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.