (or) they object, this correction will be disputed. So, if there is none (correction), it does not bind. Thus, do not trouble the entrepreneurs too much. If possible, the KUP should be business-pro, be fair, and attempt to obtain more income with less effort. Do not fuss over it since the Tax Office has very limited staff, thus, don’t be too aggresive. They may be aggressive when there is proof. If there is no proof, just don’t.

In terms of institutional reform, from the Supervisory Committee’s view, what does the Tax Authority really need?

Actually, the self-assessment demands a close supervision. What happens in practice now is that the supervision is considerably low. Why it is so, because the organization has not yet been strong, it is still weak. It is considered weak, because the IT-based has yet to work. First, the data should be valid. Second, it should also be comprehensive. Third, the system should be integrated. It is in fact still fragmented. The system integration is required because in the future everything will be processed IT-based. The more the Taxpayers are, the more complicated it will be if using the manual system. The audit may be conducted automatically, not manually.

For example, the VAT system in which the key is tax invoice. There is VAT-In on the buyer’s side and VAT-Out on the seller’s. So if there is no tax paid by the seller, it may not be credited. If the match is available, the refund should be automatic, no need to be audited or such. The same goes to Income Tax. In Income Tax, there are expenses that become withholding objects. Like wage and salary expenses, the match is Income Tax Article (ITA) 21. When there is ITA 21 paid, it is deductible.

What is an ideal institutional structure of our tax authority? Is it in the form of semi-autonomous entity separated from Ministry of Finance or still in the current form?

Those are two models that are similarly productive. The autonomous tax authorities in Asia are, for example, Singapore, Malaysia, the Philippines. Yet, in Thailand and Vietnam, their Directorate General of Taxes is not separated from Ministry of Finance, but they are still productive. It is just a matter of the man behind, depending on the individual.

So far, what is the Supervisory Committee’s view on the performance and coordination of Tax Authority, in this case, DGT and DGCE?

DGT and DGCE are both the part of Ministry of Finance. Why may not both of them be united? As an illustration, all export-imports are conducted through DGCE. Why does not DGT use the number (data) of DGCE related to transfer pricing? In fact, DGCE should also understand about it. Especially since the profiling, as well as the company audited are the same. If possible, both DGCE and DGT are one unit, even share the same opinion. So, it is like whether it is possible to be simplified, for instance, if the import and export become single submission. So that anything reported by DGCE is also useful for DGT. So (until now), it has not been integrated. It is just a matter of data exchange because they still have their own interests. 

The same applies in internal DGT, the national conceptual thinking has not existed yet. It is because each Tax Office still competes to gain income. It is supposed to be national pattern, not individual or local pattern. 

Concerning monitoring issue, has currently the authority of the Supervisory Committee been quite effective to guide the tax reform? 

Previously in 2007 tax reform draft, the first idea was to form an independent Supervisory Commission of Taxation, because DGT wanted to be an entity. However, the political situation has not allowed it. Since DGT was not an entity, the Supervisory Commission of Taxation changed to Supervisory Committee of Taxation. Until now, we have not seen a strong DGT as in the era of Mr. Marie Muhammad and Mr. Darmin Nasution. So, if DGT wants to be an independent institution, it takes a strong man to exist. 

Speaking of the broadening role of Supervisory Committee that also includes policy controlling, what does the Supervisory Committee think about the current tax policies? Especially for Tax Amnesty? 

The Tax Amnesty is needed for a change in tax system. Both are changes in behaviour and in administration that are fundamental. The amnesty means erasing the Taxpayers’ sins in the past with intention to start a good thing. In fact, the point of starting a good thing has not yet begun, for example, by disciplining the data. Do not handle the big things first, but start trying to manage the Taxpayers’ data based on its validity. The thing is, there has not been a pioneer to the integration of data to date. So, the pattern and the way are just the same as the past amnesties.

The current data is kept. Why it is supposed to be kept, instead of disseminating it to each Taxpayer. It is expected that for the improvement in the future, there should be concrete data. We hope that with the new system, the tax system can adapt like bank. In banks, even those in the suburbs, all accounts are detectable. The tax information system should be like that, which is real time. 

Does it mean similar to banking information network or financial data integration?

It’s only the model that is similar to bank account. Let’s see Bank Republik Indonesia (BRI), which is a State-Owned Enterprise, (the information network) can reach suburban areas. It’s impossible if DGT as a part of the state government could not be like that. (They) should give a try, it doesn’t have to be in a big scale firstly, start it from VAT-Registered Person. The number of VAT-Registered Persons are approximately 650,000. And, those having role in 93% of revenue are only the 17% or around 105,000 taxpayers. Start it by accessing the data of these 105,000 taxpayers first. It should be acknowledged, where the purchase is from, to which party the sale is made. It will be automatically discovered about those making sales to VAT-Registered Person as well as the revenue of all entrepreneurs in Indonesia. No need to perform any audits.

Have these ideas been forwarded to the government? What is the response?

We have brought these ideas, however it is not a simple thing. It is easier to create policy, one day is possible. What to make sure is which models we should use. There are various models, for example by simply following Australia’s model, any model is good. It has fixed and good software. We do not need to formulate our own design. It is similar to the current banking that becomes global network that all bankings should match. It is like ticket system that is also global network. Even the company level can make it happen, thus the Tax Office should be able to do so. 

Regarding Automatic Exchange of Information (AEoI), how the Supervisory Committee view this?

This data is like the blood vessel of tax. It is also the key of self-assessment. Because in all aspects, the initiative of each tax activity is on Taxpayer. The Tax Authority is only responsible to check whether what is reported has been accurate in accordance with the real situation. How to check it is not like how paranormals do it, but like regular people that the supporting data should be at hand. In the Netherlands, for instance, there is no tax withholding on saving interest in bank. Yet, at the end of the year, the bank reports it to the Tax Office.

Do the data integration, information openness, and institutional reform may close any tax avoidance loopholes?

Whether Taxpayers are compliant or non-compliant is not because all the humans are like angles, it is not. It is more because of the system that is created in many ways (and) put people with no option, except to comply. What makes it so is the tax administration. So, the data and the tax system should be strengthened to secure the revenue, and it should attach to payment system. The payment system in this context is through the withholding, the collection. If requested to remit tax by their own initiative, it’s impossible.

So, it should start, if related to sales-purchase transaction, the Tax Office should not retreat. It is a condition that should not happen. If the sales transaction between VAT-Registered Person and consumers does not use buyer data, it is not a big deal. But, if the transaction between entrepreneurs, the data is a must. The VAT-Registered Person is doing business because of profit motive, while the buyers are only regular citizen. 

Regarding the global trend in which many countries decrease their tax rates, should Indonesia follow?

Yes, (Indonesia) should follow. If not, the tax competitiveness will be low. Indonesia is the country that is attractive for product marketing. Thus, in the future, people will do export to Indonesia but the profit will be shifted or make Base Erosion of Profit Sharing (BEPS) to the country with low tax rate.

Is the tax rate reduction will be followed by the increasing of Taxpayer’s compliance?

The compliance is actually the opposite of the rate. If the rate is lower, the level of compliance will increase. The higher the compliance is. It is because the economic value of tax compliance is so big. Thus, (the tax rate reduction) also gives rise to the increase of compliance.

How is the tax challenge in 2018?

In 2018, the economic growth is forecast to increase to 5.4%. It is also expected that the more tax potentials may be realized. Now the problem is what kind of tax instruments (should be used) to realize it. Nowadays, the approach of State Budget and Expenditure to the economic sectors or posts is considered booming. Again, the tax system should adhere to those sectors, so the possibility of the tax ratio will stick to each sector.

Thailand for example with the VAT rate of 7%, its tax ratio is 5.6% towards Gross Domestic Product (GDP). Indonesia with the VAT rate of 10%, the tax ratio is only 3.9%. Why Thailand has higher tax ratio, because its tax base is larger than ours. The sectors that are easily taxed like finance, insurance, and capital market are subject to taxes. The stock exchange is subject to tax, it is called special business tax with the rate of 3%, which is lower than general rate of 7%.