Commentary: How Indonesia could boost its tax amnesty programme further

Commentary: How Indonesia could boost its tax amnesty programme further.

SINGAPORE: Launched with much fanfare some time back, Indonesia's tax amnesty programme has gotten off to a slow start, with barely 1.5 per cent of its total targeted amount booked thus far. Even if the government target has been too lofty to begin with, the slow pace has brought a sense of anxiety to market players.

While we remain cautiously optimistic that the pace of take-up will accelerate in the coming months, as participants figure out the programme's details and sort out their legal and financial preparations, we also think more tweaks can be made to address some lingering concerns.

For example, offering ways for participants to pay extra for additional features such as installments of the penalty tax rates, instead of lump-sum, upfront payment now, as well as a shorter lock-in period compared to 3 years, could make a difference.

IT AIN'T OVER TILL IT'S OVER

The Olympic Games may have drawn to a close, but that does not mean its spirit cannot live on. In particular, its motto of "Citius, Altius, Fortius" – Latin words for faster, higher, stronger – should be adopted by Indonesia's Finance Ministry at this point.

Despite hard work from officials there, the tax amnesty programme has gotten off to a slow start, with IDR57.1 trillian (USD$4.3 billion) of assets declared thus far, comprising of just 1.43 per cent of the admittedly lofty target that the ministry had set itself. As they face pressure from within and beyond to show greater progress for the 9-month-long programme, the idea that one can reach for the gold medal, because the race is still very much on, and every little ounce of extra effort will still make a difference, can be a powerful one.

To that end, with Sri Mulyani back at its helm, the Finance Ministry has launched a number of new regulations to further broaden the appeal of the tax amnesty programme, as well as to clarify lingering uncertainties. Regulations 122 and 123 of August 8, in particular, opened up a broad array of new asset classes in which repatriated money can be invested during the three-year lock-up period.

Apart from investments into bonds issued by Indonesia's sovereigns and state-owned enterprises (SOEs), for example, the latest regulations allow for investments into companies, as long as they are domiciled in Indonesia, either through direct stakes or via venture capitals (VCs). For those with lower risk appetite or those who are simply more comfortable with tangible and physical forms of wealth, the regulations allow for holdings of gold bullion and properties, as well.

Meanwhile, the government would also allow for withdrawal of returns and interests on declared assets, and transfers between participating banks, as long as the initial principal sums stay the same for the three-year duration.

FURTHER TWEAKS

The underlying philosophy of the latest initiatives appears to be flexibility - that as long as you participate to redress old wrongs, the government is willing to listen to your concerns and work with you to find optimal ways out. The broadening scope of eligible assets in which repatriated money has to be parked seems to be a response to the sense that they had been too narrow previously, particularly when set in contrast with the whole gamut of the global investable universe that such money could have gone into if it stays in sophisticated offshore financial centres.

Viewed from that angle, we believe that the process of adjusting the regulations to better reflect concerns of would-be participants and thus boost the ultimate take-up rate has not ended. We will not pretend to have any particular insights into what exactly would constitute any further changes going forward, but we do think that the existing set of regulations could still be tweaked further, potentially, to boost the programme's appeal even more.

Take the penalty tax rates, for instance. At as low as 2 per cent for on-shore and to-be-repatriated assets that are declared by the end of September, it is hardly punitive to be sure, especially when compared with top bracket rates of 25 per cent for corporations and 30 per cent for individuals. In fact, such low rates have invited criticism from some observers, including an OECD official who argued that it is unfair to compliant taxpayers.

Still, the reality is that, for those endowed with large sums of wealth, even such relatively low percentages make for a hefty quantum of money to be handed over at one shot. For those less blessed, even if the sums amount to less, there is nevertheless the potentially tricky issue of liquidity needs.

Even if one's heart is willing in parting with money up-front to fulfill the amnesty requirements, the cash flow constraints that may be placed could limit enthusiasm, especially for smaller businesses running on thin margins with on-going working capital needs.

Hence, one way of making things more palatable for participants – and, thus, boosting the potential take-up rate – would be to offer the possibility of settling tax liabilities in installments rather than lump-sum, up-front payment as of now. The payments could perhaps be spread over the duration of the three-year lock-up period. To retain the incentives for those who are able or willing to pay the penalty tax up-front to still do so, those opting for the protracted payment scheme could be made to pay additional interests on their unsettled liabilities, with rates tied to certain government bond yields, perhaps in half-yearly installments. If they fail to pay these future tax liabilities for the particular period, the government should have recourse to withdraw the correct amount from the relevant accounts at participating banks.

Meanwhile, the issue of a three-year lock up period has also often been highlighted as one reason for caution in repatriating funds home. No matter how broad the universe of investable assets the government can offer is, there remains some discomfort over not being able to have complete freedom over "your own money" in the time period.

Here, there is perhaps space for another carefully designed adjustment. The price of money, that is, interest, can again be used as a clearing mechanism. For those that indeed value free rein over their money, the lock-up period could be shortened, perhaps halved, to 18 months, but with the application of a higher penalty tax rate. Given that this particular category of participants falls between those with offshore assets but who choose to repatriate, and those who opt to keep them offshore, tax rates can be a simple average of the two.

Those who declare their assets in the first tranche ending September this year, for example, would thus pay 3 per cent, the average of 2 per cent and 4 per cent payable by existing categories of participants. This can be done either up-front in a lump sum, or, following our earlier discussion, paid in installments with added interest during the 18-month period.

ENOUGH CARROTS, WHERE'S THE STICK?

To be sure, all the potential tweaks we touched on above can appear to be instruments for further mollycoddling of tax evaders on the surface. After all, with the tax amnesty programme as it stands, they are already offered a magnanimous way out, a chance of getting a blank slate after years, if not decades, of evading their responsibilities as citizens.

One vein of thinking would naturally be, why must the government go out of its way even more to accommodate the lingering concerns of these tax evaders, particularly when by 2018 there should be no place left for them to hide?

The answer? Reality.

The reality is that the only major stick that the government can wield remains the 2018 Automatic Exchange of Information framework. Given that it is not yet in place, the government can only really brandish a potential weapon, not an actual one at this point.

Eventually, Indonesia's tax department will have what it takes to take what taxpayers have. For now, however, because the stick cannot yet work optimally, the onus is thus on providing carrots that are as enticingly sweet and tender as possible. As discussed above, these have already brought about regulatory changes that allow for greater choice in captive investments. They may yet bring about further changes, including ways for participants to pay extra for what they deem important, either via installment schemes or options for shorter lock-in periods.

A lot is riding on the success of the tax amnesty programme. It used to be more unequivocally a bonus for the country, a good thing to have if it takes place but not too big a deal if it does not. However with so much expectation built into it, the scheme increasingly risks becoming a baseline necessity.

While we remain cautiously optimistic that take-up rate would accelerate once participants better understand the operational details of the programme and have enough time to make the necessary legal and financial preparations, we think more could be done still.

Partly because of the anticipation of a successful programme, Indonesia has received substantial chunks of portfolio inflows across both equity and government bond areas. Flows into the latter, in particular, are inching towards the US$12 billion mark, boosted further by a pathetically low-yielding global environment. The risk of disappointment in tax amnesty leading to portfolio outflows thus cannot be dismissed totally, especially if it coincides with another sudden reversal in sentiment towards emerging markets.

Already, Bank Indonesia (BI) appears to have been acting cautiously on its monetary policy front of late. Last week's decision to keep policy rates on hold, despite substantial room given by relatively muted inflation, illustrates that. Indeed, we are of the view that, even though BI is still keen on easing further, with at least one policy rate cut to go by year-end, the central bank is still going to wait for more substantial pick-up in tax amnesty participation before acting. The last thing it wants is to be forced to suddenly double back and hike its policy rates to safeguard Rupiah stability a la Taper Tantrum of 2013.

For now, the central bank is going to focus on making sure that its monetary policy framework adjustment, using the 7-day Reverse Repo rate as the benchmark rate, will continue to proceed smoothly. Thus far, that has indeed been the case, with the interbank market rate hugging the new policy rate closely and helping to develop the country's money market and therefore transmission of monetary policy decision onto lending rates charged by banks.

All in all, we retain the view that Indonesia has a lot more potential positive catalysts to offer investors than negative ones. We just wish to see more active participation in tax amnesty in the coming months for us to be more certain that, ultimately, the programme will see a much faster rate of participation and a much higher amount of declared assets, resulting in a much stronger footing for the Indonesian economy to face what may come on the global front.