Government sticks to plan to tax foreigners' overseas income

JAKARTA (JP): The government said on Friday it would stick to its ruling on taxing expatriates' overseas earnings despite concerns that the policy might impede foreign investment.

Director general of tax Machfud Sidik denied a foreign media report that he had softened his stance over imposing income tax on expatriates' overseas earnings.

According to media reports, Indonesia was awaiting negotiations on tax treaties with other governments before it would require expatriates to pay their income tax in full.

But Machfud acknowledged that his office faced difficulties in fully imposing the tax ruling due to lack of clean personnel and qualified data.

"It is a matter of weakness in law enforcement against expatriates," he said, adding; "tax payers everywhere are the same, there are naughty expatriates too."

According to him, only 20 percent of expatriates are registered tax payers.

Based on last year's amended tax law, foreigners working or living in Indonesia for more than 183 days in a 12-month period must report all their income, including that of overseas income to the local tax authority.

Machfud said that to fully comply with the ruling, the government had to work with other countries' tax administration.

At present, he said, the government planned to revise some of their treaties because they had become outdated.

For example, an expatriate who should pay 20 percent income tax to the Indonesian government was only charged 10 percent because of a treaty with another country, he explained.

But Machfud said that renegotiation of these treaties was difficult, as some governments were protective of their tax information.

Another problem was the prevailing bribery practices among tax officers in Indonesia.

"In enforcing our law on them (expatriates) we must work smart, gather accurate evidence, and not seek their mistakes," he said.

Meanwhile, Machfud said the government decided to exempt income taxes on interest gains from banks savings and time deposits of up to Rp 7.5 million (about US$790) following public protests.

The new income tax ruling on interest gains was issued to clarify the government regulation No 131/2000 introduced on Dec. 15, in which the income tax rates on earnings from the interest of banks savings and time deposits would be increased to 20 percent from 15 percent.

Under the regulation, all interest gains from banks savings, time deposits, checking accounts and Bank Indonesia Certificates are subject to 20 percent income tax.

The latest ruling which was issued on Feb. 1, stipulates that only interest gains of over Rp 7.5 million are affected by the regulation.

Under the new ruling, banks saving accounts of up to Rp 625 million in value, with an interest rate of 12 percent per annum, are not only freed from the income tax hike, but have instead become tax free.

But Machfud said he was optimistic that the target to increase tax receipts from the interest gains to Rp 10.4 trillion this year from Rp 2.4 trillion last year could be achieved despite the new tax policy.

The government issued the decree, following a four-week study on complaints that the rise in the tax rate would trigger a capital flight.

Machfud dismissed the worries, saying that local banks offered higher interest gains that would offset the five percent income tax hike.

He added that a recent central bank's ruling to limit offshore transaction further lifted bankers' fears of capital flight.

Although the regulation on the tax rate increase had become effective as of Jan. 1, the government delayed its implementation by one month to allow a team to evaluate the banks' complaints.

Chairman of the Association of Private National Banks (Perbanas) Gunarni Soeworo said the association welcomed the government's move.

"Our primary fear had been that of capital flight, but Bank Indonesia's new regulation has helped reduce that," she said. (bkm)