Tax Institutional Reform Should Not Be A Mere Name-Changing

In the Draft Law of Taxation General Provisions and Procedures (KUP), the Government added a clause on establishment of special institution or body as a prospective substitute of Directorate General of Taxes (DGT) and probably Directorate General of Customs and Excise (DGCE) as well. This has been a long discourse that comes and goes along with the spirit of tax reform that has been on and off in Indonesia.

Discourse on the tax authority reinforcement is not a new talk in the context of global world. The awareness of the increasing importance of tax as the source of development funding demands an efficient and competitive authority performance. This phenomenon stimulates many countries in the world in giving autonomy and function flexibility to the tax authority over the last decades.

In practice, the form and the power of tax authority in every country vary. There is hardly, in any country, a tax authority that is having a full autonomy. Some tax authorities are in the form of semi-autonomous institutions and some are in directorate level under Ministry of Finance.

Singapore tax authority, for instance, Inland Revenue Authority of Singapore (IRAS), is a semi-autonomous tax institution that is not under the Ministry of Finance. Instead, it is closely supervised under a kind of Supervisory Board, in which the Minister of Finance acts as the leader. IRAS as the country representation has the authority to conduct tax agreement negotiation, draft the taxation laws, and give suggestion related to property appraisal to the Government.

However, there are also tax authorities in directorate level or under a ministry having authority almost equal to or even wider than that of the semi-autonomous tax authority in other countries. For example, in Thailand, the directorate of tax revenue has a considerably broad authority if compared to that of the semi-autonomous tax institution of Japan.

Meanwhile, in Indonesia, the tax administrative system is managed by multiple directorates under the Ministry of Finance, namely DGT and DGCE. With very limited authority, tax authorities are unable to design their own organization quickly due to the bureaucracy process. The lack of flexibility makes it difficult for DGT and DGCE to make changes in and development of the tax administrative system, as well as internal improvement in order to be balance with the dynamic and rapid business development in practice. This authority limitation, to some according to several parties, is considered as an obstacle of tax reform in Indonesia.

Sectoral Ego

The plan of tax institutional transformation actually has been a discourse in Indonesia since 2007. However, instead of focusing on the tax reform, conflicts of interest as well as sectoral ego are in the spotlight. It is proven by the fact that up to six top DGT leaders and five Director Generals of Customs and Excise successions, the plan is never realized.

A serious discussion upon this matter was actually held in the mid 2014 and was a part of the last 100-day presidency program of the 6th President of the Republic of Indonesia, Susilo Bambang Yudhoyono (SBY). As a result, three options of tax structural reform turned up.

First, establishing a new institution named State Revenue Agency (Badan Penerimaan Negara/BPN) under the coordination of Minister of Finance. Second, BPN as a new institution is separated from Ministry of Finance and is responsible directly to the President as the head of the state. Third, by simply giving flexibility to DGT to conduct staff recruitment and determine remuneration system so that they can collect taxes easier.

Then, question arises: what kind of institutional transformation is suitable to improve Indonesian taxation system? Is it by establishing special institution separated from Ministry of Finance structure or simply by giving a wider authority to DGT and DGCE?

Institutional reform of United States (US) tax authority, Internal Service Revenue (IRS), can at least be a lesson. Now, IRS is a semi-autonomous institution with several authorities strenghtening it. However, prior to this status, IRS had gone through various stages of institutional transformation.

IRS prototype, which is the position of Commisioner of Internal Revenue, has been confirmed since 1862 in Abraham Lincoln’s presidency, which later on changed into a new institution named the Bureau of Internal Revenue. In 1953, the US reorganized the Bureau of Internal Revenue to become IRS as we know today. In other words, it took 91 years or nearly a century to find a suitable tax authority format for US. 

Proportional Authority

Based on the research of Arthur Mann (2004), the establishment of Semi-Autonomous Revenue Authorities (SARA) cannot guarantee the success of a country in enhancing its revenue, reducing corruption practice and tax avoidance, and improving taxation service. The examples are the implementation of SARA in Ecuador, Guatemala, Peru, and Tanzania that is limited to provision of platform or base to create efficient taxation administration without guaranteeing success. The point is that the establishment of semi-autonomous institution or SARA is not necessarily the panacea that will quickly heal the tax problems. In other words, the real problem is not the institutional status or form, yet the range of the tax authority’s power. 

According to Organization for Economic Cooperation and Development (OECD), there are nine authorities ideally owned by a tax authority: (1) authority to make regulations; (2) authority to impose sanction or penalty; (3) authority to design its own internal organizational structure; (4) authority to arrange and allocate budget; (5) authority to arrange level and composition of staff; (6) authority to recruit staff; (7) authority to appoint or dismiss staff; (8) authority to determine staff’ salary; and (9) authority to determine performance standard.

The more complete the tax authority’s power is, hopefully the better taxation system of a country will be. However, it is only a few taxation institution having complete authorities.

A lot of considerations can be references in deciding the type of power a tax authority shall have. One of them is the consideration of needs and capacity of resources. Each country has different characters in terms of human resources, information technology, as well as number of taxpayers and width of area.

In other words, the authority has to be proportional to the needs and resources available. An authority that is too big will only create a super power institution that is hard to control. Meanwhile, if the authority given is limited, the performance of the tax authority will not be optimal.

Bigger autonomy and authority will enable a tax authority to break any boundaries restraining them this whole time from creating a more effective and efficient organization management. It is also important that transparency and accountability have to be maintained.

In many cases, including in Indonesia, the Minister of Finance has a significant role in controlling and performing direct supervision to the tax authority. Nonetheless, ideally, according to OECD, strategic authority and direct supervision by Minister of Finance shall be limited to appointment of board of directors and drafting of taxation policy.

Indonesia can learn from supervision performed towards Singapore tax authority, IRAS, by some kind of supervision committee. The committee cooperates with external auditor in reviewing IRAS’ financial statements. The supervisory committee also has the authority to approve policies on remuneration and appointment, promotion and main remuneration of the senior executives in IRAS.

Thus, what is debated now should be more about the distribution of proportional power to tax authority without ignoring the importance of supervision. It is no more about the position of an institution, whether autonomous or still under Ministry of Finance. If it is always only about “separation from bed and board” and name changing, Indonesia is not getting anywhere. Don’t let the long discourse and discussion be pointless just because we are trapped in the politics of identity. What’s in a name?

*Short version of this article has been published in CNBC Indonesia, February 28, 2018

CNBC Indonesia

Disclaimer! This article is a personal opinion and does not reflect the policies of the institution where the author works.