Corruption and Tax Compliance

A report of tax compliance achievements from the Taxation Directorate General in May was overshadowed by all the noise of the 2019 election. This is despite tax compliance being a crucial issue that determines the state’s ability to fund all of its activities and national development efforts.

Compared to the government’s 85 percent tax compliance target in 2018, the tax compliance realization remained low at 67.09 percent (Taxation Directorate General, 2019). Despite the figure being slightly higher than the previous year’s 66.74 percent, at this level of tax compliance growth, especially after the tax amnesty policy in 2015, it will be difficult to significantly increase our tax-to-GDP ratio from 11 percent without any significant breakthrough.

On the other hand, tax compliance is closely linked to the corruption perception index (CPI). In an International Monetary Fund (IMF) white paper titled “Corruption, Taxes and Compliance” (Anja Baum et al, 2017), the corruption level is significantly linked to the state revenue aggregate performance. The linkage effect has been estimated to be more or less 0.6 percent of the country’s annual gross domestic product (GDP).

The conclusion was made after studying links between several countries’ corruption perception indices as published by Transparency International and tax compliance parameters, such as the tax compliance gap, tax ratio, value-added tax (VAT) efficiency ratio and several other variables.

In fact, almost all countries with a high CPI have good taxation administration systems. Scandinavian countries, for instance, are famed for their high CPIs as well as high tax compliance rates and good tax ratios.

However, it is equally interesting that this study also concludes that improvements in the taxation administration system will lead to more significant CPI improvements than corruption eradication efforts, including the establishment of anticorruption agencies.

The conclusion is in line with a 2012 study by Johnson, Taxell and Dominik, who believe that public finance management improvement, including taxation administration system improvement, would be far more effective in preventing corruption. With a good taxation administration system, corruption will be easier to detect. It will be even better if the system is supported by an expansion of a climate of transparency through the establishment of a wide-ranging cashless society.

Corruptors, typical tax evaders

It is easy to believe in the logic that almost all corruptors are naturally also tax evaders. This is because corruptors and corrupt corporates will never report, let alone pay, their taxes properly based on their total revenue and illicit expenses, including money laundering.

However, history shows that Al Capone was arrested after his bookings could not be reconciled with his tax reports. From here, it became easy to investigate his other crimes.

You must know the story of Alphonse Gabriel “Al” Capone, an American gangster who slickly carried out his crimes and corruption. He always managed to evade the law as he bribed and colluded with those in power and the law enforcement. However, history shows that Al Capone was arrested after his bookings could not be reconciled with his tax reports. From here, it became easy to investigate his other crimes.

This is not too different from the common corrupt practices in Indonesia. With a taxation administration system working inclusively and hand-in-hand with law enforcement, we must be able to tear down the curtain of corruption, recover state assets and improve state finances.

Professor Sebastien Lafrance from the University of Ottawa, who is also a senior prosecutor, said in a 2018 sharing session at the Corruption Eradication Commission (KPK) that it would be important for a country’s taxation authority to back corruption eradication efforts, especially those related to money laundering.

In this digital era, it will be difficult for law enforcement to investigate massive-scale global scandals, such as the Panama Papers and the Paradise Papers, without backing from tax authorities. Moreover, with information technology advances and the automatic exchange of information (AEoI) among international tax authorities, international corruption investigation and asset-tracing will become easier.

In short, corruptors must be common enemies for law enforcement and tax agencies as corruptors are naturally tax evaders. Consequently, corruption investigations must also be accompanied with tax compliance investigations to ensure that the state’s finance rights are fulfilled before there is any corruption indictment as an ultimum remedium.

Agenda of future synergy

The presence of a proper tax administration system is key to improving the quality of public accountability and will narrow the opportunity for corruption and other financial crimes. It is time for all parties, including corporates, that commit bribery and acts of gratuity to no longer be able to blur the traces of their financial flow in their tax reports.

This can be achieved by accommodating various inclusive and collaborative features that support other state bodies in improving tax compliance.

The government must accelerate its development of a tax administration system that will not only improve tax compliance and state revenue but also support corruption prevention and eradication efforts. This can be achieved by accommodating various inclusive and collaborative features that support other state bodies in improving tax compliance.

For instance, the Taxpayers\' Status Confirmation (KSWP) Information System must be expanded to include not only passive checks but also the ability to receive feedback related to permit revocation or revision that may affect taxpayer compliance.

Simplifying and integrating KPK state officials\' wealth reporting (LHKPN) system and the Taxation Directorate General\'s e-filing system must also be achieved. What is reported in the LHKPN must be in line with what is included in taxpayers\' wealth reports attached to tax reports.

Integrating the two documents will make it easier for taxpayers and those required to file the LHKPN to carry out their responsibilities. The integration will also ease the work of tax examiners and the KPK\'s LHKPN analysts in verifying and following up on findings of indications of irregularities in the wealth reports of state officials.

Cashless system expansion and improved accuracy of the single identity number (SIN) system will also be crucial in supporting effective operations of a tax administration system.

Beyond system development, synergy between tax analysts and law enforcers, thus far relying on limited and sporadic personal relations, must be transformed into a proper system of mutual strengthening.

A joint investigation scheme between law enforcers and tax examiners must be expanded in corruption investigations and with clear and adequate regulations.

Of no less importance, the President as head of government must ensure that cooperation between law enforcers, tax authorities and other relevant agencies is constructive and freed from sectoral ego and conflicts of interests. Without it, our country will continuously be trapped in a poor CPI and tax ratio.

Mohammad Tsani Annafari, Advisor, Corruption Eradication Commission; Member of the Indonesian Fiscal and Tax Administration Association [IFTAA])