Indonesia’s corrupt tax amnesty – how many will follow?

From Reuters:

“Business may be about to look up for the [wealth management] industry helped by President Joko Widodo’s tax amnesty plan that could encourage rich Indonesians to declare assets previously concealed from the authorities, either at home or abroad.”

So Indonesia is contemplating a tax amnesty. It’s not in place yet, but some sort of announcement is expected next month.

We generally take a very dim view of tax amnesties – they are short term palliatives that come at the expense of much larger long-term revenues, and they severely damage democracy, creating a sense that there is one rule for the rich and powerful, and another rule for everyone else.

More importantly, perhaps, we fear that this is a canary in the coalmine as the world’s élites start to rebel against an approaching era of greater transparency.

Yet this amnesty is, unsurprisingly, being officially portrayed in Indonesia as necessary. Via Bloomberg:

“In normal conditions, it’s true, this would wound the sense of justice,” Finance Minister Bambang Brodjonegoro told reporters in Bali in December. “But the issue now in Indonesia is that there are massive amounts of people who aren’t paying. An amnesty is an innovation to break the deadlock.”

Nonsense. The real story is that this comes amid a fast-rising global appetite for cross-border transparency, and ahead of the rolling-out of the OECD’s Common Reporting Standard, the new transparency scheme which many secrecy jurisdictions including Singapore — wealthy Indonesians’ tax haven of choice —  has agreed to participate in. Indonesian élites potentially face exposure from the outside, and they are looking for an escape route. Not everyone thinks this is a good idea, as this more balanced Bloomberg story explains.

“Bad move, say tax analysts, anti-corruption activists and the Organisation for Economic Cooperation and Development. The quest for a short-term budget boost risks missing its mark and exacerbating the country’s perennial tax evasion, they say.
. . .
Yustinus Prastowo, head of the Center for Indonesia Taxation Analysis [said] the amnesty would be the country’s fourth since independence in 1945 . . .calling the move “legalized money laundering.”

Quite so. The amnesty isn’t in place yet so its final outlines aren’t clear, but, according to one report:

“The bill is likely to be pushed through with little resistance in parliament in the weeks ahead.”

(We have no idea how many Indonesian parliamentarians stand to benefit from the amnesty.) But here at least are the key elements that seem to be on the table:

• Immunity from prosecution (admittedly, prosecution for tax offences in Indonesia can be scary (and not our cup of tea; though we’d bet that this generally applies to the smaller fry and not to the well-connected.)
• A tax rate at one percent for those who come forward quickly enough. (That’s right: one percent: even the Swiss felt obliged to impose a rate of 30 percent of principal in their corrupt Rubik amnesty deals with the UK and other countries.)

Benefits to certain Indonesians will flow from this proposed amnesty, of course:

“This amnesty will have a positive impact on the wealth-management business,” said Anggoro Eko Cahyo, director of consumer banking at Bank Negara Indonesia, whose “Emerald Priority” members are wafted by helicopter across the capital when they are in an emergency.”

Government officials are also, beyond these wonders, dangling a windfall of $4.4 billion. Budgets are stretched and all that: Indonesia really needs this money. And that is a big chunk of change.

But let’s now see what might happen if Indonesia didn’t do this, finance-wise. If there were hypothetically no amnesty: just the standard tax payment arrears and penalties.

First of all, official sources estimate roughly $200 billion stashed in secrecy in Singapore alone, and a total of $300-400 billion out there in total.

What kind of taxes and penalties might be paid on this money?

Well, it’s very hard to know what kinds of holdings these assets are held in, how they might have been taxed if declared, and how long they have been held offshore for.  Deloitte outlines penalties and sanctions for the category “Fails to submit tax return through negligence” yields a penalty of 1-2 times the unpaid tax, on top of the arrears – but there are bigger numbers for other categories of offences.

Let’s imagine for the sake of argument that the average unpaid tax was worth, let’s say, 25 percent of the principal. That’s a conservative estimate for long-held offshore monies. Let’s say it attracted the minimum penalty rate of 1 X the unpaid tax, for a total of 25+25=50 percent. That would yield tax revenues of, let’s say $150-200 billion. We have no idea how much the CRS would really have caught – but it is pretty clear that this $4.4 billion is a drop in the ocean: a classic case of misdirection to distract people from what’s really going on.

But the bigger story here is this. Better cross-border transparency is coming. It’s not perfect, but it’s a great improvement on a transparency-free past. Wealthy tax evaders around the world won’t want to get caught. Some will employ clever tax advisers to find the loopholes. Others will lobby for tax amnesties. And many will do both.

We’ve seen the ideas already floated in places like Argentina.  Expect to see more of these.