How is the Indonesian tax amnesty affecting Singapore?
Beyond news of the haze, perhaps you would have heard that Indonesia has rolled out another tax amnesty just a few months back. At this point, we must already realise that whatever happens in our neighbouring countries affect us here in Singapore too.
The Indonesian tax amnesty kicked off in July, and has gotten off to a slow start. Earlier media reports suggested that Singapore’s banks would suffer a serious blow from funds being withdrawn by rich Indonesians under the amnesty.
There were also suggestions that the Singapore property market might be negatively impacted given it has historically been the recipient of significant investments from Indonesians.
A few properties in Singapore owned by Indonesians seem to have come onto the market recently at discounted prices.
What you should know about the tax amnesty
The tax amnesty allows for past ‘misconduct’ by Indonesian taxpayers to be forgiven on payment of a 5% tax levy on all hitherto hidden overseas assets. This option to give Indonesians a “clean slate” is meant to encourage them to declare these overseas assets, sell then off, and have the proceeds repatriated.
The Indonesian government has forecasted that around $76 billion will be returned under these terms. Both the central bank of Indonesia, and the private sector, have put the figure much lower, at closer to $42 billion and $30 billion respectively.
Given the government collected only $500 million in its previous tax amnesty in 2008, even the private sector estimates of the tax take look rather optimistic.
The conservative estimations may be partially due to the stipulations that come with returning money to Indonesia.
Will Indonesians actually do it?
One requirement that may hinder them from repatriating the money home is that they are required to keep returned money in the country for three years, and invest it only in government mandated domestic assets. That makes little sense for investors who are already comfortable with their diversified portfolio.
On top of that, the Indonesian Rupiah has performed poorly against the Singapore dollar over the last few years, so, naturally, they would be reluctant to hold a weaker currency.
But perhaps the bigger reason is to do with the tax amnesty concept itself. Although tax amnesties have been regularly used by tax authorities around the globe, they do not have a particularly good track record of compliance.
Their biggest flaw is that they penalize regular taxpayers, and demonstrate that there are huge advantages in not paying tax because of the chance of being ‘forgiven’ in the future.
Some have even pointed to Indonesia’s relatively high tax rate (27%) as one of the chief underlying causes of the low number of actual tax payers in the country.
Discussions are ongoing about Indonesia lowering the rate to a level closer in line with Singapore’s 17%, which would be clearly more attractive to higher net worth individuals and corporations.
Whether Indonesia can develop as sophisticated a financial hub and wealth management industry as Singapore, however, is an entirely different issue.
Even as Singapore does not enjoy the natural resources of oil and gold that Indonesia does, its banking sector is widely regarded as superior. Despite rumours that Singapore banks have offered incentives to Indonesian clients to keep their money in Singapore, MAS Managing Director Ravi Menon has suggested a large outflow of money from Singapore to Indonesia is not likely.
Singapore ramping up their anti-money laundering efforts
Nevertheless, irrespective of the tax amnesty in Indonesia, pressure remains on the city state to clamp down on money laundering.
Investigations related to the recent banking scandal involving the Malaysian state fund, 1MDB, are still ongoing, and there is a push for banking transactions to be made more transparent.
Singapore has pledged to sign up to the OECD accord requiring the automatic exchange of tax information between signatory countries. The accord is due to come into force in 2018.
While many Indonesians may choose not to move their money out of Singapore in this current tax amnesty, perhaps new inflows will reduce as anti-money laundering related legislation tightens in the Republic.