Indonesia's Comprehensive Strategy Against Tax Evasion: Global Engagement and Domestic Measures

Introduction

In the evolving landscape of global finance, Indonesia has emerged as a formidable player in the fight against tax evasion. With a specific focus on its affluent demographic, the country has strategically aligned itself with international bodies such as the Financial Action Task Force (FATF) and the Joint International Tax Shelter Information and Collaboration (JITSIC). This article delves into the intricacies of Indonesia's multifaceted strategy, exploring its international collaborations, domestic capacity-building initiatives, and targeted efforts to address challenges posed by financial instruments like trusts.

Indonesia's Global Engagement

Indonesia's decision to join the FATF is a testament to its commitment to adopting and enforcing stringent measures against money laundering and terrorist financing. Following a rigorous mutual evaluation review (MER) during the fourth Plenary in October 2023, Indonesia secured full membership, meeting specific criteria outlined by the FATF. This strategic move enhances Indonesia's ability to align with global standards, ensuring transparency and accountability within its financial system.

The FATF, established in 1989, is an intergovernmental body that sets international standards to combat money laundering and terrorist financing. By joining this esteemed organization, Indonesia positions itself to adopt and implement measures that not only align with international norms but also contribute to the global effort to combat financial crimes.

The membership process involved a comprehensive evaluation, covering compliance ratings on 40 FATF recommendations, immediate outcomes, and overall effectiveness. Indonesia had to fulfill specific requirements, including achieving a 'compliant' (C) or 'largely compliant' (LC) rating on at least 33 of the 40 recommendations, meeting certain criteria on key recommendations, and demonstrating a high or substantial level on at least five out of 11 immediate outcomes.

JITSIC Network: Strengthening Cross-Border Collaboration

Simultaneously, Indonesia has actively engaged in the JITSIC network, a platform designed to facilitate collaboration among its 42 member countries in tackling cross-border tax evasion. The JITSIC network allows members to cooperate and share resources, experience, and expertise directly on specific cases. For Indonesia, this means gaining access to crucial information for identifying and addressing tax evasion schemes, particularly those involving high-net-worth individuals.

The JITSIC operation in Indonesia is coordinated by Mekar Sari Utama and Sanityas Jukti Prawatyani, serving as the director and deputy director, respectively, of the International Taxation Directorate. The collaboration within the JITSIC network adheres to strict rules to ensure the confidentiality of information and the confidence of the taxpayer. Each member appoints a single point of contact responsible for managing the country's JITSIC interaction, ensuring efficient and secure information exchange.

Participating actively in the JITSIC network not only allows Indonesia to contribute to global efforts against tax evasion but also provides the country with a valuable network of intelligence. This intelligence is crucial for identifying and countering potential tax evasion activities linked to its affluent demographic. 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.

Capacity Building Initiatives: Equipping Tax Authorities

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's commitment is evident in substantial investments in training programs, technology, and collaborations with international experts.

In October, the Indonesian Directorate General of Taxation (DGT) conducted a joint DGT-OECD workshop on exchanging information as a tool to combat tax evasion. The four-day workshop saw participation from more than 120 individuals, including tax auditors, tax supervisors, and international tax specialists. The collaboration with organizations like the OECD, HM Revenue and Customs, and the Australian Tax Office reflects Indonesia's proactive approach to not only impart technical skills but also foster a culture of compliance, ethics, and vigilance among its tax enforcement personnel.

Efforts to streamline communication and cooperation among various agencies involved in combating tax evasion reflect a multidisciplinary approach. This approach ensures a holistic understanding of the issue, facilitating more effective prevention and enforcement measures. Indonesia's commitment to building a competent and ethical workforce not only enhances its ability to combat tax evasion but also instills a sense of responsibility and dedication within its tax enforcement agencies.

Trusts: A Focal Point in Indonesia's Fight Against Tax Evasion

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

Trusts are commonly found in common law countries but are rarely recognized by civil law countries. Indonesia, as a civil law country, does not recognize trusts in its tax system, posing challenges in addressing offshore trusts declared by resident settlers or beneficiaries. The non-existence of specific regulations for trusts has proven to be a hurdle in unraveling the complexities involving trust schemes.

To address this issue, the DGT actively communicates and coordinates through the JITSIC network, especially within the 'wealthy population expert' sub-group. This group focuses on individuals evading tax by abusing trusts in complex cross-border schemes. One of the discussed cases involves eight jurisdictions and trust-foundation-company arrangements. The group also discusses how to recognize trusts when there is no domestic regulation, how to treat the separation of trust assets, and the effect of trust residency shifts on income attribution.

The focus on trusts is not merely a response to emerging challenges but a proactive step in anticipation of evolving strategies employed by those evading tax. 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 Tax Enforcement

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.

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 stakeholders.

Conclusion

In conclusion, Indonesia's comprehensive strategy against tax evasion reflects a proactive and determined effort to address the challenges posed by financial crimes. The country's engagement with international organizations like the FATF and active participation in the JITSIC network provide a global perspective and valuable intelligence in combating tax evasion. Simultaneously, domestic capacity-building initiatives and a targeted focus on areas like trusts demonstrate Indonesia's commitment to fostering a competent and ethical tax enforcement workforce.

As Indonesia navigates the complexities of tax evasion schemes and evolving financial landscapes, its multifaceted approach positions the country as a forward-thinking participant in the global fight against tax evasion. Through continuous collaboration, training, and regulatory adaptability, Indonesia aims to establish a taxation system that ensures fairness, transparency, and accountability for all stakeholders involved.

By fLEXI tEAM