Government Urged to Implement Multi-Layered Oversight to Prevent Tax Avoidance in Planned International Financial Centre

A senior academic has cautioned that the government’s plan to offer special incentives to investors in the proposed International Financial Centre (PFII) must be accompanied by stringent, multi-layered oversight to prevent the facility from becoming a conduit for tax avoidance. The warning comes as the government and the House of Representatives deliberate the legal framework for the new financial hub.

Rahma Gafmi, a professor at Airlangga University’s Faculty of Economics and Business, stated that the most critical defence is the implementation of economic substance rules. She argued that the government must require companies operating in the PFII to demonstrate genuine economic activity, including maintaining a physical office, employing an adequate number of local staff, and incurring operational expenses that reflect real business presence. “Entities that are merely paper companies without real activity must be denied registration,” she said.

To combat the risk of round-tripping, where domestic funds are disguised as foreign direct investment, Rahma urged the establishment of a centralised registry for ultimate beneficial owners. This system must provide real-time, transparent data to tax authorities and law enforcement. She also called for an integrated supervisory framework linking the Financial Services Authority (OJK), Bank Indonesia (BI), and the Directorate General of Taxes (DJP) to automatically flag suspicious fund flows.

Rahma further recommended the creation of a dedicated supervisory unit within the PFII with cross-sectoral data access to verify the alignment of financial transactions with tax obligations. She stressed that the centre must comply with international standards, including the OECD’s Automatic Exchange of Information (AEOI) and Common Reporting Standard (CRS), to avoid being placed on a grey list. The tax system should also align with the OECD’s Pillar Two global minimum tax framework to prevent aggressive profit shifting.

She insisted that tax incentives should not be offered as a “blank cheque” indefinitely. Instead, they must be tied to conditional contracts with key performance indicators such as actual investment realisation, quality job creation, and technology transfer. The government should conduct periodic evaluations and retain the right to review, adjust, or revoke incentives if companies are found to be engaging in tax avoidance practices detrimental to the state. Rahma also called for regular independent audits by reputable international firms and a protected whistleblower channel to report suspicious activities, warning that without institutional independence, the oversight function would be compromised by the drive to attract capital.