I put the word "hope" in the title to show more optimism instead of pessimism in 2021. It is important to always maintain hope even under the worst conditions. However, "worry" is very humane and needs to be managed even in a good condition. This is because catastrophic events and crises may suddenly happen. Including in analyzing taxation, there will always be opportunities and challenges amid global economic and political dynamics that are completely uncertain.
Talking about 2021 certainly cannot be separated from the role of the previous year, which is full of challenges and disasters. It is the Coronavirus Disease 2019 (Covid-19) pandemic, an invisible monster that has taken millions of lives worldwide. The United States (US)-China trade war that has not subsided amid the issue of the post-British Exit (Brexit) split of the European Union, as well as the heated political identity during the US’ Presidential election, have also added to the grim face of the world.
World Health Organization (WHO) recorded that more than 83.9 million people in the world were infected by Covid-19 throughout 2020 and more than 1.8 million people died because of it. Economic activities have stalled in line with quarantine policies and social restrictions in various parts of the world. Multilateral institutions—such as the World Bank, International Monetary Fund (IMF), and Organisation for Economic Co-operation and Development (OECD)— also made corrections to their 2020 global economic projections from previously an optimistic growth above 2% to minus more than 4%.?
Indonesia's economic recession has also received global attention amidst the government's hesitation in responding to the pandemic. After growing at an average of 5% during the 2015-2019 period, the pace of Indonesia's economy stopped abruptly in 2020. The ADB, World Bank, IMF, and OECD have even cohesively revised Indonesia's 2020 economic outlook to be decreasing, from an optimism above 5% to minus 1.5% then to minus 2.4%. The multilateral institutions' forecast is not significantly different from the Indonesian Government's pessimistic projection range—minus 2.2% to minus 1.7%.?
The direction of the economic movement is consistent with tax performance. This is because the amount of the tax payment depends on the economic capacity (income and purchasing power) of taxpayers. Consequently, under normal circumstances, the growth of tax revenues is naturally influenced by economic growth and inflation. When using the assumptions of economic growth (5.3%) and inflation (3.1%) in the 2020 State Budget, tax payments are expected to grow naturally above 8%.
Yet the reality is not as expected. Economic stimulus policies in the form of social assistance and tax incentives are insufficient to prevent the national economic downfall. Instead of growing, the economy declined by the range of -2.2% to -1.7% even though the inflation rate was managed to be maintained at a low level of 1.68%. Taking account of the natural conditions of the aforementioned economy, the tax revenue should have stagnated or even if it had fallen, it would not be more than minus 0.5%. In fact, the tax revenue plunged to minus 19.7% in 2020, leaving a fiscal deficit twice as wide as it should be—which is only 3% of Gross Domestic Product (GDP).
The story will certainly be different in the new year 2021, which is, as always, greeted with hopes, especially with the discovery of the Covid-19 vaccine and the beginning of gradual vaccination in a number of countries.
Unfortunately, new uncertainties continue to emerge. As many countries are competing to produce the Covid-19 vaccine and start vaccination, news emerged that the mutation of the Coronavirus is spreading faster and possibly more deadly. This new variant of Coronavirus that spreads throughout the United Kingdom (UK) is known as "Super Covid" or "Super Mutant.” Meanwhile, the Nipah virus with a 75% mortality rate is spreading rapidly in Malaysia and is feared to be a new pandemic in Asia. In short, both types of the new viruses are more dangerous and no vaccine or cure has been found.?
New challenges and hopes also arise from Uncle Sam. At least, Joe Biden, the 46th president-elect of the US provides a breath of fresh air to the people of the world who have had enough with Donald Trump's controversial policies.
In contrast to his indifferent predecessor, Biden, who is paired with Kamala Harris, is more concerned about the Covid-19 pandemic handling. Hours after being officially sworn in, Biden signed 15 executive orders aimed at improving federal action on the coronavirus crisis that has claimed the lives of more than 400,000 US residents. Biden targeted 100 million vaccinations in his first 100 days in office.
Biden and Harris also continue the American Relief Plan program by submitting additional subsidies and social assistance budgets to the US Congress. The Former Vice President of Barack Obama also rescinds Trump's policy on eliminating protections for federal employees, including rules that make it easier to hire and fire public servants. In that case, Biden asks the Labor Department to provide a federal government minimum wage of USD15 an hour and guarantees unemployment insurances for those who refuse dangerous jobs.??
Further, Biden annuls Trump's policies on climate change, immigration, and racial relations. The re-joining of the US in the 2015 Paris climate agreement and the cancellation of the controversial Keystone XL Pipeline are Biden's policies that have received positive responses from environmentalists. The President-elect Biden and Vice President-elect Harris are also expected to ease tensions in the trade war between the US and China.
In terms of taxation, in their campaign, Biden and Harris promised to impose higher taxes on wealthy people and corporations to create a fairer tax system. The Democratic politician also urged the merger of federal and state taxes.?
Biden and Harris come up with three tax increase scenarios, first, raising the tax rate on an income over USD400 thousand to 39.6% from 37%, second, increasing the tax rate on an investment income above USD1 million to 39.6%, and third, imposing an additional income tax of 12.4% for workers earning more than USD400 thousand per year, the tax burden of which is shared between employees and companies.
Biden also explicitly stated that he would tax the US’ digital giants, such as Apple, Google, Amazon, and Microsoft, especially on an income received by a corporation from business activities abroad. In essence, what Biden will do is in stark contrast to Trump's protectionist, inward-looking, and confrontational policies.?
Biden's economic policy, popularly known as Bidenomic, is somewhat of a relief to the Indonesian Government, particularly related to the government's plan to tax non-resident tax subjects that sell goods or services to consumers in Indonesia online.?
In the Trump era, the digital tax policies of Indonesia and several countries were strongly opposed by the US government because they were considered discriminatory and burdensome to the US’ digital companies. After being questioned by the United States Trade Representative (USTR), the dispute of digital tax between Indonesia and the US is currently extending to the World Trade Organization (WTO). Again, Indonesia's diplomacy and negotiation skills are being tested as a sovereign country.
In general, the taxation challenges in 2021 are no less complicated than those in 2020. While the toughest test of the last year was the Covid-19 virus, which triggered an economic recession, in 2021 the challenges will increase with the outbreak of the Super Covid and Nipah virus. Apart from that, a series of natural and non-natural disasters is also a welcoming challenge at the beginning of the year, which requires serious attention. All of these have not been taken into account by governments or multilateral institutions when projecting or compiling economic targets for 2021, including tax payments.?
Assuming an economic growth of 5% and inflation of 3%, the tax revenue in 2021 naturally grows at least 8%. However, in the 2021 State Budget, the tax revenue target is set at IDR1,229.6 trillion or only grows by 2.6%. The government argues that the target is set by reconsidering the role of taxes in supporting economic recovery. The acceleration of Value Added Tax (VAT) refunds, incentives of Income Tax Article (ITA) 22 on import, government-borne taxes, as well as tax holidays and tax allowances are a series of fiscal facilities that will proceed this year.
With a lower growth target than its natural growth, there should be no reason for tax authorities to repeat the shortfall. Expansion of the tax base by starting to intensify the taxation of electronic economic transactions should ideally compensate for the decrease in tax payments from conventional sources affected by the pandemic.
The large portion of the underground economy also poses a challenge for the tax authorities. In this case, the tax extensification should collaborate with local governments by targeting the informal business sectors.
In addition, it is also necessary to transform the tax service system that educates, facilitates, and adapts to the increasingly digital lifestyle of taxpayers. In other words, the development of tax information technology becomes a necessity to optimize services, strengthen supervision, as well as systematically improve taxpayer’s voluntary compliance.?
Lastly, related to the effectiveness of the utilization of tax data and information from third parties, such as banks or financial institutions, the implementation of Automatic Exchange of Information (AEoI) and the Law on Financial Information Access for the Purpose of Taxation requires cross-institutional coordination to be effective in increasing the tax base. The Directorate General of Taxes (DGT) also needs the support of other authorities authorized to limit cash transactions in order to succeed in its missions.
The point is, don't be like the-chicken-or-the-egg, which is only busy looking for the root of the problem. The government and tax authorities cannot plead for a shortfall due to high economic targets and tax revenues. Many tax incentives should not be an excuse if it is on target.?
Hopefully, despite the uncertainty, the government successfully secures tax revenues this year.?
**) A short version of the article was published in CNNIndonesia.com on 5 February 2020