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The Law on Harmonization of Tax Regulations has been enacted. Through a discursive and deliberative process, Law Number 7 of 2021 has been finally enacted by the Government along with the Parliament through State Gazette Number 246 of 2021.
There are numerous new contents in the law enacted during the pandemic, one of which is the addition of an individual income tax rate layer. Article 17 paragraph (1) of the Income Tax Law as amended by the HPP Law regulates that the income tax rate for individuals with taxable income above five billion rupiah is 35%. Whereas, in the previous provision, the maximum personal income tax rate was 30%. The addition of this layer also places Indonesia as the country with the highest OP income tax rate in ASEAN along with Vietnam and Thailand (Shira, 2017).
Conversely, Article 26 of the Income Tax Law regulates that the income tax rate on income received by foreign taxpayers is 20%. This means that the tax imposed on domestic taxpayers with income above five billion rupiah is relatively higher than the income tax imposed on foreign taxpayers.
With these three facts, one can imagine several implications that may occur in the future. First, there is a possibility that Taxpayers with Taxable Income above IDR5 billion will try to split and divert their income into in-kind income in the form of facilities, facilities and other in-kind benefits. Indeed, the Income Tax Law regulates that in-kind with certain limitations is no longer excluded as a tax object. However, as long as the tax on natura has not been further regulated in the derivative regulations or as long as the tax rate on natura is lower than the personal income tax rate, there is still a loophole for high-income taxpayers to divert their income in the form of natura.
Second, from the side of employers who provide Income Tax Article 21 benefits, it will be more profitable to employ foreign taxpayers (expatriates) compared to domestic taxpayers if the taxable income of the employee or professional is above five billion. As explained above, the highest rate of Income Tax Article 21 is 35% while the rate of Income Tax Article 26 is 20%. In fact, if there is a double tax avoidance agreement with a partner country, the Income Tax Article 26 rate can be lower. Thus, for employers who provide Income Tax Article 21 benefits for their employees who earn more than five billion, it would be more beneficial to hire foreign taxpaying employees or professionals because they will be subject to a lower tax rate.
If this condition continues, it is possible that it will erode the national competitiveness of the Indonesian. Moreover, in the era of gig economy like nowadays, a foreign worker can work anywhere and anytime without being bound by country restrictions. This is in line with the results of research conducted by Bucovetsky (1991) which states that if there are two tax jurisdictions where taxpayers can easily move (mobile), then the jurisdiction with a lower tax rate generally has better and more stable macro and micro-economic conditions.
Third, in the long run, the difference between Income Tax Article 17 and 26 rates will trigger tax planning in the form of income shifting on income received by individual shareholders. The form and shape of tax planning conducted by Individual Taxpayers to obtain the benefit of lower tax rate can be in various ways. For example, Individual Taxpayers who act as shareholders convert their income as dividends because based on the HPP Law, dividends are not tax objects (Merks, 2011).
Also Read: Legal Remedies for Objections in the Perspective of the HPP Law
To overcome this condition, there are basically several policies that can be taken by the government. First, the government must immediately issue derivative regulations governing the subject, object and limit of fringe benefit tax. This regulation is important to avoid income shifting for high-income individuals. As it is known that the higher a person's position, generally it will be followed by income and other facilities that come with it. Thus, a person with high income will generally find it easier to transfer income in the form of cash into other facilities or enjoyment. Therefore, the determination of the subject, object and threshold of fringe benefit tax becomes very important to be applied.
Second, to prevent human capital outflow due to differences in income tax rates as well as to maintain national competitiveness of domestic human resources amid the onslaught of the gig economy and crowdfunding, the government can provide incentives, for example in the form of reduced tax rates for Individual Taxpayers who invest part of their income in domestic derivative instruments such as government bonds, stocks, obligations and so on.
In addition, the government can also provide incentives for foreign companies that provide know-how for domestic taxpayers. Indeed, in the short term, this incentive will increase tax expenditure. However, in the long run, this policy will strengthen Indonesia's human resources and national competitiveness, which in turn will increase tax payments. However, it should be noted that incentivising high wealth individuals must be done carefully. A research conducted by Hope and Limberg (2022) finds that tax cuts on the rich will lead to income inequality in both the short and long term. In addition, tax cuts on the rich do not have a significant effect on economic growth and unemployment.
Third, to prevent tax planning in the form of income shifting on affiliated transactions involving high wealth individual taxpayers, the government must strengthen supervision of beneficial owners. Moreover, to prevent aggressive tax planning on different tax rates, the government can also provide incentives or compensation to taxpayer management, for example in the form of ease of reporting, accelerated returns and elimination of fines.
Research conducted by Armstrong et al (2012) found that there is a negative correlation between incentives given to company management and the effective tax rate. It means that management who are given compensation or tax facilities will generally reduce the tax burden reported in the financial statements compared to management who are not given facilities. This is in line with research conducted by Graham et al (2014) which found that incentives in accounting and finance play an important role in reducing aggressive tax planning.
In the end, we hope that tax policy, especially for wealthy taxpayers, not only can provide maximum benefits for the people but also provide justice for all taxpayers.
References
Armstrong, C. S., Blouin, J. L., & Larcker, D. F. (2012). The incentives for tax planning. Journal of Accounting and Economics,, 53(1), 391-441. https://doi.org/10.1016/j.jacceco.2011.04.001.
Bucovetsky, S. (1991). Asymmetric tax competition. Journal of Urban Economics, 30(2), 167-181. https://doi.org/10.1016/0094-1190(91)90034-5.
Graham, J. R., Hanlon, M., Shelvin, T., & Shroff, N. (2014). Incentives for Tax Planning and Avoidance: Evidence from the Field. The Accounting Review, 89(3), 991-1023. https://doi.org/10.2308/accr-50678
Hope, D., & Limberg, J. (2022). The economic consequences of major tax cuts for the rich. Socio-Economic Review, 20(2), 539-559. doi: 10.1093/ser/mwab061
Merks, P. (2011). Dividend Withholding Tax Planning Techniques: Part 1. Intertax, 39(10), 460-470. https://doi.org/10.54648/taxi2011050
Shira, D., & Brown, M. (2017, February 28). Personal Income Tax in ASEAN: a Guide to 2017 Rates - ASEAN Business News. ASEAN Briefing. Retrieved September 2, 2022, from https://www.aseanbriefing.com/news/personal-income-tax-asean/
