Tax amnesty: A new start, not the end game

Tax amnesty: A new start, not the end game

John A. Prasetio
Jakarta

Tax amnesties always invite debates and controversy. Advocates
of amnesties argue that a they will increase voluntary
compliance. Individuals with past evasion are no longer locked
into continued tax evasion. They get the opportunity to enter or
to reenter the tax system. Critics, however, contend that tax
amnesties create moral hazards with honest taxpayers viewing them
as an unfair break for tax cheats.

Indeed, tax amnesties have been used in many developed as well
as developing countries.

Argentina has offered numerous tax amnesties, but they have
not been widely viewed as a success. The clear lesson from the
Argentinean experience is that a tax amnesty without structural
adjustments in the underlying fiscal system is likely to fail.

The 1997 amnesty in India, on the other hand, collected US$2.5
billion from over 350,000 individuals and was considered a
tremendous success. This amnesty was accompanied by an extensive
media blitz on radio, television, billboards and newspapers,
using movie stars, sports figures and other celebrities.

The Indian government also introduced a new tax system at the
conclusion of the tax amnesty, offering substantial new features
such as reduction in tax rates, elimination of double taxation of
dividends, and a significant increase in enforcement efforts
after the amnesty.

In considering a tax amnesty plan for Indonesia, we must begin
by defining precisely the problems that have brought our tax
system to its current state.

Are current tax compliance problems in the country mainly due
to the quality of tax enforcement, or are they attributable to
the numerous gray areas as well as complexities in the existing
laws, or marginalization of taxpayers, weak administration, high
tax rates, technology, or even other matters? At the very least,
an amnesty, together with a major change of the tax system and a
reorganization of the tax administration, should add up to a
total solution to address key problems in the existing tax
regime.

In Argentina, taxpayers viewed the amnesty requirements as too
burdensome, and the government did not build sufficient
credibility among the public in wanting a new beginning and a
different relationship with taxpayers. The Argentina experience
is instructive; to avoid failure in an amnesty program the
government of Indonesia must be prepared to create a new
environment where taxpayers will recognize that their key
concerns regarding the old system and practices will be
adequately addressed, and that under the new regime, the benefits
of evasion will no longer exceed the cost.

It is important that the government not only introduce a
credible amnesty program, but must also have credibility in its
commitment to reform. Two identical amnesties in different
political environments with different perceptions of the
government's commitment to comprehensive tax reform will induce
different levels of success.

There is always a controversy about who will be eligible for
participation in a tax amnesty, particularly on how to deal with
known delinquents. The standard practice is to allow all
taxpayers with previously unpaid taxes to participate in the
amnesty program, as long as their unpaid liabilities are not
known to the tax administration.

A variation on this is to make all taxpayers eligible for the
amnesty program except in cases or in periods where the
authorities have initiated criminal prosecution. In the 2003
amnesty program in Italy, a taxpayer involved in pending tax
litigation, such as one in the midst of an appeal process, can
settle the litigation by paying a percentage of the value of the
case. Limitation on the taxes that would be subject to the
amnesty will necessarily limit the type of taxpayer who can
participate in the program.

A more critical challenge for Indonesia, however, is on
designing a plan that will stimulate the repatriation of capital
that had illegally left the country, and to motivate hard-core
evaders to participate. For one, there must be a belief that the
amnesty is a one-time opportunity.

As amnesty means forgiveness, the amnesty must specify the
amount of unpaid taxes and penalties that the tax administration
will forgive, and it must also specify whether the amnesty will
waive any civic or criminal penalties relating to previously
unreported wealth and income.

Given the limited resources of the tax administration, the
effect of amnesty on their workload needs to be carefully taken
into account. A successful amnesty program with widespread
participation will increase the workload of the tax
administration massively and prevent the administration from
devoting significant resources to law enforcement years after the
amnesty period ends.

To overcome this challenge, in the 2003 amnesty program in
South Africa the government established an independent body
responsible for evaluating all applications for amnesty, and for
granting or denying approval in respect to such applications.
This body was also charged with providing to relevant ministries
a list of all applications for tax relief in a way that did not
disclose the identity of the applicant openly.

The Indonesian government and the business community have come
to see that attractive tax policies are needed to put Indonesia
back on investors' radar screen. Without an improved tax
environment, it will be difficult to sustain the timid investment
recovery that began toward the end of last year.

Very soon, a special committee of the House of Representatives
will begin their deliberations on the three drafts of tax
legislation and will determine whether these draft tax laws
proposed by the government will truly create an investment-
friendly environment. An amnesty program as part of a larger
effort to reform our tax system could serve as a useful
transition mechanism to allow both the tax authorities and every
taxpayer in the country a new start, so we can all start focusing
on our future.

The writer is vice president of the Indonesian Chamber of
Commerce and Industry (Kadin) and head of its international
cooperation department.