BI to go ahead with mandatory write-off plan

BI to go ahead with mandatory write-off plan

JAKARTA (JP): Bank Indonesia plans to go ahead with its
mandatory write-off policy for banks even though its
implementation will be contradictory to certain tax regulations,
a senior central bank official said yesterday.

Heru Soepratomo, the central bank's managing director for the
supervision of commercial banks, said that Bank Indonesia is
currently preparing guidelines for the write-off regulation.

"We have no plan to delay the issuance of the write-off policy
even though the taxation issue is likely to remain a problem," he
said during a discussion on the effectiveness of write-offs as a
means of dealing with bad debts.

Speakers at the panel discussion, held by the Center for
Fiscal and Monetary Studies, featured I Made Erata, the director
for income tax at the Directorate General of Taxes; Trenggono
Poerwosoeprodjo, chairman of the federation of domestic private
banks; Novyan Kaman, a member of the House of Representatives;
and business analyst Jasso Winarno.

He said that the central bank and the Ministry of Finance will
work together to seek a solution to the taxation problems
encountered when banks write off bad loans. The policy would also
conflict with certain banking laws.

The government allows banks to use a maximum of 3 percent of
their productive assets as a reserve against loan losses. The 3
percent reserve is not taxable because it is categorized as cost.

However, on the borrower's side, once the loans are written
off they are categorized as income and subject to taxation.

At present, writing off is not mandatory for banks.

Heru said that many banks cannot write off their bad loans --
even if they have enough reserves to offset the bad loans -- due
to different interpretations of the regulations on tax payments.

Regardless of Bank Indonesia's decision, conflicts already
exist between the nation's banking and tax laws.

According to tax regulations, a borrower whose loan is written
off a bank's balance sheet must be reported to a local office of
the Directorate General of Taxation. However, according to a law
on banking secrecy, banks are not allowed to report the names of
borrowers to third parties other than the central bank.

Erata said that keeping the names of the borrowers could
facilitate tax evasion because the write-offs are subject to
taxation.

"I think the government should issue a new decree to clarify
the banking secrecy law so that the tax office will not have a
problem in verifying the loans written off by banks," he said.

Members of the House of Representatives have called on the
central bank to be careful about issuing the mandatory write-off
policy.

Soewarno, a House member from the Armed Forces faction, said
that the policy could encourage borrowers to default on their
loans because it will free them from being under the direct
control of the banks.

He said that banks generally have to recoup written-off loans
through the courts or their own internal bad loan mechanisms.

"Some borrowers feel more comfortable knowing their names are
protected under the banking secrecy regulation," he said.

He shared Erata's view on the need for a decree to further
clarify the regulation.

Identifying loan defaulters would help tax offices with tax
verification and make public the means by which loans are written
off.

Bad loans in the country's banking industry totaled more than
Rp 9.02 trillion (US$3.8 billion) as of April this year, of which
Rp 6.38 trillion occurred in state-owned banks. (hen)