Distrusted taxpayers

Distrusted taxpayers

After more than a decade of impressive achievements in the tax system, as indicated by the significant broadening of the tax base and the annual average increase of 24 percent in tax receipts, we were surprised to learn that tax assessment is now the biggest problem faced by foreign businessmen in Indonesia.

Most of the around 75 foreign businessmen attending the Economist Conferences' Roundtable with the Indonesian government in Jakarta last week complained about heavy-handed treatment by tax officials. They alleged that tax officials never believe their tax assessments and that the T-men always make their own assessments with which to force individual negotiations. That has caused uncertainty about tax liability.

We are fully aware that no tax system in the world is simple or easy to comprehend. That is why, in the first place, the government totally reformed the tax system in 1983 and introduced completely new laws on general tax administration, income, value added and property taxes. All agree that the new laws, which were further amended early this year, are much less complex and easier to comprehend. The laws also minimize exceptions and reduce the scope of discretionary bureaucratic judgment.

Another most outstanding element of the new tax system is the self-assessment principle to replace the previous one whereby tax liabilities were assessed by tax officials through direct negotiations with the taxpayers.

The self-assessment system is supposed to minimize direct negotiations between the taxpayers and tax officials. Obviously, as Tax Director General Fuad Bawazier has often asserted, the self-assessment system is not a permit for taxpayers to assess their tax liabilities however they wish.

Nonetheless, the puzzling question raised by the foreign businessmen's complaints is: Why tax officials approach those foreign corporate taxpayers with such distrust.

True, as Fuad has argued, not all businessmen are honest about their tax assessments. But we believe that foreign companies, many of which are units of multinational corporations, should be more capable of assessing their tax liabilities as their books are usually audited by major accountancy firms with international reputations. Moreover, they always have highly skilled tax consultants on their staff. In fact, we should magnanimously acknowledge, that tax compliance among foreign companies is much higher than that among domestic firms whose financial accounts are often questionable.

Part of the problem, we think, is that the self-assessment system has not yet been supported by a reliable data network or a computerized information system which enables tax officials to cross-check the data of taxpayers. Part of this problem is being addressed with guidelines from the central bank and tax directorate general which requires borrowers applying for bank loans of more than Rp 30 million to support their applications with copies of their annual income tax returns (assessment forms). But the process of building up such a reliable computerized data system will require a long time.

The other problems are the difficult, arduous process of objection and appeal in cases of disagreements between the taxpayers and tax officials. This hurdle often prompts taxpayers to opt for "negotiations" with disagreeable tax officials.

But another problem which is actually inherent within the whole bureaucracy, due partly to the extremely low pay of civil servants, is the inadequate supervision of officials that makes it much easier for corrupt and recalcitrant officials to evade detection and punishment.

The tax directorate general indeed is still faced with the formidable task of not only collecting a steadily larger amount of revenue for the state budget but also improving its administrative capability by increasing the number of skilled administrators and auditors. As if that is not enough, the directorate general is also coping with the delicate task of improving the integrity of its poorly-paid personnel who, due to the characteristic of their job, constantly face great temptation.

We think the tax directorate general, being faced with so many formidable challenges, should set a better set of priorities for checking and auditing taxpayers to achieve the maximum result. But we believe foreign companies should not be on top of its list of priorities.