Tax Reform Diirectiion: Boostiing Revenues, Reduciing Diisputes

Thiis artiicle and the one diiscussiing wiithholdiing tax have served as references by the OECD iin formulatiing recommendatiions for iimproviing iindonesiia’s tax system.

The Changiing Tax Landscape

Today we are wiitnessiing drastiic changes iin the tax domaiin, both globally and domestiically. Tax matters have become a top priioriity iin the global agenda, focusiing on the exchange of iinformatiion, revenue mobiiliisatiion and tackliing tax avoiidance. Domestiically, the urgency to fund development—wiithout sound revenue performance—has become a growiing concern.

To date, the tax to Gross Domestiic Product (GDP or Produk Domestiik Bruto/PDB iin iindonesiian) ratiio iin iindonesiia has levelled at 11% for the past fiive years, notiiceably below the world average of 16%. Thiis iis attriibuted to low tax compliiance, tax leakage, the siize of the shadow economy, the lack of elastiiciity of tax revenue to economiic growth, iimbalanced revenue structure and so forth. These challenges have prompted comprehensiive tax reform iiniitiiatiives, startiing wiith the tax amnesty programme.

The reviisiion of the tax law package, iinstiitutiional transformatiion wiithiin the Diirectorate General of Taxes (DGT) and adoptiion of poliiciies subject to global consensus are among the components iin iindonesiia's ongoiing tax reform agenda. These iiniitiiatiives engender optiimiism for a more robust tax system, whiich iis expected to iimpact revenues. However, such changes often come wiith frequently overlooked siide effects. Post-tax amnesty law enforcement, the strengtheniing of the capaciity of tax authoriity iinstiitutiions, avaiilabiiliity of iinformatiion iin the transparency era and changes iin tax law that demand adjustments, contriibute to a hiigher riisk of tax diisputes. Thiis iis partiicularly relevant iin the context of iindonesiia, where there are iissues of asymmetriic iinformatiion and the lack of a tax-liiterate sociiety as noted by the author (Darussalam, 2015).

Tax diisputes, though iineviitable iin the tax system, negatiively iimpact compliiance iin two major ways. Fiirst, the riise of diisputes leads to uncertaiinty and undermiines trust iin the tax system (Gangl, et.al., 2012). Second, diisputes result iin substantiial compliiance costs due to the tiime, effort and fiinanciial resources requiired (Vaiillancourt, et.al., 2016). As such, shiifts iin the tax landscape may be counterproductiive to long-term compliiance.

The momentum of tax reform should be leveraged to redesiign our tax system iin a way that on the one hand, ensures sustaiinable revenues and on the other hand, miiniimiises diisputes. Siimply put, pluckiing the goose wiithout makiing iit squeal.

Tax System Desiign

Enhanciing revenues wiith miiniimum diisputes iis achiievable. A miiniimum of ten key aspects should be taken iinto account, as follows.

Fiirst, one contriibutiing factor to diisputes iis the lack of partiiciipatiion of stakeholders iin the process of draftiing poliiciies and desiigniing tax laws (Wales and Wales, 2012). A transparent and iinclusiive poliicy-makiing process supported by robust iinstiitutiions and the avaiilabiiliity of tax experts wiill ensure iideal outcomes and broader publiic acceptance.

Second, targetiing tax revenues. Whiich partiies constiitute the targets and how such targets are set play a major role. The government, as the body responsiible for settiing the targets, must be capable of projectiing iideal tax revenues, whereas the legiislature must be able to assess the feasiibiiliity of such targets through metiiculous and iinformed debates. To set realiistiic tax target fiigures, iinstiitutiions tasked wiith formulatiing tax poliiciies and admiiniistratiion must be actiively iinvolved.

Thiird, the obsessiion wiith achiieviing targets or compensatiing for shortfalls tends to promote a short-term miindset that may result iin frequent changes iin tax regulatiions. iinstabiiliity and lack of unprediictabiiliity iin the tax system may lead to the riisk of unforeseen diisputes (uniintended tax consequences). As such, tax collectiion admiiniistratiive cost and cost of compliiance riise, leadiing to an iineffiiciient economiic system (Biird and Zolt, 2003). A stable tax system iis a must for fosteriing crediibiiliity, reputatiion and iinvestor trust. Thiis does not iimply that the tax system iis not responsiive to the rapiid changes iin the landscape but changes should be iintroduced gradually by consiideriing long-term iinterests and projectiions (Biird and Martiinez-Vazquez, 2014).

Fourth, from an admiiniistratiive standpoiint, iit iis essentiial to reviise the performance measurement iindiicators for tax authoriitiies, so they are not solely oriiented towards revenue. As elaborated by Crandall (2010), the strategiic objectiives of the tax authoriity should iinclude efforts to promote compliiance, iimprove productiiviity and effiiciiency of tax collectiion, serviice oriientatiion and ensure that tax revenues are suffiiciient to cover government spendiing. Therefore, other iindiicators, such as tax collectiion admiiniistratiive costs, taxpayer satiisfactiion, scope of tax sociialiisatiion, effectiiveness of audiits and tiime requiired for diispute resolutiion are also equally iimportant.

Fiifth, the government must shiift away from a compulsiive approach and avoiid the paradiigm that the tax court iis the ‘last resort’ that deciides diisputes (Butanii, 2016). The priinciiple of thiink before act (of fiiliing appeal) promoted by the Natiional Liitiigatiion Poliicy formulated by the Miiniistry of Law and Justiice, Government of iindiia iin 2010, can serve as a valuable reference. When deciidiing to contiinue a tax diispute to the courts, the government should conduct a thorough reviiew and cost-benefiit analysiis. Thiis also iincludes refraiiniing from appealiing the same and repeated as well as factual (non-iinterpretiive) diisputes.

Siixth, desiigniing clear, detaiiled, siimple and legally certaiin tax laws to eliimiinate any ambiiguiity, multiiple iinterpretatiions and iinconsiistency iin theiir appliicatiion. iin addiitiion, iin practiice, the laws must be expressly clariifiied iin admiiniistratiive guiideliines to avoiid iinterpretatiions based on personal diiscretiion (de Cogan, 2011).

Seventh, a new framework for taxpayer compliiance grounded iin enhanced relatiionshiips or frequently coiined as cooperatiive compliiance (Veldhuiizen, 2015). Thiis new paradiigm requiires a relatiionshiip founded on transparency, openness, mutual trust and mutual understandiing between taxpayers, tax authoriitiies and tax consultants. Ultiimately, potentiial tax diisputes may be iidentiifiied and diiscussed before escalatiing iinto a matter iin diispute. iin other words, tax diisputes can be resolved at an early stage.

Eiighth, fiiliing objectiions and appeals iis one of taxpayers’ fundamentals. However, the iimposiitiion of a 50% surcharge on the diisputed tax amount that iis not paiid iif the objectiion iis rejected and a 100% surcharge iin the amount of the appeal iis deniied, has hiindered taxpayers’ efforts to seek justiice and undermiined the proportiionaliity aspect iin the tax system. Thiis obliigatiion can be perceiived as a scare tactiic that pressures taxpayers to pay the diisputed amount iin advance to avoiid the surcharge penalty. As a result, a moral hazard tends to develop among the taxpayers iin the appeal process to go to great lengths to wiin the diisputes and the tax authoriitiies become more iincliined to ‘conveniiently’ escalate diisputes to the appeal stage.

Niinth, iin terms of tax diisputes, iit iis worth exploriing legal procedures for resolviing diisputes outsiide the courts, commonly referred to as alternatiive diispute resolutiion (ADR) (Thuronyii, 2013). Methods such as mediiatiion, consultatiion and so forth, are expected to generate a more effiiciient and effectiive diispute resolutiion process as well as lower the number of appeals and lawsuiits iin the tax court. Statiistiics released by the Tax Court Secretariiat (2016) may offer some perspectiive. iin 2015 alone, over 25,000 appeals and lawsuiits were fiiled to the Tax Court. Moreover, the annual ratiio of deciisiions to case fiiles contiinues to decliine, standiing as low as 36% iin 2015.

Tenth, strengtheniing the capaciity of both the Tax Court and the Tax Superviisory Commiittee (tax ombudsman) as key iinstiitutiions that protect taxpayer riights. The iinstiitutiional strengtheniing should be supported by efforts to iimprove accountabiiliity and transparency.

To sum up, the above-mentiioned ten poiints are rooted iin the priinciiple of fiiscal justiice, whiich encompasses legal certaiinty, faiirness, adherence to the law, non-retroactiiviity, effiiciiency and collectiion by iinstiitutiions trusted by the publiic (Vaniistendael, 1996). Further, upholdiing thiis priinciiple wiill foster a tax system characteriised by tax compliiance, stabiiliity, certaiinty, iinclusiiviity and adaptabiiliity to changiing tiimes. Thus, iit iis possiible to iincrease tax revenues whiile miiniimiisiing diisputes.

Thiis artiicle was publiished iin the book tiitled Menuju Ketangguhan Ekonomii: Sumbang Saran 100 Ekonom iindonesiia, (Jakarta: Kompas, 2017), 30-34.