Newsmaker Interview: Ay-Tjhing Phan

PwC Indonesia partner and tax leader discusses the tax amnesty, the ASEAN economic community, and how a better tax system can help lure foreign investment

By Mary R Silaban
Wednesday, August 10, 2016

PwC, the world renowned accounting and consulting company has been operating in Indonesia since 1971 when PriceWaterhouse entered a partnership with Indonesian public accountants Drs. Hadi Sutanto and Rekan. The strong partnership has developed into one of the most reputable public accounting firms in Indonesia, with clients ranging from multinationals to local businesses.

Ay-Tjhing Phan, a tax partner with PwC Indonesia and head of PwC Tax, is one of Indonesia’s leading tax minds with more than 20 years experience in tax in many countries.  AmCham Indonesia spoke with Ay-Tjhing about her views on the tax amnesty and how Indonesia could be more attractive to foreign investment if the tax system is more effectively managed.

AmCham Indonesia: What are the responsibilities of your role?
Ay-Tjhing Phan:
My responsibility to the firm is to ensure the tax business of PwC Indonesia runs smoothly and my responsibility to my clients is to assist them to allow them to effectively manage their tax affairs and to ensure that they receive quality services from PwC.  But I also have a responsibility to the people of our tax department. I make sure PwC develops and builds talent here, since our people enhance the quality of the organization and ultimately support our clients. PwC focuses on providing value to our clients and to society, and we can only achieve that by having the right talent, the best brand, and delivering the highest quality.

What is your view on the tax amnesty?
I see this tax amnesty program in a positive light. This shows the government is being very serious about further enhancing the Indonesian tax system and broadening the tax base. At present, Indonesia has a very low tax-to-GDP ratio when compared to its peers and the country's development very much depends on how much revenue can be raised and how much liquidity we can bring back into the market.

The government believes that there are many assets owned by Indonesians outside the country. At a time when boosting national development is a challenge, this tax amnesty is a tool to help the government to repatriate the assets to enhance liquidity in the country and put that money to work at home.  It is true that it can help to increase tax revenue in the short term – because of the redemption fee.  But that's not the only objective because the main objective is more long term. If you get people and companies to declare their assets, then the government automatically generates tax revenue on a longer-term basis because all of this wealth comes back into the system for the long term.

The objective here, which is very important, is to enhance, and help to collect comprehensive and valid data. With this program the government aims to push the button to restart everything. Hopefully, seeing the launch of this program and the many socialization events that have already been conducted and continue to be conducted, I personally am very supportive of this program – despite the pros and cons.

Since its launch, has there been much interest in the program?
Of course!  Before the law was passed, I had been talking with a number of taxpayers about it. We had been talking about financial planning, whether they have assets onshore, or offshore, whether they have all the necessary supporting information and/or documents.  Although the rate is not necessarily high, the taxpayers are also looking for some possibility to have a lower rate which requires bringing the assets onshore.

I used to think that only high-level income people would be interested in this program, but, surprisingly, middle-income people have shown great interest in this program as well.

What are the fundamental problems within Indonesia’s tax system that hinder investment?
This can be seen from various factors. Of course, if we take a look at the commercial side we are talking about return on investment [ROI]. If you are an investor, you have to make sure that you get the highest ROI possible, which will be determined by the after tax profit of the company.

So competitiveness with neighboring countries is needed. Even though our tax rate is not considered high compared to some places, there are still opportunities to make sure we are competitive with our peers.

To create a competitive tax rate, the government needs to massively expand the tax base. If you don't have a tax base then how is this going to work? So if we talk about how we create a tax base, it is not something that can be done immediately. It has to have a reliable integrated system.

You see from the statistics, the number of tax payers is still considered low in Indonesia. So you must go through this process, make ultimate use of this data to achieve the right numbers of taxpayers coming into the system - taxpayers who are really going to pay tax. When people want to invest in something, they might find financial support from banking or other financial institutions. Financial models will show whether or not you have an adequate return on investment and how much and when. What is needed when making investment decisions is, of course, certainty, including tax treatment. If tax treatment is unclear then how are we going to calculate the projected return on investment?

This will be directly impacting investment, as investors would rather put investment in countries that give them certainty. Tax regulations must be created in a very detailed clear manner - non-ambiguous guidance is necessary because investors need to know how much of their return will go to taxes – again certainty is key. When you have some changes to the tax rules it means new regulations, but you also need to be careful because you need to be able to create trust. This is one of the fundamental aspects too.  If the rules of the game, and resulting tax costs are constantly changing, investors have a difficult time making investment decisions.

Indonesia’s tax system is based on self-assessment, which of course requires trust from both the government and the people and this needs to be built. It is not that easy because we are going through so much transition and change. If we chose this way forward, then tax officers must have the right mindset that will create a good experience and trust with the people.   But I believe with the introduction of the tax amnesty, creating a more advanced and vast tax base by obtaining the data will be taken care of, although for that we still need a long term plan.

There have been concerns from companies that the tax office seems to put more and more tax on good tax payers. 
That may have been the past, but this new tax amnesty and also development of better data collection tools shows that the emphasis is shifting.  The Tax Office is paying serious attention to improving the IT system with the objective to help tax payers to be able to more effectively make tax payments and reporting and to ensure that they are able to test how compliant tax payers are.  Again this will help give them enough data, for understanding who needs to pay tax and who has not yet paid the tax.

If this runs on the right track, they will no longer focus on the same tax payers, but on finding new tax payers. The Tax Office needs to have reliable and complete data to determine who has not actually paid tax. If they have the data then they can make full utilization of it by going after the delinquent and non-compliant taxpayers.

I believe that we need to go in that direction by having valid data so that later this will be able to be developed and the tax base expanded. Prevailing law allows that if you have data, and you have a legal basis to possess that data, you have the right to approach the taxpayers based on that data. Using the data, they can come up with a better strategy.

There is so much IT being developed right now, so as long as they can satisfy their needs, it is good to go. These will be effective tools to help realizing the tax objectives.  And back to the question of whether or not these initiatives will be effective, well the effectiveness can be measured only if we have statistical data. Statistical data must be presented to measure how far this has succeeded, because I believe this satisfies the needs of the law. If we don't have the statistical data then we won't be able to measure the success.

Regional tax integration under the ASEAN Economic Community (AEC) has been raised as an idea. What’s your view on this? Is such integration possible?
Economic integration under the AEC is more than just a tax system. Tax collection is viewed as a sovereign right of a country. Each country, whether you like it or not, has its own tax system. What is needed is collaboration in facing the AEC. If all of the members have the same objectives to collect tax based on the fact that it’s the sovereign right of each country, my worry is that an integrated taxation system won't happen.

But that is not necessarily a bad thing, I think this is more about how to better collaborate among ASEAN member countries to make us economically solid, not about the whole taxation system being integrated into one.

If Indonesia wants to improve its tax system, what policies should be changed to provide assurances to investors?
The issue is beyond tax.  I can’t pinpoint just a few regulations because it's pretty complex. But one thing is for sure, following the tax amnesty, we need to have an integrated tax system, socializing the rules, and applying them impartially.  With the tax amnesty law, it is up to the taxpayers whether they want to take this opportunity and pay the redemption fee and come back into the system, or ignore this opportunity and face the consequences.

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