Published in The Jakarta Post in 29 December 2023
As Indonesia embarks on the spirited journey of a presidential election campaign, the nation is confronted with a looming economic challenge that demands immediate attention—the perilous state of its tax ratio. Positioned as one of the lowest in the region and showing a concerning trend of decline over the last twenty years, this issue has spurred sophisticated discussions on how to reverse this fiscal descent. However, amidst the intricate fiscal debates, there exists an overlooked “elephant in the room”—the utilization of trusts by the wealthy to hide offshore wealth, a silent but potent quake undermining Indonesia’s economic foundation. Regrettably, the discourse aimed at rectifying the potential revenue losses resulting from undeclared wealth is notably absent from the mission statements of all current presidential candidates.
In 2016, Indonesia’s high-net-worth individuals were believed to collectively possess offshore wealth worth a total of $250 billion USD (Said, 2017). According to The Atlas of the Offshore World, a research initiative affiliated with the EU Tax Observatory under the Paris School of Economics, the offshore wealth of Indonesian citizens is estimated to have reached $32 billion USD in 2022, constituting 2.36% of the country’s GDP. This projection is based on an analysis of official statistics from the Swiss central bank and the Bank for International Settlements, as well as the identification of systematic anomalies in the international investment positions of various nations. Moreover, the dataset indicates a decline in Indonesia’s estimated offshore wealth as a percentage of GDP from 2.51% in 2015 to 1.86% in 2016, when the tax amnesty took place. However, this decline appears to have reversed in the subsequent year, with a steady increase observed.
The latest offshore leaks from the Pandora Paper, brought to light by the International Consortium of Investigative Journalists (ICIJ) in 2021, have exposed a significant number of Indonesia’s wealthy population engaging in the utilization of offshore trusts. The Pandora Paper, constituting the largest leaks of offshore data in history, encompassing 11.9 million leaked documents with 2.9 terabytes of data, has revealed the secret offshore accounts of global politicians and wealthy elites. However, it is crucial to note that mere involvement in such schemes doesn’t automatically imply illicit activities. Despite the government’s efforts, including two “tax amnesties” conducted in less than ten years to incentivize the repatriation of offshore wealth, the offshore leaks expose a disconcerting reality about the challenges in countering undeclared offshore wealth, particularly through the utilization of offshore trusts schemes.
Trusts, prevalent in common law jurisdictions but rarely regulated in civil law jurisdictions, are legal arrangements that split the legal and equity ownership of assets. The instrument provides a legitimate framework for individuals to shield their assets from tax authorities. The offshore leaks lay bare the reality that Indonesian wealth is finding refuge in trusts based in tax havens, posing a considerable threat to the nation’s revenue stream and fiscal integrity.
Indonesia, in its current legal landscape, lacks specific regulations governing trusts. The revised explanation of Article 18 of the Income Tax Law provided by the Law on the Harmonization of Tax Regulations fortifies the principle of substance over form as a general countermeasure against tax avoidance concerning offshore trusts schemes. Nevertheless, there remains a notable absence of specific regulations addressing trusts up to the present moment. Since 2016, the Directorate General of Taxes (DGT) has undertaken substantial efforts to formulate regulations aimed at addressing trusts. Although the issue of trusts regulation has been acknowledged, progress has been sluggish and lacks the necessary momentum to drive meaningful change. Addressing this intricate web of fiscal challenges requires an infusion of colossal political will.
The ongoing election process emerges as a pivotal moment, a unique opportunity for politicians to gather political support from the people and address the elephant in the room. This fiscal puzzle, encompassing tax ratios, trusts utilization, and offshore wealth, holds significant ramifications not only for the affluent but, perhaps more crucially, for the common people. The electorate stands to benefit from a comprehensive strategy that brings equality to the fiscal landscape.
Regulating trusts is a strategic move that could have tangible benefits for both the common people and the affluent. Establishing guidelines for offshore trusts would not only secure legal certainty that encourages the wealthy population to repatriate their assets but may also contribute to increasing Indonesia’s tax ratio and attracting inbound wealth. This endeavor must be accompanied by initiatives aimed at mitigating distrust between taxpayers and tax authorities while simultaneously enhancing confidence in the efficacy of law enforcement and tax dispute resolution in the tax court.
The initial step in regulating trusts involves offering guidance on reporting and income attribution for offshore trusts with Indonesian settlors and beneficiaries. To address the absence of a general trusts law, a viable approach is to employ a classification framework. This framework would classify offshore trusts into recognized entities under Indonesian law for tax purposes, such as collective investment vehicles (CIV), foundations, or permanent establishments. The regulatory framework should incorporate specific anti-avoidance measures, including anti-deferral measures, substitute distribution mechanisms, and provisions against value shifting. Furthermore, the regulation should mandate Indonesian settlors and beneficiaries to provide sufficient disclosures regarding their offshore trusts arrangements in their tax returns.
Increased tax revenue from the wealthy could be channeled toward essential public services, infrastructure development, and social welfare programs, alleviating the financial burden borne by the broader population. It is imperative to assure taxpayers that their tax money will be used responsibly and protected from corruption. Simultaneously, trusts regulation signals Indonesia’s dedication to fair and transparent financial practices, enhancing its credibility on the global stage.
The absence of concrete action on trusts regulation underscores the necessity for political will. The election season is an opportune moment for candidates to demonstrate their commitment to economic integrity and transparency. Indonesia’s future president must possess the foresight to address this issue head-on, enacting specific guidance on offshore trusts and steering the nation toward a more robust and equitable economic future.
Yusuf Akhmadi 
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