SINGAPORE — The Indonesian tax amnesty law passed last month has bolstered financial markets amid high hopes that reduced rates will spur a massive influx of repatriated assets.
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Indonesian stocks surged on the afternoon of June 28, after the law was passed. The benchmark Jakarta Composite Index jumped about 1% that day and touched fresh year-to-date highs on June 29 and 30. The rupiah rebounded sharply from historic lows against the dollar.
Bank stocks fared especially well. Bank Mandiri jumped 5% June 28, while Bank Negara Indonesia climbed more than 2%. The infrastructure sector also made a strong showing, with cement manufacturer Semen Indonesia advancing for three straight days through June 30.
The return of money parked overseas will “improve the profits of banks struggling to secure deposits,” said an analyst in Sumitomo Mitsui Banking Corp.’s Singapore office. The analyst estimates that the program will lift Indonesia’s real gross domestic product for this year by 0.1% to 0.2%.
Wong Kok Hoi, chief investment officer at Singaporean hedge fund APS Asset Management, said he expects the repatriation of offshore funds to increase investment related to real estate and infrastructure, including roads and ports.
A much-needed boost
The measure offers reduced tax rates on undeclared overseas assets that are voluntarily reported or brought onshore by the end of March, while waiving penalties on participants. It imposes rates of just 2-5% on repatriated wealth, compared with standard income tax rates of 5-30%.
Just 3.5% of Indonesians filed tax returns in 2010, data from the Japan External Trade Organization shows. The rate is even lower for companies, at 2.1%. This indicates that the tax collection system is not functioning as intended, which may owe partly to the country’s size.
The equivalent of hundreds of billions of dollars is believed to be squirreled away in tax havens. Collecting taxes on this money is extremely difficult and highly inefficient given the time and effort needed. Tax amnesty plans take a different approach entirely, offering attractive rates to encourage voluntary tax payment. Indonesia’s program is seen bringing 1 quadrillion rupiah ($76.4 billion) into the country.
Successful precedent
Indonesia does not have a monopoly on the amnesty idea. In the U.S., 49 states implemented tax amnesty programs more than 110 times between 1982, when Arizona started the trend, and fall 2011, according to Megumi Kashiwagi, senior research fellow at the Canon Institute for Global Studies.
A 2011 program by the state of Washington, for example, brought in about $346 million in tax revenue from businesses — 907 times what it cost to administer. Tax amnesty programs can help governments “find hidden tax evaders and delinquent taxpayers, raising tax revenue over the medium term,” Kashiwagi said.
But with tax dodging and income concealment in the global spotlight after the release of the Panama Papers, some worry that tax amnesty will just encourage moral hazard. Time will tell whether Indonesia’s broad-minded policy will bring in the massive sums expected and bolster stocks and infrastructure investment.
KOTARO HIDAKA, NQN staff writer
Source: Nikkei.com
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