AEoI, a Momentum for Tax Reform

Almost a year ago, the world was shocked by the leakage of 11.5 millions of confidential investment documents with total capacity of 2.6 terabytes owned by a Panama firm, Mossack Fonseca. These millions of documents so-called “Panama Papers” revealed a presumption of the biggest tax evasion and money laundering network through more than 214,000 shell companies in 21 tax heaven countries. 

The investigation result of 100 media groups as the members of International Consortium of Investigative Journalists (ICIJ) mentioned the world’s famous personalities as the money owners, starting from business people and corporations, politicians, celebrities, athletes to state officials and former state officials. Some of them are Indonesia citizens. 

Even though no evidence had shown any law violation, the reports from ICIJ revealed modus used by the super rich to hide their assets through offshore companies in tax heaven countries. 

Based on a research in 2015 by a non profit organization, Global Financial Integrity (GFI),  every year developing countries lose around USD1 trillion due to corruption, tax evasion, and money laundering. GFI predicts that the tax potential evaporating from Indonesia due to illegal money shifting reaches IDR 200 trillion every year.

This research result is supported by the review of Publish What You Pay Indonesia Coalition, stating that Indonesia ranks as the 7th of countries with the highest amount of illegal money flow.  Within the years of 2003 to 2012, Indonesia was recorded to release fund in total of IDR1,699 trillion  or IDR 167 trillion in yearly average. 

Nevertheless, the overall data are only estimation, and until now there are no fixed figures of the asset value hidden in the tax heaven countries and thus no tax loss can be calculated due to such aggressive financial planning scheme. 

The leakage of “Panama Papers” documents seems to be a slap on the face for governments of the entire globe, including Indonesia, which at the same time are struggling to anticipate any tax avoidance and money laundering. This condition urges the global commitment to accelerate the implementation of Automatic Exchange of Information (AEoI) to track down assets hidden by taxpayers in tax heavens.

Pioneer of AEoI

The massive acts of tax avoidance by trusting assets in offshore banks and financial institutions are closely related to differences in tax rates applied in every country.  Combination between very low tax rates and guarantees of bank secrecy has been making some countries or jurisdictions popular as tax heavens. 

The existence of bilateral tax treaty to prevent double taxation on taxpayers does not guarantee that the practice can be eliminated. Tax treaty ideally still requires taxpayers to pay tax difference due to lower tax rate imposed abroad to the tax authority lower to their countries of origin. In reality, many taxpayers do not report their assets and income from abroad or even pay the tax differences, which therefore their countries are losing their potential tax revenue. 

This phenomenon has become a critical issue by tax authorities across the world. The idea of the significance of financial information disclosures for tax purposes further emerged during the G20 leader member meeting in London, England in April 2009 following the uncovered scandal of tax avoidance involving the Union Bank of Switzerland (UBS). 

The scandal made the United States (US) government react in speed by filing an indictment against UBS to hand over identities and account information of its 250 citizens. Upon the case, UBS lost and paid total penalty of USD870 millions. 

A year later, the US government released a policy of Foreign Account Tax Compliance Act (FATCA). To overcome tax evasion and avoidance by its citizens, all financial institutions in the world are requested to give reports to the Internal Revenue Services (IRS) on information related to financial accounts owned by the US citizens or other entities significantly owned by the US residents (substantial ownership interest). For financial institutions which are not cooperative will be charged with 30% withholding tax on fund transferred from the US. Types of payments as tax withholding objects at 30% rate among others are payments of dividend, interest and asset sales.

The global commitment of tax information exchange application bilaterally and multilaterally became stronger pursuant to the increasing numbers of tax fraud cases uncovered. G20 with the initiative from Organization for Economic Co-operation and Development (OECD) further endorsed financial information exchange under the framework of tax treaty; Tax Information Exchange Agreement (TIEA); and Convention on Mutual Administrative Assistance in Tax Matters (MAC). 

Indonesia, so far, has been engaged in tax treaties with 65 countries. For TIEA, Indonesia has been in cooperation with 6 (six) countries, whereas for MAC, 94 countries have been in commitment with Indonesia. 

Nevertheless, all the ongoing information exchange agreements were considered insufficient since they were still made on requests. Thus, the idea to adopt automatic information exchange such as FATCA came into surface. G20 and OECD then agreed to apply AEoI starting from year 2017 or 2018. 

Indonesia, in July 2015, signed Multilateral Competent Authority Agreement (MCAA) stating commitment to commence AEoI in September 2018. Accordingly, starting from that point of time, taxpayers’ accounts in other countries can be directly accessed by the tax authority. The commitment is made to maintain Indonesia’s creditability in the international world and is to take part of the global financial information exchange network. 

Homework 

The Directorate General of Taxes (DGT) of the Ministry of Finance in many occasions has justified the significance of AEoI for Indonesia. The big dream is that AEoI is able to prevent and detect criminal acts of money laundering, tax avoidance and terrorism funding, as well as to encourage repatriation of overseas fund owned by taxpayers. DGT also hopes that AEoI will generate more accurate financial information of taxpayers in overseas.  

However, it is not easy for Indonesia—which applies banking data secrecy system—to implement AEoI. The General Tax Provisions and Procedure (KUP Law) has actually regulated banking data disclosure, but it is limited to tax audit purposes. Precisely in Article 35 of the KUP Law, it is affirmed that secrecy of data or evidence from banks, public accountants, notaries, tax consultants, administration offices, and/or other third parties is discarded for three purposes, namely tax audit, tax collection or tax crime investigation. Particularly for banking data, it can only be given under a written inquiry from the Minister of Finance. 

To be able to implement AEoI, the Banking Law and the KUP Law need to be revised. Both are the main gates to the preparation of common reporting standard (CRS), as the standard reporting of data exchanged between countries through each authority. This can be a very difficult homework for the Government considering that the process is not easy and consumes quite a long time in the Parliament. 

A government regulation in lieu laws (Perppu) is the most realistic options of legal reinforcement to be issued by the Government in a short run. The Government has given a green light that such Perppu will soon be released after tax amnesty program. 

The content of the Perppu more or less will adopt the basic scheme of AEoI recommended by OECD. What to exchange will be financial information of both individual and corporate taxpayers, covering identity, saving balance, interest, dividend and other income. Those obliged to report them will be banking and non-banking financial institutions, including depository institutions, custodian institutions, investment entities and certain insurance companies. 

Reciprocal principle is applied in AEoI that makes two dimensions attached to DGT, as data provider and recipient at the same time. As a data provider, DGT should give data and information of Income Tax withholding on Non Resident Tax Subject acquiring income from Indonesia. 

DGT can also give financial information and data of banking or financial institution customers to a relevant tax authority of a partner country. However, the data and information should firstly gain approvals from the customers, to be submitted by the bank to the Financial Service Authority (OJK), and to be further handed over to DGT. 

The second dimension is the other side of a coin. Tax authorities from the other countries should do the same thing and are mandatory to provide financial data and information of Indonesian citizens in their respective countries to DGT. 

Total Reform

Various public reactions are common to every new policy issued, no exception with AEoI implementation plan. Fears of loosing privacy and risks of capital shifting to overseas have become issues arising by parties less agreeing with this policy. By contrast, transparency and taxpayer compliance are the spirits echoed by the Government and parties supporting the AEoI plan.  

With or without AEoI, being complied with laws basically is a must for taxpayers. The current regulation package has actually been making a clear separation between which is “legal” and “illegal” in tax area. However, it is sadly to admit that it has not been perfectly executed due to many factors, such as taxpayers’ incompliance, resource constraint, and lack of database owned by the tax authority. 

AEoI is expected to tackle problems related to database and taxpayers’ incompliance. Nevertheless, it does not really answer the problem of resource constraint of the tax authority to process data and administer taxpayers’ compliance to be able to generate a clear output, which is state revenue growth. 

Thus, AEoI should be part of a total and comprehensive reform in the Country’s taxation sector. Efforts for strengthening database and taxpayers’ compliance should be accompanied with capacity increase, professionalism, and competence of the tax authority. All of which should be accommodated during the political budgeting process between the Government and the Parliament in the 2017 National Legislation Program (Prolegnas). 

When the tax reform is comprehensively carried out, there will be no loopholes for taxpayers to be delinquent. The same thing will apply for the tax authority. There will be no more reasons to blame on taxpayers when the tax revenue target cannot be reached. So, welcome to the tax information disclosure era. 

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