Tax Amnesty – Key Considerations and Action Points

The ‘Carrot’ and the ‘Stick’

At the end of last month, we provided comment on the passing of the Tax Amnesty Bill and highlighted that the Bill itself left many questions unanswered. The full text of our previous commentary is set out below. The implementing regulations will go some way towards addressing these but many issues may need to be tested and difficulties ironed out before anywhere close to full clarity is achieved……..the main issue in this respect is that there is very little time for taxpayers to take advantage of the ‘çarrot’ being offered and thereby avoid the ‘stick’.The program is due to end in March 2017 with the most favourable outcome only available until 30 September 2016 for many. Key points to note:

• ALL taxpayers are eligible* to take part (including expatriate tax residents)
• Early disclosure attracts a lower penalty, or ‘ransom’, but we recommend full consideration of the overall impact and strategy to decide the correct timing
• Asset allocations will determine the overall tax impact, including future taxes, although taxpayers should be aware that changes in the income tax law are also planned within the year

On paper the carrot is significant – a relatively small amount of ‘ransom’ money will effectively wipe the slate clean with regard to any taxation liabilities which would otherwise arise on undisclosed assets – and the process appears simple and quick. However, depending on the complexity of asset holdings and other factors, many taxpayers may still find that there are more questions than answers in determining how the program may apply and how to meet the disclosure requirements to allow the most favourable outcome. 

The key consideration though may be the stick which will be employed alongside the carrot – an intensive campaign is planned on those taxpayers who do not take advantage and it would seem that the standard five year statute of limitations may be waived for taxpayers who do not participate in the tax amnesty program – assessments may be possible back to 1985!

What to do?

We recommend that risks are assessed and that actions follow a three step process (which applies to both corporate and individual taxpayers):

1. a full and frank assessment of the level of compliance to 31 December 2015 and the existence of undeclared assets
2. an analysis of the ability to comply with the disclosure requirements and the impact this will have on the application and on disclosures and tax costs going forward
3. decisions on the restructuring of asset holdings to ascertain whether tax planning is necessary to enhance investment strategy and approach  

The first step should assist in painting a picture of the level of risk and combined with step two the extent to which the benefits can be enjoyed. The third step should allow taxpayers to manage their effective tax rate in the new global tax environment in which tax considerations are increasingly important, with additional transparency necessitating careful planning and consideration of all stakeholders.

* the only exceptions regarding eligibility are those being investigated or convicted of tax crimes

Last month’s commentary

To the news that the Tax Amnesty Bill had finally been passed we asked the question (on 28 June 2016) “Are you Prepared?”…….to which we commented:

“The truthful answer to that is probably no. There are too many uncertainties regarding how this will be implemented for many who are in the position to take advantage to do so.

Setting aside, if we may, the moral arguments for and against this long-awaited bill, the fact is that it is now upon us and it would seem that high reliance is being placed on its success in attracting the repatriation of funds in the short term and an increase in the level of tax compliance thereafter.

Both aims would appear to be sound but there is significant unease that many issues have not been thought through and the practical implementation of the regulations are likely to see many new problems arise and a lot of complexity as taxpayers try to take advantage of the favourable terms without laying themselves open to double taxation or problems in other jurisdictions. Many may find themselves in positions where the ‘tax tail is wagging the commercial dog’ as assets are liquidated or transferred in efforts to comply with the most favourable rates.

Whilst we await further details and implementing regulations, all Indonesian resident taxpayers should be aware (if this fact has somehow escaped them) that the Indonesian Tax Office has the right to impose tax on worldwide income. Certain types of income in Indonesia are subject to favourable tax regimes but (except if declared under the tax amnesty) if the income is deemed to be sourced overseas it will be taxed at up to 30% for individuals and up to 25% for corporates…….aside from ensuring a full understanding of the extent to which assets have been omitted from any tax declarations to date, taxpayers should consider the breakdown of these assets, the extent to which they may be liquidated or transferred and the extent to which any liquidated funds can be invested in assets which will allow the most favourable rate to apply on the declaration, whether this means repatriation or relates to the timing of the declaration.”