Panama Papers, Tax Amnesty, and the National Economy
A few days ago, Minister of Finance, Bambang Brodjonegoro, said that the Government of Indonesia is considering lowering the rate of corporate income tax from 25% to only 20%. This is of course a good news for the companies, but because there were stories that the government has failed in achieving the target of tax revenue in last year, the market saw that the tax rate reduction could have negative impact on state finances and of course the national economy as a whole, and consequently the Jakarta Composite Index (JCI) fell more than 1% in Tuesday. But here we're not going to discuss this JCI.
The statement of the Minister was possibly a response to the news about 'Panama Papers', documents containing the information of more than 214,00 offshore companies (companies that registered in certain countries, but has offices and operations outside of the country), including from Indonesia, where there were many Indonesian businessmen who deliberately set up a special purpose vehicle (SPV) in the country of Panama for specific purposes, including tax evasion. Why Panama? Because the income tax in the country was only 0%, so that Panama is also known as a tax haven.
Well, before the stories about Panama Papers, it is common knowledge that there are many companies and conglomerates who deliberately set up SPV in tax haven countries, usually a small country the middle of nowhere, such as the British Virgin Islands, Seychelles, Cayman Island, Malta etc, with the aim of avoiding taxes. A company could transfer its income or some of its assets/cash from the original company which operating in Indonesia, to the SPV registered in British Virgin Islands, so it becomes tax-free. This also explains why there are a lot of companies which reported losses in their financial statements (so they do not need to pay income taxes), but strangely they still operate normally without threat of bankruptcy, because they actually did not lose money, but most of the company's income was transferred to SPV. This SPV is like a bank account which opened in offshore, so even it looks like that the company putting its assets/money in a location far away from Indonesia, but the money can still be used/withdrawn at any time as long as they hold the ATM.
An example of information about a Company that is 'established' in the British Virgin Island, and has a 'representative office' in Jakarta, but actually operates in Indonesia as a contract holder of oil block operation from Pertamina. Article taken from the prospectus of an Indonesian public company.
And this practice does not only happen in Indonesia, but almost all over the world. While this practice is certainly detrimental to the state where the company operates, but on the other hand there are no laws that prohibit companies/individuals to set up SPV abroad. This means that if the government wants to encourage companies to no longer transfer their assets out of the country so they may pay their taxes properly without any maneuver, the company must be given certain incentives instead.
That's why, since the beginning of this year the Government had proposed a tax amnesty program, in which if the program is approved by the House, the companies with certain criteria can report/pay its tax arrears without interest or penalty. At first glance this tax amnesty looks favorable only to the companies/rich men and hurt the country, but this is actually will increase the revenue of the tax itself. And if the corporate tax rate dropped from 25% to 20%, then the Government may expect that the company would return their 'overseas assets' to Indonesia and could be taxed. This story about Panama Papers is also a momentum for the government to subtly force the corporations and super rich individuals to withdraw their assets to Indonesia, or they will receive a social sanction or accusation from the society that they had evaded taxes (although, when a person/company set up an SPV in overseas, the goal is not always to evade taxes).
The question now, if all of these efforts are successful, how it would impact on the national economy? Well, of course, keep in mind, there are many challenges for the Gov to achieve their goal of increasing tax revenue. First, such policies like tax amnesty and corporate tax cuts, all of them are must approved by the House first, and that means there will be a political bargaining process that can be prolonged. Second, if the corporate funds in overseas returned to Indonesia, then what they have to do with that much money? If they want to set up the company, the process for licensing etc is still complicated, to buy stocks or bonds in the capital market possesses great risks (especially if they do not understand how the capital market works. Do not ever think that large companies are understand about stocks or bond investing just because they have a lot of money), while the interest on bank deposits were too small. So in this case the government should also provide additional policies, like launching a state debentures that is specifically designed to accomodate these corporate funds, facilitating the process of investment/establishment of companies in the country, and so on.
And third, if the Government is trying to 'withdraw' the company's funds from the overseas, these overseas countries that will not remain silent. In some of financial center countries such as Singapore, Switzerland, and Hong Kong, their economy depends on fee income of managing investments belonging to companies and HNWI around the world, including from Indonesia, so that if the Indonesian government launched a specific policy to attract these investment back, they will also launch policies so that the funds will remain there.
The point is, although the Government has a good intention, but the results will not be achieved in the near future. Only indeed, if the efforts succeed, then: 1. The tax revenues would increase, so that the development of infrastructure will be more aggresive, 2. Indonesia will be flooded by 'foreign funds', which actually belonged to Indonesian themselves, and some of them will go into the stock market, and it will push the JCI up, and 3. The process of establishment of corporation and investment will become more easy to accommodate the influx of funds from abroad, and the business establishment will attract labor, and the economy will grow as a whole.
Well, sounds good, right? But of course the process will take time. But at least we can say that the Indonesian economy, in terms of the decision maker (read: the Government), is now on track, and sooner or later we will see that the companies posted an increase in profit in line with increasing economic growth, which targeted to be 5.3% in 2016. In next month, the Central Statistics Agency (Badan Pusat Statistik/BPS) will release economic growth figures for the first quarter of 2016, and let's see if we make it to be one step closer to the target of 5.3%, as the latest figure was 4.79%.
Any inquiries about investment in Indonesia Stock Market, please send an email to teguh@averepartners.com
Date: Thursday, April 14, 2016
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