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.