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away from Indonesia, but the money can still be used/withdrawn at any time as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.
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.
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
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