Tending to the big fish

Tending to the big fish

The opening of the first Large Taxpayers' Office (LTO) in
Jakarta earlier this week is part of the concerted effort to
ensure full tax compliance through better, more efficient
administration and auditing.

Since the Jakarta LTO will be the model for other LTOs that
will be set up in the provinces, the government should see to it
that the new institution indeed provides better tax
administration services to taxpayers. This is important to remove
from the outset concerns among large taxpayers that they will be
the main target for what the public widely perceives to be one of
the country's most corrupt public institutions.

The LTO's initial emphasis on the 200 largest corporate
taxpayers is only a matter of priority designed to achieve
optimum results, because these companies account for almost 25
percent of the country's total tax receipts.

That our tax administration is grossly inefficient and corrupt
is easy to deduce from the very low rate of tax collection. For
the current fiscal year, for example, total tax revenue is
estimated at only about 13 percent of gross domestic product,
compared to 25 percent to 40 percent in other ASEAN countries.

Most analysts estimate that tax collection remains extremely
low in proportion to the potential tax revenue, or about 50
percent of corporate and personal income taxes and 55 percent of
value added taxes.

True, tax evasion and fraud occur in every tax system, but tax
noncompliance in Indonesia is unusually widespread because of the
small chance of being caught, collusion with corrupt tax officers
and the inadequate number of competent tax auditors.

But in all fairness to the tax office, the massive tax evasion
should also be blamed on the low tax culture, which in turn is
bred by the public's negative perception of the government as a
corrupt system. Many potential taxpayers might simply think, "Why
bother to pay taxes if most of the money will eventually end up
in the pockets of corrupt officials."

Better administrative services and more effective audits are
therefore the most vital requirements the LTO has to meet in
order to enable it, as a new institution, to operate properly
with a high degree of credibility, to make it different from
other tax offices.

It is encouraging to learn that these prerequisites were
indeed central in the thought process behind the establishment of
the LTO, as can be seen in the thorough screening of officials
recruited for the office and the granting of special remunerative
incentives for LTO officials.

One may argue that high salaries cannot guarantee honest
officials within a highly corrupt system. But even more
impossible would be getting competent and honest staff if the pay
scale strictly followed the inhumanely low civil service salary
standards in the country. As a completely new institution, the
LTO is better positioned to insulate itself from the corrupt
system by making the right choices in the recruitment of its
officials. But this is possible only if the LTO is able to offer
better remunerative packages.

The LTO certainly cannot work properly without a computerized
information system manned by competent and honest officials. This
is not only because of the huge amount of income tax and value
added tax revenue it administers, but because LTO officials must
also check or audit numerous complex transactions by large
corporate taxpayers. This is especially true if the taxpayers are
subsidiaries of multinational companies which do a lot of
intracompany deals, to ensure that they meet their obligations
fully according to the tax book.

Given the different characteristics of the business operations
of large corporate taxpayers, and the many complaints raised by
taxpayers about what they consider arbitrary decisions by tax
officers regarding tax liabilities, the LTO obviously needs to
develop and assign specialist tax auditors to each major business
area to minimize disputes with taxpayers over the interpretation
and enforcement of tax laws. Too frequent disputes could breed an
environment of distrust between tax officials and taxpayers that
is certainly not conducive to tax compliance.

Most important for the LTO to be able to accomplish its
mission is that from the outset it sets and enforces a strict
code of conduct, is supervised by an effective internal audit
department and opens a hot line for taxpayers to report bad tax
officials.