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Indonesia’s Second Tax Amnesty: Is This Your Last Chance?

tax amnesty
Indonesia’s Second Tax Amnesty: Is This Your Last Chance?

We believe Indonesia is heading in the right direction, despite the distractions global events have been throwing our way for the last couple of years.

We were actually saying similar things back in 2016 in a “Connecting the Dots” piece in Gapura Bali as well as in blogs on our own website around rules, regulations, due diligence, nominees, investment road maps … and taxes – that nasty four-letter word nobody really wants to talk about.

But taxes are once again a hot topic in Indonesia with the window for the second tax amnesty, called “Tax Amnesty Volume II” or Voluntary Disclosure Program, opening on 1st January and ending on 30th June 30 2022.

One of the most significant factors to consider is the government’s drive to normalise all regulations and streamline rules and processes between the central government, provincial governments, and regencies. Most decisions for any investments, for example, are now centralised and as a result, a lot faster than in the past and a good number of permits can now be issued in just 10-15 days.

This easing up on both domestic and foreign investments is making it easier and more transparent to open businesses in Indonesia and savvy investors are taking notice. In fact, some international financial institutions and consultants, such as Wellington Capital Advisory, believe that Indonesia may become the fourth-largest economy in the world by 2030. And that’s worth taking seriously.

There are many reasons for this, not least of which is a COVID-forced reliance on its own large domestic economy, which the World Bank rates as the largest in Southeast Asia. In tune with this, the administration has passed many regulations around the country’s natural resources to downstream more of its raw materials before exports. The Omnibus Law has also created more of an appetite for a domestic market with many factories and producers focusing on the tastes and desires of an ever-growing domestic middle class.

With all of this happening it begs the question, at least it does to us, why so many businesses, investors, and consultants still try to create shortcuts to circumvent the laws and regulations, especially as in the very near future all systems will be connected through OSS.

Don’t get us wrong we’re the first ones to admit there’s more than one way to set up a business, depending on what business you’re in of course, but there are some basics to understand and be aware of, no matter what you’re doing.

We’re using the Urban Dictionary definition of the phrase What could possibly go wrong?” here because it’s a tongue-in-cheek statement of optimism and also an immediate trigger for Murphy’s Law (if something can go wrong, it will), which is then followed by a cascade of unexpected and terrible consequences.

So, let’s look at a few scenarios of what we see in our line of work, which is legal advice, real estate, investments, tourism, and other related industries. Believe it or not, these are based on real-life examples and when it comes to real estate, they involve a peculiarly Bali-specific problem of nominees.

Some of these may give you shivers and if any of the following rings bells, you may want to grab a chair and take a few deep breaths before you give us a call.

Here we go …

What could possibly go wrong if you own property under a nominee you fully trust? 

“Actually, I don’t even know the nominee. It was just a name and a signature on a document I was asked to sign, so I could buy my villa under a freehold title. It seemed to work just fine and there won’t be a problem with it.”

Oh, dear.

Because what if the nominee is under financial pressure from his or her family and they could be looking at ways to get something out of the property? This does happen and there are cases out there with nominees demanding billions of rupiah for their signature and there’s nothing you can do about it!

What if your nominee passes away and you have to deal with the next generation who may not know much about what their parents signed and what their rights are?

And what if the tax office found out you were the beneficial owner and had been receiving active income for the last 5-10 years? You don’t think they know how to check Facebook accounts and Airbnb?

The tax office is saying that anyone not coming clean this time around with the second tax amnesty will be penalized with 200 percent of whatever un-paid taxes they may find!

And what if the nominee had paid taxes but you hadn’t? You’re liable again through something called “BUT” (Badan Usaha Tetap or Permanent Establishment) or personal income tax. And what if the nominee on your Pondok Wisata license suddenly didn’t want to be on it anymore? How do you make sure you’re operating in compliance? And what if the nominee sold the property? Or leased it out for many years?

What could possibly go wrong if you buy land that doesn’t have the correct status for what it is you want to build?  

Well, for a start you won’t be able to register a business on it and that would mean you won’t be able to get the permits you need. Makes sense, right?

With the newest version of OSS, regardless of what permits are issued, it may well be very difficult to legally perform any activity other than what is allowed through the official zoning. As an example, let’s say you buy a property in a residential zone and someone tells you that you could get an operational permit to rent it out, like a three-bedroom villa that would be just great for holiday rentals.

Well, here’s some hard truth served real cold on that.

In this kind of scenario, the government would tend to allow locals to operate without the right permits, but as a foreigner, they won’t. And you would need to develop an official relationship with a local so the tax office can clearly identify who pays what, as well as the permit office making sure you comply.

It hurts, we know. But it’s what happens.

What could possibly go wrong if you do not take advantage of the latest, second tax amnesty and you want to sell?  

You definitely do want to sit down for this one.

The second tax amnesty started on 1st January and ends on 30th June and there are various categories for what you would need to pay on any undeclared assets and income, including property.

“Then we just won’t sell like we were planning,” you say. “There’s no way I’m paying that much tax! Let’s just forget about selling it and either continue living in it or just rent it out.”

Hang on a second. Don’t you think the government already know and will just come for their taxes anyway, even if you’re not selling?

(Spoiler alert: the answer is a resounding “Yes!”)

There are already cases where the tax office has hit people with a 200 percent penalty for this kind of thing. And this time around, they say they will enforce this on those not complying. You should also be aware that the tax office also has the right to conduct a tax investigation going back 15 years. This applies to any business, not just real estate.

And, oh my god, what if immigration finds out? Because isn’t receiving a direct income from a business considered “work” and therefore subject to having the correct visa? As a matter of fact, the recent regulations softening up for foreign ownership of properties clearly states that any ownership, including long term lease, will require either a PMA and/or residential status.

I know some of these scenarios seem a little far-fetched, and for us, they’re almost unbelievable because we’ve been trying to advise people to get all of their ducks in a row for quite some time, but believe me they are very real.

We’re not trying to scare you or put you off with this brutal kind of approach, we’re just trying to make you aware so you don’t fall into the trap many people here have fallen into. We have argued for years for clients to observe the laws, rules, and regulations because Indonesia is normalising and complying with general international practices and want to increase taxes as well as make sure all are in compliance, expats and locals alike. It’s for real this time, there is no going back, no further opportunities for shortcuts anymore. This really is the last chance.

And remember ignorance may be bliss but it’s no argument under any country’s laws.

Seven Stones Indonesia provides a range of business services, including market entry, country representation, consultancy, and advisory services as well as tax and accounting packages. We can offer a free review of your structure to make sure you comply, as well as advice on general taxes and taxes relevant to the ongoing tax amnesty.

If you’d like to learn more about how we can help, get in touch with Seven Stones Indonesia through [email protected]

By Terje H. Nilsen, CEO and Co-Founder of Seven Stones Indonesia

Sources: The World Bank, Wellington Capital Advisory, Gapura Bali, Seven Stones Indonesia, Kompass, Online-Pajak, Urban Dictionary

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