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.