The ongoing tit-for-tat imposition of tariffs between the US and China and the EU might not escalate into a full trade war, however, it is already impacting on global commodity prices and industrial activity. This has implications for Indonesia’s ambitious tax revenue target and, by extension, taxpayers.
The 2018 tax revenue target of IDR 1.6 quadrillion assumed relatively benign macroeconomic conditions. Whilst official inflation remains under control, interest rates have increased and the exchange rate is well beyond the IDR 13,400/USD used for the Budget. In addition, global commodity prices are tracking lower as the prospect of more tariffs impacts on demand for raw materials. All of this suggests corporate profitability in Indonesia will not be sustained through 2018, putting downward pressure on tax collections.
This is likely to be exacerbated by Government Regulation No. 23 (PP-23) of 8 June, 2018 that reduces the rate of Final Tax from 1% to 0.5% for companies and small businesses with annual revenues less than IDR 4.8 billion. According to the Director-General of Taxation, this could result in a reduction of tax revenues of up to IDR 1.5 trillion for 2018. Although PP-23 is expected to create longer-term tax revenue uplifts because taxpayers can only utilise the Final Tax rate for a maximum of 7 years (3 years for companies), the short-term impact on tax revenue remains.
Therefore the Tax Office continues to focus attention on extensification and intensification activities to ensure more potential taxpayers are brought into the tax net, and to capture all tax objects for existing taxpayers.
The 2016 Tax Amnesty, the subsequent removal of bank secrecy, and the implementation of the Automatic Exchange of Information with foreign jurisdictions are crucial steps to allow the Tax Office access to more information regarding taxpayers’ assets and income. Although not widely publicised, a key purpose of the Tax Amnesty was to build data on taxpayers’ assets. Recent regulations, such as SE-14 of 19 July 2018 on Supervision of Taxpayers after the Tax Amnesty Period, confirm this.
That is, the Tax Office will prioritise attention to taxpayers that did not follow the amnesty (where data suggests there are un/under-reported assets) and to ensuring that taxpayers that did follow the amnesty are lodging their 2016 and future tax returns in accordance with their Tax Amnesty Declarations (e.g. reporting income from the tax amnesty assets, not claiming tax losses from 2015 or earlier periods, not claiming depreciation for tax amnesty assets).
We are also seeing more compliance audits. In addition to answering questions regarding variances in reported assets compared to data received by the Tax Office, there will be more attention to transfer pricing documentation. Another area of review is the implementation of the reporting rules for claiming deductions for borrowing costs.
Meanwhile the Government has floated the taxation of inheritances and unutilised retained earnings as possible inclusions to the amendments to the Income Tax Law. All aimed to boost tax revenues.
The Tax Office has better systems for capturing and analysing data, and is becoming more pro-active. Taxpayers should no longer assume they will only be audited if they claim a refund. There is an increasing chance of an audit for compliance reasons and greater likelihood of queries if there are variances in asset data reported compared to the data received by the Tax Office. Therefore taxpayers should undertake their activities assuming they will need to respond to the Tax Office, rather than hoping they will not.
Macro-economic conditions likely to put pressure on tax revenue
0.5% Final Tax for SME could reduce tax revenues by IDR 1.5 trillion
Tax Office pro-actively using Amnesty, bank and AEOI data to target non-compliance
This article has been published at The Jakarta Post, 13 Agustus 2018