Published in International Tax Review in 1 December 2023

https://www.internationaltaxreview.com/article/2cis8mlnw911ebbngrri8/navigating-indonesias-battle-against-tax-evasion

The Global Tax Evasion Report 2024 stated that major initiatives by international cooperation have contributed to the decline in offshore tax evasion by around three factors in less than 10 years. In recent years, Indonesia has emerged as an important player in the global fight against tax evasion, particularly focusing on its wealthy population. As the country solidifies its commitment to international standards, membership in organizations such as FATF (Financial Action Task Force) and JITSIC (Joint International Tax Shelter Information and Collaboration) has become integral to its strategy. This article delves into Indonesia’s endeavors to combat tax evasion, emphasizing its capacity-building initiatives and placing an additional spotlight on trusts.

A Strategic Move

Indonesia’s decision to join FATF and JITSIC underscores its dedication to combating financial crimes on a global scale. FATF, established in 1989, serves as an intergovernmental body that sets international standards to combat money laundering and terrorist financing. By aligning itself with FATF, Indonesia positions itself to adopt and implement stringent measures, ensuring the transparency and accountability of its financial system.

During the fourth Plenary of FATF in 2023, Indonesia was granted full membership after it underwent a Mutual Evaluation Review (MER), which the Plenary discussed and approved in February 2023. The MER consisted of multiple stages, including filling out the questionnaires, collecting evidence on the implementation of 40 FATF recommendations, assessing the effectiveness of the 11 Immediate Outcomes (IO), and conducting On-Site Visit to confirm the questionnaire and request additional evidence.

To be qualified for FATF membership, Indonesia is required to fulfill four minimum requirements:

1. Compliant (C)/ Largely Compliant (LC) rating on at least 33 recommendations from 40 FATF recommendations;
2. C/ LC rating on recommendation 3 (money laundering offense), recommendation 5 (criminalizing terrorist financing), recommendation 10 (customer due diligence), recommendation 11 (record keeping), and recommendation 20 (reporting of suspicious transactions);
3. High (H)/ Substantial (S) level on at least 5 IO from the overall 11 IO;
4. Low (L) level at most on 3 IO from the overall 11 IO.

JITSIC, on the other hand, focuses on tackling cross-border tax evasion by facilitating the exchange of information among its member countries. The JITSIC network allows its 42 members to cooperate and share their resources, experience, and expertise directly on a specific case. These features allow members to work together on following up on the various offshore leaks. In Indonesia, the operation with JITSIC is coordinated by Mekar Sari Utama and Sanityas Jukti Prawatyani as the Director and Deputy Director of the International Taxation Directorate.

The cooperation operates with strict rules to ensure the confidentiality of information and the confidence of the taxpayer. To ensure the sharing of expertise is conducted in an agile and confident manner, each JITSIC member will appoint a Single Point of Contact (SPOC) to be responsible for managing the country’s JITSIC interaction.

As Indonesia becomes an active participant in JITSIC, it gains access to a wealth of information crucial for identifying and addressing tax evasion schemes involving its wealthy population. The participation allows Indonesia to exchange and analyze information under the double tax convention in a coordinated and collaborative way on a real-time basis. The investigated cases under the JITSIC network include cross-border investment and financing arrangements, foreign tax credit schemes, and the exploitation of trust structures and offshore arrangements by high-net-worth individuals.

The collaboration with FATF and JITSIC is not just a diplomatic move for Indonesia; it’s a strategic alignment that enhances the nation’s ability to track and combat global tax evasion. Through the exchange of information and cooperative efforts, Indonesia can tap into a vast network of intelligence, strengthening its position in identifying and countering potential tax evasion activities linked to its affluent demographic.

Strengthening the Arsenal

Recognizing the complexity of tax evasion schemes and the need for a skilled workforce to combat them, Indonesia has prioritized capacity-building within its tax authorities. The government has invested in training programs, technology, and collaboration with international experts to enhance the capabilities of its tax enforcement agencies.

Recently, the Directorate General of Taxation (DGT) conducted a Joint DGT-OECD Workshop on Exchange of Information as a Tool to Combat Tax Evasion. The four-day workshop invites more than 120 participants from diverse functions, including tax auditors, tax supervisors, objection reviewers, and international tax specialists. The speakers were coming from the OECD, HM Revenue and Customs (HMRC) and Australian Tax Office (ATO).

The capacity-building initiatives in Indonesia are not merely about imparting technical skills; they encompass a broader strategy that involves fostering a culture of compliance, ethics, and vigilance. By investing in the professional development of its tax enforcement personnel, Indonesia is not only building a competent workforce but also instilling a sense of responsibility and dedication to the cause of eradicating tax evasion.

Efforts have been made to streamline communication and cooperation among the various agencies involved in combating tax evasion. This multidisciplinary approach ensures a holistic understanding of the issue and facilitates more effective prevention and enforcement measures.

Unraveling the Complexity

One area that has come under particular scrutiny in Indonesia’s fight against tax evasion is trusts. Trusts, often utilized for legitimate financial planning, can also be exploited for illicit purposes, leading to tax evasion. The Indonesian government is intensifying efforts to understand and regulate trusts, striking a balance between legitimate wealth management and preventing their misuse for evading taxes.

Trust is an instrument that is commonly found in common-law countries but is rare to be recognized by civil-law countries. Indonesia, as a civil-law country, does not recognize trusts in its tax system, which raises the issue of the treatment of offshore trusts declared by the resident settlor or beneficiary of Indonesia. The issue of trust in Indonesia is becoming a central point during the public uproar over offshore leaks. The leaks show many of the Indonesian High-Wealth Individuals utilize hazy offshore structures that involve trusts. The non-existence of specific regulations for trust has proven to be a hurdle to unraveling the complexities involving the trust scheme. 

To properly address the issue, DGT actively communicates and coordinates through the JITSIC network, especially with the sub-group Wealthy Population Expert Group (WPEG). The group works on tackling tax evasion by abusing trusts in a complex cross-border scheme. One of the discussed cases involves eight jurisdictions and trust-foundation-company arrangements. The group also discussed how to recognize trusts when there is no domestic regulation, how to treat the separation of trust assets, and the effect of residency shifts on income attribution.

The focus on trusts is not just a response to emerging challenges but a proactive step in anticipation of evolving strategies employed by those engaged in tax evasion. By staying ahead of the curve and adapting regulations to address the potential misuse of trusts, Indonesia is positioning itself as a forward-thinking player in the global fight against tax evasion.

A Holistic Approach to Combating Tax Evasion

In conclusion, Indonesia’s proactive stance against tax evasion demonstrates its commitment to upholding international standards and fostering a transparent and accountable financial environment. As Indonesia faces the dynamic landscape of financial crimes, its adaptability and proactive measures showcase a determination to protect its economic integrity. By aligning itself with organizations like FATF and JITSIC, investing in capacity building, and focusing on specific areas like trusts, Indonesia is sending a clear message that it is serious about tackling the intricate challenges posed by tax evasion.

The journey towards combating tax evasion is an ongoing one for Indonesia. As the country continues to refine its strategies and collaborate on a global scale, it positions itself as a major player in the collective effort to eradicate tax evasion. The nation’s commitment to staying at the forefront of global efforts is evident in its active participation in international bodies.

Through a holistic approach that combines international cooperation, domestic capacity building, and targeted assessment, Indonesia is paving the way for a more secure and equitable taxation landscape. The battle against tax evasion is multifaceted, and Indonesia’s multifaceted approach will hopefully ensure a fair taxation system for all.