As the world becomes more global and cross-border activities become the norm, tax administration needs to work together to ensure that taxpayers pay the right amount of taxes to the right jurisdiction. According to the OECD, today’s global financial world, virtually unlimited, makes it easier for people who want to hide their money overseas to avoid taxes. The amount of money that is heavily guarded abroad and is not permitted as long as taxpayers fail to meet tax obligations in their home law territories.
The growing concern in some jurisdictions with the promotion of tax transparency and cross border tax avoidance has resulted in a global commitment to implement international tax information exchange. Countries have a common interest in maintaining the integrity of their tax system. Cooperation between tax administration is essential in the fight against tax evasion and in protecting the integrity of the tax system. The key aspect of such cooperation is the exchange of information. This requires a fair and transparent international tax system to avoid tax evasion and encourage a conducive tax policy in each member country. Implementation of AEoI is closely related to the role of other countries. In the implementation of AEoI the principle of reciprocity or equal treatment with other countries into one.
The story began in 2009 when G-20 members announced a joint commitment to end the era of bank secrecy for tax purposes. Subsequently, in February 2014, G-20 and OECD members agreed on the “Common Reporting Standard” (CRS) issued by the OECD as an automated banking information exchange instrument. CRS provides an annual automatic exchange between government financial account information. The standard specifies financial account information to be exchanged, financial institutions that need to be reported, various types of accounts and taxpayers, as well as the common due diligence procedures that financial institutions must follow.
By the end of 2014, 51 countries approved the Competition Authority Agreement (MCAA) to apply the standardized tax-related information exchange in the avoidance of combat tax through the exchange of financial information between countries. This is a clear sign of a paradigm shift in applying transparency in financial institutions to a new era of financial secrecy. The presence of “financial secrecy” in today’s era is like wrapping up complex economic transactions into “Blackbox” increasingly difficult to trace. Globalization actually has a dark side. In the tax context, globalization creates the vulnerability of erosion of the state tax base to the possibility of international tax evasion activities. Such activities are generally carried out by placing assets or income abroad without reporting to the owner of the country’s assets ownership of the asset’s domicile.
As of August 30, 2017, 95 jurisdictions have signed a multilateral competent authority agreement (MCAA) to automatically exchange information under Article 6 of the Multilateral Convention on Mortgage Administrative Assistance in Tax Issues. Further, September 2017 could be said to mark a historic point in international tax enforcement, as it is the month that around 50 jurisdictions have committed to making their first automatic exchanges of information under the OECD Common Reporting Standard (CRS). Countries that have signed contracts with CRS will exchange information “automatically” with each other. This is something of a step change in international tax enforcement.
Financial information to be reported in relation to reported reports includes interest, dividends, account balances, income from certain insurance products, proceeds from the sale of financial assets and other income generated in connection with the assets held in the accounts or payments made in connection with the accounts. Reportable accounts include accounts owned by individuals and entities (including trusts and foundations), and the standard includes the requirement that financial institutions “see through” passive entities to report those who control them.
Financial institutions covered by this standard include custodial institutions, depository institutions, investment entities and certain insurance companies, unless they are at low risk used to avoid taxes and are not included in the reporting.
Traditionally, information about a person or business has been sent from one tax authority to another on demand, based on evidence that tax fraud or some other crime has occurred. Under automatic information exchange, if the customer is identified as a jurisdictional tax resident whereby Indonesia has signed an international agreement, the information collected shall be shared with the local tax authorities and other relevant tax authorities. In connection with the banking sector, upon opening a new account, the bank must first determine whether the account holder is the person who can be reported by requesting the certification form itself from the customer / account holder. If the certification form itself specifies that the account holder is a resident for tax purposes within the reported jurisdiction, the bank account will be treated automatically as a reportable account.
Director General of Taxes Ministry of Finance Robert Pakpahan affirmed that Indonesia is currently eligible to join the cooperation of exchange of information on the taxation (Automatic Exchange of Information / AEoI) between countries.
There are four requirements set by OECD for Indonesia to participate in AEoI. First, the law in the form of issuance of regulations in the country, where the government has issued Government Regulation Enforcement Taxation No. 1 of 2017 on the exchange of financial information. Secondly, the OECD requires the Indonesian government to follow several international agreements. Indonesia has also activated an international agreement.
The third requirement is a quality information system and technology in which Indonesia qualifies. The IT system already has an external team that assesses the system at the Directorate General of Taxes. The last requirement is the ability of the government and the ability to maintain data confidentiality. Indonesia has also been declared eligible for this governance capability to keep the data secure.
Indonesia believes that financial transparency through AEoI will be useful in handling illicit financial flows that have been detrimental to developing countries for years. President Joko Widodo reiterated Indonesia’s determination to support the implementation of the policy of exchange of financial information between countries for the benefit of taxation. This method is believed to increase the revenue of developing countries amid the global economic slowdown. President Joko Widodo said Indonesia is committed to increasing tax revenues in maintaining business and investment climate.