Indonesia must craft a long-term policy to clamp down on tax evasion.
As the largest Southeast Asian country with abundant natural resources, Indonesia still encounters difficulties in strengthening its economic base. Even though it started to show signs of recovery following the reformation era of 1998, state revenues are too weak to support the country’s economy, especially with its increasing population.
Many observers believe that Indonesia, as a developing nation that relies heavily on taxes, remains unable to boost its income through increasing tax rates. Over recent years, allegations have surfaced over the government’s taxation-related corruption. According to data by Indonesian Corruption Watch, the country has suffered losses of nearly $10 billion due to tax-related corruption.
But is corruption the main cause of Indonesia’s lack of revenue?
If examined further, the fundamental problem is not tax-related corruption. Rather, it is due to Indonesia’s loss of income tax from its wealthy citizens who store money overseas. In recent years, the middle-class has experienced a significant growth, which has resulted in an increased tax burden. As a result, Indonesian tycoons gradually move their assets abroad to escape income tax.
Singapore is a haven
Singapore is well-aware of the rising wealth of Indonesians. Banks in the city state offer a variety of benefits to guarantee the confidentiality of customers, and favorable interest rates are set to entice foreign clients. Coupled with a stronger economic system and political stability, Singapore has become a highly strategic location for wealthy Indonesians to store their savings and escape income tax at home.
Indonesian assets in Singapore amount to approximately $300 billion. A significant portion of this is used to strengthen Indonesian foreign exchange reserves. In fact, a survey by Merrill Lynch-Capgemini estimates that a third of Singapore’s wealthy residents are Indonesian. Out of 55,000 rich people in Singapore with a total wealth of around $26 million, 18,000 are from Indonesia.
Interestingly, this money does not stop in Singapore, but also spreads from there to drum up business activities in Indonesia.
These conditions have led to claims that the main driving force behind the Singaporean economy is Indonesian tycoons. In other words, the benefits from investors who conduct business activities by dredging natural resources in Indonesia are reaped by states like Singapore.
How Do They Do It?
There are three different methods that Indonesian businessmen use to move cash overseas.
First, an individual could choose to reside in Singapore so no law is violated at home or abroad. This practice is successfully carried out by Sukanto Tanoto, the fifth richest man in Singapore who was suspected by Jakarta as the mastermind of tax evasion through his company, Asian Agri.
Second, Indonesian businessmen move money overseas via the services of professional consultants. For the wealthy, it is not difficult to pay legal and financial advisors to outsmart the taxation system in both countries. The objective is not explicitly to hide wealth, but to control the balance of income and in what form the cash is being transacted.
Finally, the last way is through secret bargaining with Indonesian officers. Many Indonesian businessmen residing in Singapore are wanted by authorities back home, including Samadikun Hartono, Bambang Sutrisno and Agus Anwar. These tycoons are believed to still have assets and businesses in Indonesia.
In late 2014, Indonesian Finance Minister Bambang Brojonegoro flew to Singapore and discussed issues related to the state’s willingness to exchange banking data. However, over a year has passed and the plan has not been implemented. Singapore’s banking assets are highly important to its economy. It is impossible for the state to lose global trust in its confidential banking system that has been built over recent decades.
If we look at the fragility of the Indonesian economy, it is inversely proportional to the strength of the Singaporean economy. Indonesia cannot expect Singapore to share banking information. Nor can Jakarta expect the world to put pressure on Singapore.
Political Pressure on Singapore
Indonesia seems to have no idea how to locate the money of Indonesian businessmen in Singapore or to look for tax evaders. Therefore, Jakarta is planning to implement a tax amnesty, which is expected to start later this year. The system aims to entice Indonesian tycoons to move funds from Singapore to Indonesia without risk of prosecution.
However, it is believed that the policy would not have a significant impact on the Indonesian taxation sector. Until today, there has been no formal plan over how to implement this tax amnesty. As a result, Indonesia remains weak and no one can guarantee that the money will ever go back to the country.
It is important to note that the amnesty program will not increase the total amount of Indonesian tax in the long-run. This system is simply a popular policy with short-term goals in order to boost tax revenue—a quick fix that the government thinks will improve state finances.
The tax policy should instead be accompanied by fiscal improvement with long-term goals in mind. Indonesia should be more rigorous in its monitoring of tax evaders. Actions that can be taken by Jakarta include supervising financial transactions as much as possible; exerting efforts to reduce cash transactions; strengthening tax audit laws; and increasing penalties for tax crime. This strategy is the ideal path for Indonesia to clamp down on tax evasion.
However, it will certainly not be easy, given the tricks that corporate tycoons will show before the government implements its plan. The rampant practice of transfer pricing and sophisticated offshore systems will be more difficult for the government to monitor.
If Indonesia is still unable to clamp down on tax evasion, the country has one last weapon to pull its money out of Singapore: to put political pressure on the government.
Indonesia could force Singapore to send the money back, as well as to investigate allegations of money laundering and tax evasion. Jakarta could adopt the political pressure of the United States, which was recently successful in forcing banks in Switzerland to agree to an investigation of American billionaires who store cash in Swiss banks.
Indonesia has an opportunity to apply political pressure given the economic potential of the country, which is the largest market for products and services from Singapore. But it seems impossible to do so as President Joko Widodo has pleaded for Singapore to invest in Indonesia.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.