IMPROVING TAX COMPLIANCE IN A GLOBALIZED WORLD: TAX COMPLIANCE IN INDONESIA By. Chamelia Gunawan

CHAPTER 1: TAX GAP IN INDONESIA A.

Definition of Tax Gap

Generally, tax gap can be defined as the difference between taxes owed and taxes paid. 1 Similar to many other countries, Indonesian Governments uses tax gap as a tool to measure tax compliance. Brodjonegoro (at that time he was served as the Indonesian Vice Minister of Finance, recently he is the Indonesian Minister of Finance) in his presentation defines tax gap as the difference between tax potency and tax effort. 2 Tax effort is the ratio between the actual tax revenue and tax capacity. 3 Relationship between the tax gap and tax administration measures may be illustrated as follows: 4

Net Tax Gap Gross Tax Gap Enforced Collections

Potential Tax Collection

Compliance Enforcement Actual Tax Collection

1

Voluntary Collections

See Rust Conference 2016 (Improving Tax Compliance in a Globalized World) Questionnaire. Bambang Brodjonegoro, Domestic Resource Mobilization: Case of Indonesia, Presentation on Asia-Pacific Outreach Meeting on Sustainable Development Financing, Jakarta, 10-11 June 2014, pp.12. 3 Idem. 4 John Brondolo and team, Tax Administration Reform and Fiscal Adjustment: The Case of Indonesia (2001-07), IMF Working Paper, 2008, WP/08/129, page 19. 2

Tax gap has three main components, namely: (i) non-filling gap; (ii) under-reporting gap; and (iii) underpayment gap. 5 B.

Methodology of Tax Gap

Indonesian Fiscal Policy Agency (Badan Kebijakan Fiskal-”BKF”) 6 has periodically conducted research to find the potency of tax revenue per sector. Analysis on per sector tax revenue is conducted in order to determine the leading and/or the under tax sectors. 7 Based on BFK report in 2014, data used to determine the tax revenue potency of each sector is business surplus ratio and salary ratio data from output input table of 2008, GDB data based on business classification of 2010-2012, composition data of GDB based on business scale of 2010, and income realization of each sector for period of 2010-2012. 8 C.

Tax Gap in Indonesia

Potency of Non-Oil and Gas Income Tax and Tax Potency of 2012 (trillion Rupiah) 9 Sector

Income Tax of Entity and Individual Potency Realization

1. Farming, Agriculture, Forestry

Tax Gap (100%-ITCR)

ITCR*

26.26

10.1

38.50%

61.50%

2. Mining

140.96

43.48

30.80%

69.20%

3. Industry

120.28

56.48

46.90%

53.10%

9.13

5.55

60.80%

39.20%

5. Construction

47.39

2.95

6.20%

93.80%

6. Trading, Hotel and Restaurant

50.56

16.27

32.20%

67.80%

7. Transportation and Communication

31.33

17.91

57.20%

42.80%

8. Finance

62.2

54.54

87.70%

12.30%

9. Services

50.59

19.35

38.20%

61.80%

4. Electricity, Gas and Drinking Water

10. Unknown** 5

155.08

Brodjonegoro, et.al. BKF is an agency under and responsible to Ministry of Finance; and having duty to formulate, determine and provide recommendation in fiscal policy and financial sector. See Articles 4, 4, 44 and 45 of Presidential Regulation of Republic of Indonesia No. 28 of 2015 regarding Ministry of Finance. 7 Pusat Kebijakan ABPN, Kajian Potensi Penerimaan Perpajakan Berdasarkan Pendekatan Makro, Badan Kebijakan Fiskal, 2014, page 1. 8 Idem. Page 2. 9 Indonesian Fiscal Policy Agency, Kajian Potensi Penerimaan Perpajakan Berdasarkan Pendekatan Makro, Ringkasan Eksekutif, 2014. 6

Total Source: Directorate General of Tax

538.71

381.61

70.80%

29.20%

* ITCR: Income Tax Coverage Ratio, which is a comparison between realization and tax revenue potency. ** Unknown: including in unknown are (i) unclassified income; (ii) error classification income; and (iii) other nonoil and gas income.

Based on the above table, total of income tax revenue potency for non-oil and gas sectors in 2012 compare to its realization is quite significant, namely IDR538.71 trillion (approximately USD40.98 million) 10 and IDR381.61 trillion (approximately or USD29.03 million) 11. Therefore, in total realization of non-oil and gas revenue in 2012 is only 70.80% and there is a tax gap of 29.20%.

CHAPTER 2: IMPROVING ACCESS TO INFORMATION NEEDED BY TAX ADMINISTRATIONS A.

Self-Assessment and Expiry of Tax Examination

Every taxpayer in Indonesia is obliged to fill tax return correctly, completely, clearly and properly sign the tax return. 12 However, the tax authority still has authorization to review and assess the tax return submitted by the taxpayers. After five years, tax return submitted by taxpayer will be consider as valid and true and the tax authority cannot further challenge the tax return. 13 Mechanism for Indonesian tax authority to review and asses the tax revenue are as follows: 1. Review (Penelitian) Review is a series of activities conducted to review the completeness filling of tax return and its attachments including review on the writing and calculation correctness. 14 2. Audit (Pemeriksaan) Audit is a series of activities to collect and process data, statement, and/or proof which conducts objectively and professionally based on an audit standard to test the compliance of tax obligation and/or for other purposes in order to implement the tax laws and regulations. 15

10

Based on Foreign Exchange Transaction Rate of Bank Indonesia dated 4 April 2015, USD1 is equal to IDR13,145, see www.bi.go.id. 11 Based on Foreign Exchange Transaction Rate of Bank Indonesia dated 4 April 2015. 12 Article 3(1) of Law No. 6 of 1983 regarding General Provision and Procedures on Taxation as lastly amended by Law No. 16 of 2009. 13 Article 22 of Law No. 6 of 1983 regarding General Provision and Procedures on Taxation as lastly amended by Law No. 16 of 2009. 14 Article 1(30) of Law No. 6 of 1983 regarding General Provision and Procedures on Taxation as lastly amended by Law No. 16 of 2009. 15 [] of Law No. 6 of 1983 regarding General Provision and Procedures on Taxation as lastly amended by Law No. 16 of 2009.

Before 2015, there was one other mechanism to verify the tax return, namely verification. Verification is a series of activities to test the compliance of subjective and objective obligation or tax calculation and payment based on taxation data and information owned or obtained by Directorate General of Tax in order to issued tax assessment letter. 16 Verification mechanism is provided under Government Regulation No. 74 of 2011 regarding Procedures of Taxation Right and Obligation, however provisions related to the verification under this regulation has been annulled and revoked by the Supreme Court by Decree No. 73 P/Hum/2013 dated 30 June 2014.

B.

Bank Secrecy and Tax Payers Access of Information

Indonesian tax law provides regulation on access of information for tax audit purposes. This regulation is specifically provided in Article 35 of Law on Taxation General Provision which provides: “(1) “if information or evidence from bank, public accountant, notary, tax consultant, administrative office and/or the other third party having relations to the audited taxpayers is required in executing the provisions of taxation legislation, based on a request from the Director General of Taxation, the parties shall give up the requested information or evidence. (2) In the case of the third parties as referred to in paragraph (1) being bound by an obligation to keep it in secrecy, for the purpose of audit, tax collection or investigation into criminal offense in the taxation field, the obligation to keep it in secrecy shall be abolished, except for bank wherein the obligation to kept it in secrecy shall be abolished on the basis of written request from the Minister of Finance.” Based on the above-mentioned regulation, based on request from Directorate General and/or Minister of Finance, expert, such as attorney, tax consultant and even banks are required to provide information requested., in case of tax audit, tax collection or tax criminal investigation. Even there are mechanisms to obtain confidential information for tax purposes, in practice, tax authority in Indonesia is still facing some difficulties to obtain information on taxpayer. Some barriers found by the Indonesian tax authorities in obtaining information due to bank secrecy are: 17 (i) inefficient bureaucratic procedures; (ii) banks are reluctant to cooperate with tax authority in disclosing the required information; (iii) limitation to access data of taxpayers provided by law. In providing information of taxpayer, banks are not allowed to provide financial conditions of a saving customer unless it is specifically written or stated in order or permit from Bank Indonesia [or Financial Services Authority]. 18 16

Article 1(4) of Government Regulation No. 74 of 2011 regarding Procedures of Taxation Right and Obligation. Provision on verification in this regulation 17 Agung Wibisono and Chamelia Gunawan, Pembukaan Rahasia Bank Untuk Kepentingan Pemeriksaan Perpajakan Menurut Perundang-undangan Yang Berlaku di Indonesia, Unversitas Pelita Harapan, Law Review, Volume XI No. 2, November 2011, page. 90-102. 18 Article 8 of Bank Indonesia Regulation No. 2/19/PBI/2000 regarding Requirements and Procedures to Issue Written Order or Permit to Disclose Bank Secrecy.

C.

Access of Information Improvement in Indonesia

Tax authority in Indonesia keep improving their access to the tax payer financial conditions. There is still a lot of room for improvement of access of information. The following are some improvement that has been/may be started in Indonesia. 1.

Tax Lotteries

Tax lotteries is a practice to address the practice of not asking for a receipt by transforming receipts into 'lottery tickets', which will further give incentives to tax payer to collect them and include them in the tax revenue. 19 In Indonesia, in term to the individual tax payer (nonentrepreneur), the so called 'tax lotteries' has not been applied yet. 2.

Electronic Cash Register

Directorate General of Tax is still preparing the implementation of cash register system. This system is planning to be implemented in all Indonesia in 2019. 20 Currently, cash register system will only be implemented in the certain area. 21 D 3.

Credit Card Payment

Recently, on 22 March 2016, Ministry of Finance issued new regulation which regulates regarding credit card data for tax purpose (“PMK 39/2016”) 22. Based on this regulation as per 31 May 2016, 23 bank/credit card issuer entity should provide their customer transaction data to Directorate General of Tax. The customer transaction data shall at least contain: (i) number of credit card; (ii) merchant ID; (iii) merchant name; (iv) card holder name; (v) card holder address; (vi) id/passport number of card holder; (vii) taxpayer id number; (viii) month of billing; (ix) date of transaction; (x) detail of transaction; (xi) value of transaction; (x) limit of transaction. The purpose of the issuance of this regulation is to provide access to the Directorate General of Tax to the shopping profile of individual tax payer. 23 Before, tax authority has no access to the saving account of tax payer due to the bank secrecy. As mentioned in the previous part, tax 19

Laura Mattes, Ditjen Pajak Kenalkan Metoda Baru Cash Register, Kontan.co.id, 30 March 2016, http://nasional.kontan.co.id/news/ditjen-pajak-kenalkan-metoda-baru-cash-register 21 Ditjen Pajak Kenalkan Metoda Baru Cash Register, Kontan.co.id, 30 March 2016, http://nasional.kontan.co.id/news/ditjen-pajak-kenalkan-metoda-baru-cash-register 22 Regulation of Minister of Finance No. 39/PMK.03/2016 regarding Fifth Amendment to Regulation of Minister of Finance No. 16/PMK.03/2013 regarding Specific Type of Data and Information as well as Procedures of Data and Information Submission which related to Taxation. 23 PMK Data Kartu Kredit Berdampak Positif Penambahan Pendapatan Negara, Hukum Online, 15 April 2016, http://www.hukumonline.com/berita/baca/lt5710c9c7b82f3/pmk-data-kartu-kredit-berdampak-positif-penambahanpendapatan-negara 20

authority may access the data of tax payer in case of tax audit, tax collection or tax criminal only and not for the purpose of tax potency. However, there is no incentives provided to tax payers for the payment through credit card or wire transfer. D.

Whistle-blower Program

Whistle-blowing program in Indonesia is provided under Regulation of Minister of Finance No. 103/PMK.09/2010 dated 19 May 2010. Further, on 19 August 2011, Directorate General of Tax has issued Regulation No. PER-22/PJ/2011 regarding Obligation to Report violation and Management of Violation Report (Whistle-blowing). 24 Basic principles of this regulation are to (i) prevent and early detection to the violation of tax officers; (ii) protection to whistle-bowler; and (iii) give reward to the whistle-blower. In these regulations, every official/employee of Directorate General of Tax which see or know any violation have to report such violation to the authorized unit. The whistle-blowing program is not only limited for official/employee from internal Directorate General of Tax or Minister of Finance, but also apply to people from outside Directorate General of Tax which know the violation and/or feel not satisfy to the service of the official/employee of Directorate General of Tax may report it to the authorized unit. 25 In order to protect the whistle-blower, Directorate General of Tax offers protection the whistle blower, by keep the confidentiality of whistle-blower identity. With regard to this whistle-blowing program, Minister of Finance is on the view that provision on whistle-blowing has been implemented effectively. 26 After the implementation of this whistleblowing system, Directorate General of Tax has follow-up and give sanctions to several officials and employee of Directorate General of Tax. E.

Information Centre and Complaint Service Office (Kring Pajak)

Since the beginning of 2008, Directorate General of Tax has operated call center that function as a center for information and complaints. 27 The information and complaint center (i) provides information services, general tax advice and electronic tax application consultancy; and (ii) receives and manages complaints from the public to support the implementation of good governance principles. Based on annual report 2014 of Directorate General of Tax, the information and complaint center provided by Directorate General of Tax has been recognized well and received a lot of achievement such as 11 awards at the national level, 3 awards in the Asia Pacific region, and 2

24

Kebijakan Terkini Direktorat KITSDA, Badan Pendidikan dan Pelatihan Keuangan, Kementerian Keuangan, 1 Agustus 2013, On an official press release, Ade Komarudin, Head of House of Representatives stated that he is hoping the draft of Tax Amnesty discussion will be finished on 29 April 2016. 25 Article 2 of Regulation of Minister of Finance No. 103/PMK.09/2010. 26 Peran “Whistle-blower” Dalam Pemberantasan Korupsi, 24 Desember 2014, Badan Pendidikan dan Pelatihan Keuangan, Kementerian Keuangan, http://www.bppk.kemenkeu.go.id/publikasi/artikel/168-artikel-pengembangansdm/10977-peran-peniup-peluit-dalam-pemberantasan-korupsi. 27 Annual Report 2014, Directorate General of Tax, Ministry of Finance.

awards at world level. 28 However, the annual report does not specify the details of the awards. Below are the table showing the performance of information and complaint services office based on services 2014. Type of Services Information Application Complaint Total

Incoming Call 381,974 71,313 14,983 468,270

Answered Call 346,295 63,154 12,717 422,796

% Answered 90.82 88.56 84.88 90.29

Source: Directorate General of Tax

F.

Draft of Tax Amnesties Law

Currently, Indonesia is still reviewing draft of tax amnesties. On an official press release, Ade Komarudin, Head of House of Representatives stated that he is hoping the draft of Tax Amnesty discussion will be finished on 29 April 2016. 29 After the issuance of this tax amnesty law, people who have hidden asset abroad will not face criminal sanctions, other that flat fee from 1%-6% of the value of the assess, depends on how fast they disclose the property and whether they repatriate such assets or not. 30 However, since the draft of tax amnesties are still under review by the House of Representatives, the abovementioned benefits are still subject to change. G.

Country-by-Country Reporting

Indonesia as one of the G20 members has declared its commitment to adopt the country-bycountry reporting as suggested in Action 13 BEPS. 31 Currently, Indonesia is still working to implement country-by-country reporting principles into its domestic laws. In relation to the transfer pricing regulations, Indonesia already adopts Advance Pricing Agreement (“APA”) under Regulation of Ministry of Finance No. 7/PMK.03/2015 regarding Formation and Implementation of Advance Pricing Agreement. This regulation is effective from 12 April 2015 and applicable to all outstanding and future Advance Pricing Agreement applications. In 2014, there have been several activities related to the handling of APA, namely: 32 28

Idem. Senin Mulai Dibahas, Ketua DPR Berharap RUU Tax Amnesty Selesai 29 April, Serketariat Kabinet Republik Indonesia, 15 April 2016, Ditjen Pajak Kenalkan Metoda Baru Cash Register, Kontan.co.id, 30 March 2016, http://nasional.kontan.co.id/news/ditjen-pajak-kenalkan-metoda-baru-cash-register. 30 Making Crime Pay, The Economist, 9 April 2016, http://www.economist.com/news/finance-andeconomics/21696503-government-contemplates-handsome-pay-tax-dodgers-indonesia-weighs. 31 Nanang Zainal Arifin, BEPS Dalam Kerangka Kerja Sama G20 Dan Implementasinya Kepada Indonesia, Badan Kebijakan Fiskal, 2014, http://www.perpustakaan.kemenkeu.go.id/FOLDERJURNAL/2014_kajian_pkppim_BEPS%20Dalam%20Kerangka %20Kerja%20Sama%20G20%20D.pdf 32 Annual Report 2014 of Directorate General of Tax, Ministry of Finance. 29

1. 2. 3. 4. 5. 6. 7.

APA between Directorate General of Tax and competent authority of Singapore; APA between Directorate General of Tax and competent authority of Japan; APA between DGT and taxpayers (Unilateral APA); APA between Directorate General of Tax and competent authority of United States; APA between Directorate General of Tax and taxpayers in relation with Netherlands as a partnering country of Tax Treaty; APA between Directorate General and taxpayers in relation with Switzerland as a partnering country of Tax Treaty; APA between Directorate General of Tax and taxpayers in relation with Belgium as a partnering country of Tax Treaty.

CHAPTER 3: EXCHANGE OF INFORMATION BETWEEN TAX ADMINISTRATIONS OF DIFFERENT COUNTRIES A.

International Agreement on Exchange of Information

Although Indonesia is not a member country of OECD, it is an associate member of the OECD/G20 Project and has implemented various regulations that correspond to the concerns addressed with regard to BEPS in line with the Action Plan, including the recent regulation on exchange of information. 33 Exchange of Information in Indonesia is regulated under 125/PMK.010/2015 Minister of Finance No. 60/PMK.03/2014 regarding Procedures of Exchange of Information as amended by Regulation of Minister of Finance No. 125/PMK.010/2015. Exchange of Information is exchange of information on matters related to taxation as implementation of Double Tax Treaties, TIEAs, Conventions, Multilateral or Bilateral Competent Authority Agreement, Intergovernmental Agreement, or any other bilateral or multilateral agreements, in order to prevent tax avoidance, tax evasion, and/or abuse of Double Tax Treaties by untitled parties. 34 The so called Exchange of Information includes: (i) exchange of information based on request; (ii) spontaneously exchange of information; and (iii) automatically exchange of information. 35 1.

Tax Treaty

Tax treaty model in Indonesia basically is a mixed between UN model and OECD model. In relation to the latest version of Article 26 of OECD regarding Exchange of Information, Indonesia has one treaty that has been amended to be in line with the latest version of Article 26 of OECD Model. 36 Further, based on data base in Indonesian Ministry of Foreign Affair 37, there is no newly-concluded tax treaty that has been signed by Indonesia.

33

Freddy Karyadi and Chaterine Tanuwijaya, BEPS Effects in Indonesia, Derivatives & Financial Instruments, 2015 (Volume 17) No. 4, published online on 17 July 2015. 34 Article 1(8) of Regulation of Minister of Finance No. 60/PMK.03/2014 regarding Procedures of Exchange of Information as amended by Regulation of Minister of Finance No. 125/PMK.010/2015. 35 Article 3 of Regulation of Minister of Finance No. 60/PMK.03/2014 regarding Procedures of Exchange of Information as amended by Regulation of Minister of Finance No. 125/PMK.010/2015. 36 Protocol Amending the Agreement between the Government of the Republic of Indonesia and the Government of the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with

2.

TIEAs

Indonesia has several TIEAs which basically follows the OECD Model TIEA. Countries that have concluded TIEAs with Indonesia are among others, Bahama, San Marino, Guernsey, Jersey, Isle of Man and Bermuda. Up to date, Indonesia has not yet ratified its TIEAs with Bahama and San Marino, while the others have been ratified with presidential regulations. 38 3.

Multilateral or Bilateral Competent Authority Agreement

Indonesia has signed Convention on Mutual Administrative Assistance in Tax Matters in Cannes, France on 3 November 2011. This Convention further has been ratified by Presidential Regulation No. 159 of 2014 dated 17 October 2014. Further, on 4 June 2015, it was announced that Indonesia has joined the Multilateral Competent Authority Agreement, which implements the Standard for Automatic Exchange of Financial Information in Tax Matters. 39 The launch of the first automatic information exchange is expected to be in 2017 or 2018. 40 B.

Indonesia Involvement in FACTA Agreement

First official communication between Indonesian Government and USA Government on FACTA was been started on July 2013, whereby Indonesian sent a proposal to USA to conduct bilateral official meeting to discuss issues on FACTA implementation. 41 On 27-28 August, Indonesian delegations and USA delegations firstly met in Washington DC to discuss FACTA implementation. 42 Indonesia and USA further signed official agreement on Implementation FACTA on 1 May 2014. 43 Implementation FACTA in banking is very correlated with the bank secrecy. Under Indonesian banking law, all bank in Indonesia are obliged to keep the information confidentiality of their customer. However, as mentioned in Chapter 2 of this paper, after through some procedurals, the Directorate General of Tax still may access that confidential information. C.

Joint Audit with Tax Administration from Other Jurisdiction

Mechanism of joints audit is regulated under Directorate General of Tax No. PER-41/PJ/2011 regarding Audit Implementation on Information of Exchange Based on Tax Treaties Which Respect to Taxes on Income, and its Protocol, signed in Jakarta on 30 July 2015. This protocol has not been ratified by Indonesian Government. 37 http://treaty.kemlu.go.id/index.php/treaty/index. 38 See http://treaty.kemlu.go.id/index.php/treaty/index. 39 Karyadi, et.al. 40 Idem. 41 Gunawan Pribadi and Pande Putu Oka Kusumawardani, Penerapan FACTA di Indonesia, Pusat Kebijakan Pendapatan Negara, Badan Kebijakan Fiskal, 2013, http://www.kemenkeu.go.id/sites/default/files/2013_kajian_pkpn_FATCA%20-%20Publikasi.pdf. 42 Idem. 43 Yusnarida Eka Nizmi, Kerjasama Indonesia dan Amerika Serikat Terkait Penerapan Foreign Account Tax Compliance Act (FATCA), JOM Fisip Volume 2 No. 2. Oktober 2015.

Involves Tax Authority from Partner Country. However, so far there is not found any reference stating that Indonesian Tax Authority has conducted joint audit with tax administration from other jurisdiction. 44

CHAPTER 4: COOPERATION BETWEEN TAX ADMINISTRATIONS AND OTHER LAW ENFORCEMENT AGENCIES In 2015, Directorate General of Tax had focused its audit to the entity tax payer indicated have abused facilities of tax treaties, tax payer which conduct transfer pricing with offshore entity, tax payer having business in coal, oil and gas, tax payer having business in large scale trading, individual tax payer with medium and high income, influential individual and individual with certain professions. 45 In order to optimize the foregoing tax audits, Directorate General of Tax has cooperated with other agencies, among others: (i) joint audit with Directorate General of Customs and Excise, (ii) joint audit with Inspectorate General of Minister of Finance and Financial and Development Supervising Board (BPKP); (iii) joint audit with the Special Task Force for Upstream Oil and Gas Business Activities (SKK Migas) and Financial and Development Supervising Board (BPKP); and submit license to disclose bank secrecy in relation to saving customer to Financial Service Authority (OJK). 46 Besides cooperation with the above-mentioned agencies, Directorate General of Tax in Indonesia has aggressively cooperate with other agencies, ministerial, state-owned companies in Indonesia in order to collect data for tax potency and law enforcement. Those agencies, ministerial, stateowned companies are among others: 1.

Taxpayer data collection a.

Cooperation with National Public Procurement Agency (Lembaga Kebijakan Pengadaan Barang/Jasa Pemerintah-LKKP) On 11 November 2011, Directorate General of Tax and National Public Procurement Agency (Lembaga Kebijakan Pengadaan Barang/Jasa PemerintahLKKP) signed cooperation in data exchange and improvement of technical skill. In this cooperation, both parties agreed that (i) Directorate General of Tax may electronically access data of government goods/services procurement; (ii) LKPP may to make sure that all participant of government goods/services procurement have valid taxpayer identity number and tax compliance information. 47

b.

44

Cooperation with Other Ministries (Licenses Issuer)

Narita Indrasiti, Ditjen Pajak Akan Lakukan Joint Audit dengan Otoritas Pajak Asing, Kontan, Selasa 3 January 2012, http://nasional.kontan.co.id/news/ditjen-pajak-akan-lakukan-joint-audit-dengan-otoritas-pajak-asing. 45 Press Release of Directorate General of Tax, Minister of Finance, Tax Audit Strategy of 2015, 29 April 2015, http://www.pajak.go.id/sites/default/files/Siaran%20Pers%20Strategi%20Pemeriksaan%20Pajak%202015.pdf. 46 See Press Release of Directorate General of Tax dated 29 April 2019. 47 Press Release, Ditjen Pajak dan LKPP Jalin Kerjasama Pertukaran Data, 11 November 2011, Directorate General of Tax, Ministry of Finance, http://www.pajak.go.id/sites/default/files/SiaranPers-111111.pdf.

On 24 November 2015, Directorate General of Tax launched tax payer status confirmation program as a part of to strengthen tax administration and improve tax compliance. 48 This program will oblige every society who wish to have public service (including license) from certain Ministries to show evidences of tax obligations fulfilment (i.e. taxpayer identity number validation and submission of last 2-year tax returns). Such Ministries are among others: (i) Ministry of Law and Human Rights; (ii) Ministry of Energy and Mineral Resources; (iii) Ministry of Environmental and Forestry; (iv) Ministry of Maritime and Fisheries; and (v) Ministry of Domestic Affairs. c.

Cooperation with some State Owned Companies Directorate General of Tax signed cooperation with State Electricity Company on 8 April 2014. By this agreement, the State Electricity Company will provide data of electricity customer and their electricity bill to Directorate General of Tax. 49 The purpose of this cooperation is to crosscheck the tax data, based on Ministry of Finance, electricity is a good indicator to know the economic situation of a country. 50 Besides cooperation agreement with PLN, Directorate General of Tax signed similar cooperation agreement with PT Pelindo IV 51 and BPJS 52. 53

d.

Regulation of Ministry of Finance No. 39/PMK.03/2016 Under Regulation of Ministry of Finance No. 39/PMK.03/2016, there are more than 67 Governmental agencies, Institutions, Associations and other parties that are obliged to submit data and information which related to tax to Directorate General of Tax.

2.

Law enforcement a.

Cooperation with Financial Transaction Reporting and Analysis Agency On 19 October 2011, Directorate General of Tax and Financial Transaction Reporting and Analysis Agency (Pusat Pelaporan dan Analisis Transaksi

48

Press Release, Tingkatkan Kepatuhan Wajib Pajak, Dithen Pajak Luncurkan Program Konfirmasi Status Wajib Pajak, Directorate General of Tax, Ministry of Finance, 24 November 2015, http://www.pajak.go.id/content/tingkatkan-kepatuhan-wajib-pajak-ditjen-pajak-luncurkan-program-konfirmasistatus-wajib. 49 Kerjasama PLN dan Ditjen Pajak, Optimalkan Pajak dari Konsumen Listrik, http://www.pln.co.id/blog/kerjasama-pln-dan-ditjen-pajak-optimalkan-pajak-dari-konsumen-listrik/ 50 Idem. 51 PT Pelindo IV is a State Owned Company having business in port services. 52 BPJS is Indonesian Social Security Agency. 53 Idem.

Keuangan – PPATK) signed cooperation on prevention and eradication of money laundry and tax criminal. 54 The cooperation covers: (i) exchange of data and/or information; (ii) formulation of regulations; (iii) money laundry and tax criminal management; (iv) information technology system development; (v) tax officer assignment at PPATK; and (vi) review, socialization, counseling, education and training. 55 b.

Police of Republic of Indonesia Police of Republic of Indonesia and Minister of Finance have signed Minutes of Meeting regarding cooperation between Directorate General of Tax and Police of Republic of Indonesia on 8 March 2012 and its addendum on 19 January 2016. 56 This agreement is one of Indonesian Police commitment to assist Directorate General of Tax in tax law enforcement. 57

CHAPTER 5: CO-OPERATIVE COMPLIANCE AND RISK MANAGEMENT Indonesia Government has implemented several programs in order to improve voluntarily tax compliance from society, on of that program is called Sunset Policy. ‘Sunset Policy’ is tax facility provided by Indonesian Government to its taxpayer in form of deletion of administration sanction which aims to attract taxpayer to comply with its tax obligations. 58 Indonesian Government firstly introduced sunset policy in 2008 under Regulation of Minister of Finance No. 18/PMK.03/2008 which then valid for one year start from 1 January 2008 to 31 December 2008. Based on Regulation of Minister of Finance No. 18/PMK.03/2008, the first Sunset Policy has some limitations such as: 1. Incentives provided only for income tax; 2. Incentives provided only if taxpayer submit correction of tax return before 2007, which causes a higher taxable amount and conducted at the latest 1 January 2009. 3. Special for unregistered individual taxpayer who voluntarily register to obtain taxpayer identification number at the latest 1 January 2009, (i) will not subject to administration sanction for tax that were not paid or underpayment for tax year before the tax identification number obtained and (ii) against him/her will not conducted tax assessment, unless there is data/information stating the tax return is not true or overpayment. The first sunset policy may be considered has been effectively improve the tax compliance at that time. After the implementation of the first Sunset Policy, Directorate General of Tax noted that 54

Press Release of Directorate General of Tax, Ministry of Finance, Ditjen Pajak Jalin Kerjasama Dengan PPATK dalam Pencegahan Tindak Pidana Pencucian Uang dan Tindak Pidana Perpajakan, 19 October 2011, http://www.pajak.go.id/sites/default/files/siaranpers-111019.pdf. 55 Idem. 56 Polri dan DJP Tingkatkan Kerja Sama Kawal Penerimaan, Direktorat Jenderal Pajak, Selasa 19 January 2016, http://www.kemenkeu.go.id/SP/kawal-penerimaan-pajak-ditjen-pajak-dan-polri-tingkatkan-kerja-sama 57 Idem. 58 Ini Bedanya Sunset Policy 2008 vs TPWP 2015, Directorate General of Tax, Ministry of Finance, 13 July 2016, http://www.pajak.go.id/content/article/ini-bedanya-sunset-policy-2008-vs-tpwp-2015.

tax ratio in 2008 was increased for 0.6% (from 12,4% in 2007 to 13% in 2008). 59 In 2015, Indonesian Government again implemented the second Sunset Policy program under Regulation of Ministry of Finance No. 29/PMK.03/2015 regarding Deletion of Administration Sanction as Provided in Article 19(1) of General Provisions of Tax Law. Based on this regulation, taxpayer who disclose and pay its unreported tax liability before 1 January 2016 will not subject to administration sanction (interest). The unreported tax liability is tax liability raised before 1 January 2015. Incentives of the second Sunset Policy is available for: 60 1. All type of taxes; 2. All taxpayer submitting the first tax return or correction of tax return; 3. Any delay of payments or tax return submission conducted in 2015. Even there is no proof of correlation, after implementation of this program there is an increase to the national tax revenue of Indonesia in 2015. Based on Press Release from Directorate General of Tax, despite of the economic condition that were slowing down in 2015, tax revenue for nonoil and gas in 2015 is 12.5%. This number is higher than last year which was only 7.81%. While, tax revenue for oil and gas income is minus 43.14%. This condition was caused by the decrease of world crude oil price. For ease of reference, the following are the detail of tax revenue from 2012-2015: 61 No

Type of Tax

1

Realization 2012* 381.61

Realization 2013* 417.70

Realization as per 31 Dec 2014* 2015* ∆% ∆% 458.74 547.46 9.83 19.34

Tax Income for Non-Oil and Gas 2 VAT and Luxury 337.58 384.71 409.18 Goods VAT 3 Land and 28.97 25.30 23.48 Building Tax 4 Other Taxes 4.21 4.94 6.29 Total of Non-Oil and 752.37 832.65 897.69 Gas Income 5 Tax Income for 83.46 88.75 87.45 Oil and Gas Total including Oil 835.83 921.40 985.13 and Gas Income Source: Directorate General of Tax of Republic of Indonesia

423.53

6.36

3.51

29.40 (7.23)

25.23

5.50 1,005.89

27.47 7.81

(12.61) 12.05

49.72 (1.47)

(43.14)

1,055.61

6.92

7.15

*trillion Rupiah

59 Arie Widodo and Medina Austin, Sunset Policy: Fostering, Aware and Increase, Ortax.org, 18 May 2015, http://www.ortax.org/ortax/?mod=issue&page=show&id=67. 60 Ini Bedanya Sunset Policy 2008 vs TPWP 2015, Directorate General of Tax, 13 July 2015, http://www.pajak.go.id/content/article/ini-bedanya-sunset-policy-2008-vs-tpwp-2015. 61 Press Release, Realisasi Penerimaan Pajak Tahun 2015 Pertumbuhan Penerimaan Di Tengah Perlambatan Ekonomi, Directorate General of Tax, Ministry of Finance, 11 January 2016.

CHAPTER 6: IMPROVING THE COLLECTION OF TAXES A. Withholding Tax in Indonesia Income tax is taxable tax over income, among others, income from salary, profits, gift, and interest. 62 Tax payer is obliging to pay tax for income received in the one tax year. Under Indonesian law, mechanism to pay income taxes can be conducted by (i) pay directly to the state of by (i) withholding mechanism. Implementation of withholding tax system includes third party which appointed to conduct tax deduction and/or collection. The party who conduct the withholding is categorized as Tax Payer. Tax Payer definition under Indonesian Law is as follow: 63 “Tax Payer is individual or entity, including tax payer, tax withholder, tax collector which has taxation rights and obligations in accordance to the prevailing taxation regulations.” Indonesia has a very broad withholding income system. Withholding tax in Indonesia is not only limited to the payroll tax and passive income, such as: interest, dividend and royalty but also includes all business sectors, such as: services, trading and manufacture industry. 64 Based on Withholding tax in Indonesia may be classified in two categories, namely: 1.

2.

Domestic withholding tax a. Tax deduction in relation to work, service and individual activities; 65 b. Tax collection of income; 66 c. Tax deduction of dividend, interest and royalty, rent and fee to resident tax payer. 67 d. International withholding tax, which is tax deduction of non-resident tax payer. 68

The main different of both categories as mentioned above is the rate of tax. In the category of domestic tax law, there are various rates subject to the prevailing laws and regulations. On the contrary, for international withholding tax, tax rate is usually 20% from gross value, unless regulated otherwise by laws or tax treaties. 69 Some of the withholding taxes are final and some of them are not a final tax. Incomes that subject to a final income tax are as follows: (i) income in the form of interest from deposit and other savings, interest bonds and state bonds, interest paid by a cooperative to its individual 62

See Article 4(1) of Income Tax Law. Article 1(2) of General Provision of Tax Law. 64 L.Y. Hari Sih Advianto, Pemotongan dan Pemungutan Pajak Penghasilan, Badan Pendidikan dan Pelatihan Keuangan, Kementerian Keuangan, 1 April 2014, http://www.bppk.kemenkeu.go.id/publikasi/artikel/167-artikelpajak/12682-pemotongan-dan-pemungutan-pajak-penghasilan. 65 Article 21 of Income Tax Law. 66 Article 22 of Income Tax Law. 67 Articles 4(2) and 23 of Income Tax Law. 68 Article 26 of Income Tax Law. 69 See L.Y. Hari Sih Advianto, et.al. 63

members; (ii) income in the form of lottery prizes; (iii) income from a transaction of shares and other securities, derivative transactions traded in exchange, and sales of share or transfer of capital contribution from its company partner received by a venture-capital company; (iv) income from transfer of property such as land and/or building, construction services business, real estate business, and renting land and/or building; and (v) other certain incomes; which are stipulated by or based on a Government Regulation. 70 Obligations of Withholders Obligations of income tax withholders based on Indonesian Income Tax law are: 1. Calculate withholding tax 2. Withhold and deposit tax to the State Treasury 71 3. Fill and submit monthly tax return to tax office 72 Sanctions to the income tax withholder who is not conduct its obligations are as follows: 1. Administration sanction in relation to the failure to submit monthly tax return. 73 2. Administration sanction in relation to the failure to deposit the tax payment. 74 3. Criminal sanction in relation to the failure to not deposit the withholding tax to the State treasury. 75 General Provision Tax Law does not provide to the tax payer who fails to provide withholding proof to the income receiver. 76 In practice, if the proofs of withholding tax have not been received by the tax payer receiving income, that tax payer will not report its income or purchase which has been withhold in the tax return. Due to this condition, a cross examination against tax return of the withholders and tax payer receiving income/conducting purchase will not be matched each other. One of reasons why the withholder didn’t provide the proof of withholding is because under the prevailing laws there is no sanction for it. 77

CHAPTER 7: ADVANTAGES FOR THE TAXPAYER Indonesia adopt a self-assessment system, where the tax payers have freedom to calculate, submit and report their tax return to tax office. 78 In this system, the tax payer is obliged to have

70

Article 4(2) of Income Tax Law. Article 10 of General Provision of Tax Law. 72 Article 3(1) of General Provision of Tax Law. 73 Article 7(1) of General Provision of Tax Law. 74 Articles 9(1), (2a) and 13 of General Provision of Tax Law. 75 Article 39(1) of General Provision of Tax Law. 76 Johannes Aritonang, Sanksi Bagi Pemotong/Pemungut Pajak Penghasilan Yang Tidak Menyerahkan Bukti Pemotongan, 8 May 2015, Badan Pendidikan dan Pelatihan Keuangan, Kementerian Keuangan, http://www.bppk.depkeu.go.id/publikasi/artikel/167-artikel-pajak/21094-sanksi-bagi-pemotong-pemungut-pajakpenghasilan-yang-tidak-menyerahkan-bukti-pemotongan. 77 Idem. 78 Elucidation of Article 2(1) of General Provision of Tax Law. 71

taxpayer identity number. 79 Taxpayer identity number is a number granted to the taxpayer as identity of taxpayer in performing its rights and obligations in taxation. 80 Tax revenue has a significant role in Indonesia and is the main income of state budget. In the last recent years, more than 70% of the total of state income is contributed by tax revenue. 81 As defined in in Indonesian Law, tax is compulsory contribution to the state which is payable by any individual or entity that is enforced based on the law, without any direct benefit in return and is used for the maximum welfare of the people. 82 Therefore, if tax compliance increase in one country, taxpayer will not enjoy the result directly. CHAPTER 8: CHALLENGES AHEAD Despite on the global tax challenge, Indonesia has faced internal issue on the internal tax enforcement. 1.

Tax Court in Indonesia which is too favourable to taxpayer

Tax Court in Indonesia has a different characteristic compare to the other courts in Indonesia. Pursuant to Indonesian Constitutional Law, the judicial power shall be implemented by (i) a Supreme Court and judicial bodies underneath it in the form of public courts, religious affairs courts, military courts, and state administrative courts, and by (ii) a Constitutional Court. Tax Court as one of court in Indonesia is a special court under State Administrative Court. However, Tax court is not completely held under the Supreme Court, technically it is held under Supreme Court and organizationally and administratively it is held under Ministry of Finance. These characteristics has opened possibilities for some parties to take advantages which causes state loss. Tax court has been considered to ‘weak’ in implementing law enforcement. Mostly cases in tax court are won by taxpayer. From all cases submitted to the Tax Court almost 80% of the decision are favourable for the tax payers. 83 In relation to the litigation in the Tax Court, the official website of the Secretariat of the Tax Court 84 has issued the chart for the type of Tax Court decisions made between 2011 and 2015 with results as follows: Type of Decision 79

Percentage

See Article 2(1) of General Provision of Tax Law. Article 1(6) of General Provision of Tax Law. 81 See Indonesian State Budget of 2015 and Indonesian State Budget of 2016, http://www.satuharapan.com/readdetail/read/jokowi-ditantang-untuk-revolusi-perpajakan-indonesia 82 Article 1(1) of General Provision of Tax law. 83 Prasasta Widiadi, Jokowi Ditantang Untuk Revolusi Perpajakan Indonesia, SatuHarapan.com, 11 January 2015, http://www.satuharapan.com/read-detail/read/jokowi-ditantang-untuk-revolusi-perpajakan-indonesia. 84 http://www.setpp.depkeu.go.id/Ind/Statistik/StatBerkas.asp 80

Revocation (Pencabutan) Inadmissible (Tidak dapat diterima) Rejected (Menolak) Grant Additional Amount of Payable Tax (Menambahkan jumlah pajak yang harus dibayar) Grant Part of Claim/Appeal (Mengabulkan sebagian) Grant Whole of Claim/Appeal (Mengabulkan Seluruhnya) Cancellation (Pembatalan)

1% 14% 24% 0% 13% 36% 2%

Source: Secretariat of Tax Court

2.

Number of Taxpayer is Small Compare to Indonesian Population

In an interview with one of media, an economist stated that number of taxpayer in Indonesia is small and not all of taxpayers actively pay tax. 85 There was 60 million taxpayers but it is only 28 million taxpayers who actively pay tax. Further, there are 20 million companies registered, however it only 5 million companies which becomes taxpayers. 86

85

Prasasta Widiadi, Jokowi Ditantang Untuk Revolusi Perpajakan Indonesia, SatuHarapan.com, 11 January 2015, http://www.satuharapan.com/read-detail/read/jokowi-ditantang-untuk-revolusi-perpajakan-indonesia. 86 Idem.