Indonesia, one of the biggest economies in Southeast Asia is implementing an ambitious tax amnesty program that aims to repatriate assets from tax heavens. Thus, the country hopes to reduce social inequality, stimulate its economic growth, and increase tax compliance on a sustained basis.

The program includes tax incentives and immunity from prosecution in return for reporting undeclared assets. Launched in July 2016, the program will last for nine months. However, it has already proven to be a success as the country’s budget deficit is covered and the governmental revenue has increased significantly. So, what is the reason for the success of the program?

Context

In Indonesia, the gap between the rich and poor is wide. Although the rich people constitute as little as 1% of the Indonesian population, they own half of the country’s total wealth.The Indonesian government estimated that over USD 303 billion are held by rich Indonesians in tax heavens, such as Singapore, Hong Kong, and the British Virgin Islands. The transfer of significant wealth outside Indonesia has led to along-standing budget deficit.

The essence of the program

The program offers generous tax rates for repatriated assets (2% on domestic assets and 4% on offshore assets for the first three months, 3% and 6% in the next three months, and 5% and 10% in the last three months). Moreover, the participants in the program are not required to declare the origin of their funds. Besides, they gain immunity from prosecution.

The reported funds should be moved to specific investment instruments prepared by Indonesian financial authorities, such as government and corporate bonds, collective investment contracts, and real estate investment schemes.The Indonesian government expects to repatriate about USD 76 billion that are currently stashed abroad.

The program is particularly attractive due to the fact that Indonesia will soon start automatically exchanging tax information with other countries.

Controversy of the program

Despite its success and a potential to accelerate the economic progress of the developing country, the program received substantial criticism. For instance, it is criticized for (i) unfairly rewarding tax evaders for their past financial crimes and (ii) unequally treating the law-abiding Indonesian tax payers.

Irrespective of the criticisms, more than 600.000 Indonesian taxpayers joined the program, thus making it “one of the most successful in the world”.