Indonesians have perhaps $900 billion stashed overseas - Making crime pay - Indonesia contemplates a handsome pay-off for tax dodgers

WHAT is the best design for a tax amnesty? Some object to them all, since they reward those who have broken the law. Others argue that maximising revenue should be the goal. The OECD nods at both philosophies, suggesting that an amnesty should cost the tax-dodger less than if he were caught by the authorities, but more than if he had been compliant from the start. Few, however, would recommend the approach Indonesia is taking.

The government estimates that rich Indonesians have perhaps $900 billion stashed overseas. To entice some of that money home, it wants to offer an amnesty. Parliament, which reconvened this week, is due to take up a bill soon. People who have hidden assets abroad will face no criminal prosecution or penalties, other than a flat fee of between 1% and 6% of the value of the assets in question, depending on how quickly they declare their stash and whether they repatriate it. (The 1% is for those who bring their money home immediately; 6% for those who take more than nine months to admit to hiding assets and keep them abroad.) Yet even 6% is a bargain compared with Indonesia’s top tax rate of 30%. Scofflaws should see the amnesty as an invitation “to invest their money for Indonesia’s development,” says Indonesia’s finance minister, Bambang Brodjonegoro (pictured). Indonesia’s government projects $8 billion-15 billion in revenue from the scheme.

That Indonesia has a revenue-collection problem is beyond dispute. Only some 27m of the country’s 255m people are registered for tax and in 2014 only 900,000 of these paid what they owed. Last year Indonesia took in just 82% of the tax revenue it had set out to collect. Its tax-to-GDP ratio is around 10%, compared with 13-15% for its South-East Asian neighbours. Joko Widodo, Indonesia’s president, says he wants to raise that to 16%. Indonesia’s constitution caps budget deficits at 3%, and most governments fear to get close to the cap, since missing revenue targets requires real and immediate cuts to spending.

But by taking $10 billion or so now, the government could be leaving ten times that amount on the table. Starting next year most jurisdictions where Indonesians are presumed to keep their hidden wealth, including Singapore, Hong Kong, Switzerland and Mauritius, have agreed to share information on foreign account-holders with their home governments as a matter of course, under an OECD scheme known as the Common Reporting Standard (CRS). Applying Indonesia’s normal tax rates to a conservative estimate of the money to be revealed by the CRS could yield well over $100 billion, before penalties, which Indonesia levies at 2% of the tax due a month.

The leniency is puzzling. Indonesia could levy a 25% tariff on offshore funds, and their owners would still come out ahead. Nicholas Shaxson of the Tax Justice Network deems it “very likely that powerful people in Indonesia have engineered this to make sure they’re not exposed and not subject to penalties.” But expediency is another possible explanation: Mr Brodjonegoro says that if the government waits for the CRS to take effect, “The benefit in terms of tax revenue will only start in 2019, the end of this administration.”

The Economist