Tax amnesty: A new start, not the end game<\/p>\n
John A. Prasetio
\nJakarta<\/p>\n
Tax amnesties always invite debates and controversy. Advocates
\nof amnesties argue that a they will increase voluntary
\ncompliance. Individuals with past evasion are no longer locked
\ninto continued tax evasion. They get the opportunity to enter or
\nto reenter the tax system. Critics, however, contend that tax
\namnesties create moral hazards with honest taxpayers viewing them
\nas an unfair break for tax cheats.<\/p>\n
Indeed, tax amnesties have been used in many developed as well
\nas developing countries.<\/p>\n
Argentina has offered numerous tax amnesties, but they have
\nnot been widely viewed as a success. The clear lesson from the
\nArgentinean experience is that a tax amnesty without structural
\nadjustments in the underlying fiscal system is likely to fail.<\/p>\n
The 1997 amnesty in India, on the other hand, collected US$2.5
\nbillion from over 350,000 individuals and was considered a
\ntremendous success. This amnesty was accompanied by an extensive
\nmedia blitz on radio, television, billboards and newspapers,
\nusing movie stars, sports figures and other celebrities.<\/p>\n
The Indian government also introduced a new tax system at the
\nconclusion of the tax amnesty, offering substantial new features
\nsuch as reduction in tax rates, elimination of double taxation of
\ndividends, and a significant increase in enforcement efforts
\nafter the amnesty.<\/p>\n
In considering a tax amnesty plan for Indonesia, we must begin
\nby defining precisely the problems that have brought our tax
\nsystem to its current state.<\/p>\n
Are current tax compliance problems in the country mainly due
\nto the quality of tax enforcement, or are they attributable to
\nthe numerous gray areas as well as complexities in the existing
\nlaws, or marginalization of taxpayers, weak administration, high
\ntax rates, technology, or even other matters? At the very least,
\nan amnesty, together with a major change of the tax system and a
\nreorganization of the tax administration, should add up to a
\ntotal solution to address key problems in the existing tax
\nregime.<\/p>\n
In Argentina, taxpayers viewed the amnesty requirements as too
\nburdensome, and the government did not build sufficient
\ncredibility among the public in wanting a new beginning and a
\ndifferent relationship with taxpayers. The Argentina experience
\nis instructive; to avoid failure in an amnesty program the
\ngovernment of Indonesia must be prepared to create a new
\nenvironment where taxpayers will recognize that their key
\nconcerns regarding the old system and practices will be
\nadequately addressed, and that under the new regime, the benefits
\nof evasion will no longer exceed the cost.<\/p>\n
It is important that the government not only introduce a
\ncredible amnesty program, but must also have credibility in its
\ncommitment to reform. Two identical amnesties in different
\npolitical environments with different perceptions of the
\ngovernment's commitment to comprehensive tax reform will induce
\ndifferent levels of success.<\/p>\n
There is always a controversy about who will be eligible for
\nparticipation in a tax amnesty, particularly on how to deal with
\nknown delinquents. The standard practice is to allow all
\ntaxpayers with previously unpaid taxes to participate in the
\namnesty program, as long as their unpaid liabilities are not
\nknown to the tax administration.<\/p>\n
A variation on this is to make all taxpayers eligible for the
\namnesty program except in cases or in periods where the
\nauthorities have initiated criminal prosecution. In the 2003
\namnesty program in Italy, a taxpayer involved in pending tax
\nlitigation, such as one in the midst of an appeal process, can
\nsettle the litigation by paying a percentage of the value of the
\ncase. Limitation on the taxes that would be subject to the
\namnesty will necessarily limit the type of taxpayer who can
\nparticipate in the program.<\/p>\n
A more critical challenge for Indonesia, however, is on
\ndesigning a plan that will stimulate the repatriation of capital
\nthat had illegally left the country, and to motivate hard-core
\nevaders to participate. For one, there must be a belief that the
\namnesty is a one-time opportunity.<\/p>\n
As amnesty means forgiveness, the amnesty must specify the
\namount of unpaid taxes and penalties that the tax administration
\nwill forgive, and it must also specify whether the amnesty will
\nwaive any civic or criminal penalties relating to previously
\nunreported wealth and income.<\/p>\n
Given the limited resources of the tax administration, the
\neffect of amnesty on their workload needs to be carefully taken
\ninto account. A successful amnesty program with widespread
\nparticipation will increase the workload of the tax
\nadministration massively and prevent the administration from
\ndevoting significant resources to law enforcement years after the
\namnesty period ends.<\/p>\n
To overcome this challenge, in the 2003 amnesty program in
\nSouth Africa the government established an independent body
\nresponsible for evaluating all applications for amnesty, and for
\ngranting or denying approval in respect to such applications.
\nThis body was also charged with providing to relevant ministries
\na list of all applications for tax relief in a way that did not
\ndisclose the identity of the applicant openly.<\/p>\n
The Indonesian government and the business community have come
\nto see that attractive tax policies are needed to put Indonesia
\nback on investors' radar screen. Without an improved tax
\nenvironment, it will be difficult to sustain the timid investment
\nrecovery that began toward the end of last year.<\/p>\n
Very soon, a special committee of the House of Representatives
\nwill begin their deliberations on the three drafts of tax
\nlegislation and will determine whether these draft tax laws
\nproposed by the government will truly create an investment-
\nfriendly environment. An amnesty program as part of a larger
\neffort to reform our tax system could serve as a useful
\ntransition mechanism to allow both the tax authorities and every
\ntaxpayer in the country a new start, so we can all start focusing
\non our future.<\/p>\n
The writer is vice president of the Indonesian Chamber of
\nCommerce and Industry (Kadin) and head of its international
\ncooperation department.<\/p>",
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