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THE 198183 INDONESIAN INCOME TAX REFORM
PROCESS: WHO PULLED THE STRINGS?
Gitte Heij
To cite this article: Gitte Heij (2001) THE 198183 INDONESIAN INCOME TAX REFORM PROCESS: WHO PULLED THE STRINGS?, Bulletin of Indonesian Economic Studies, 37:2, 233-251, DOI: 10.1080/00074910152390900
To link to this article: http://dx.doi.org/10.1080/00074910152390900
Published online: 17 Jun 2010.
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INTRODUCTION
In1983Indonesiaadoptedaradicaltax reform package.It came into force in 1984–86, and replaced a complicated system ofcolonial corporate and indi-vidualincome taxlaws, aswell as the 1951salestaxlaw.Themainpurposeof thelegislationwastoincreasenon oil-re-lated taxrevenue and thusreduce de-pendenceonoilrevenue(Booth1992:41). Thisarticleanalysesthemakingofthe 1983IncomeTaxLawagainstthe politi-calbackgroundofthetime.Itdoesnot focusspecificallyonthevalueaddedtax (VAT),ataxthatalsoformedan impor-tantpartofthesamereform.The analy-sisaims toprovide aninsightinto the constraints facedbypolicymakers,the roles of various influential actors, and inparticulartheimpactontheprocess ofthewiderarenathatincludesinterest groups,themedia,thegovernment, po-liticalpartiesandforeignadvisers.Itis this arena withall its actors that actu-ally shapes tax lawmaking processes,
but it often doesnot receive adequate attentionfromforeignadvisers.
BACKGROUNDTO THE1983TAXREFORM
Even though there was an increase in non-oil taxrevenue duringthefirst 15 yearsofNewOrderIndonesia,mosttax revenuecamefromoilcompanies(Booth 1992:41).Indirecttaxrevenuegrewata similarpacetotheeconomyoverall. Di-rect taxes such aspersonaland corpo-rateincometaxdidnotgeneratemuch revenue.Taxincentivesincluded corpo-rate incometaxholidaysvarying from twotosixyears,withshareholders not requiredtopayIndonesiantaxesonthe dividendsreceivedduringtheperiodof thecompany’staxholiday.Those com-panies not qualifying for taxholidays could be eligible for an investment allowance.
The advantagesoftaxholidaysand taxincentivesareoftenexaggerated, as
THE
1981–83
INDONESIAN
INCOME
TAX
REFORM
PROCESS:
WHO
PULLED
THE
STRINGS?
GitteHeij*
AsiaResearchCentre,MurdochUniversity, WesternAustralia
Thisarticleanalysesthedraftingandadoptionofthe1983IndonesianIncomeTax
Law andthe waysthisprocesswasshapedbythe politicalcircumstances of the
time.Itseekstoprovideaninsightintotheconstraints facedbythemakersofthe
law,andintotheinfluencesvariousactorsbroughttobearonthefinaloutcome.The
impactontheprocessofthewidermilieu—interestgroups,themedia,the
govern-ment,politicalpartiesandforeignadvisers—receivesparticularattention,asdoes
theroleoftheHarvardInstituteforInternational Development anditsinteraction
illustrated by a case study in a 1980 WorldBankreportonIndonesia(World Bank1980: 52).Foreigncompanies en-joyingtaxholidayscomplainedthatthey werestill subject toa withholding tax leviedontradedcommodities.Although thistaxwasmeanttobeaprepayment ofcorporatetaxliabilities attheendof the taxable year, it was a final tax for companiesthathadbeengranted atax holiday.Theresultwasthatthebenefits oftaxholidaysweresignificantly lower thantheyappeared.Moreover,the ad-ditionalfeesandleviescollectedby vari-ousgovernmentdepartments werenot subjecttoanytaxholiday.
Beforetheoilboom,thetaxstructure wasquitesimilartothatofmanyother developingcountries,withaheavy reli-anceonindirecttaxessuchasexporttax. In1966,indirecttaxationaccountedfor 80%oftotaltaxrevenue.By1977/78this hadfallentolessthan25%,becauseof the huge increase in oil tax revenue. However,asaproportionofnon-oiltax revenue,indirecttaxesstillaccountedfor 76% in the financial year 1977/78 (Glassburner 1979: 295–316). The per-sonalincometaxsystemwasvery pro-gressive,butitaccountedforonly3%of totaltaxrevenue.
Conditionsinthe1970swerenot con-ducivetoamajoroverhauloftaxation. Withoilpricesbooming,oilrevenuewas sohigh thattherelevantministers did notsee any urgencyto reform the tax system.1AlthoughIndonesiaaccounted foronly6%ofOPECproduction,oilwas crucialtothecountry,representing two-thirdsofexports.
Variousproposalsweremadebythe International MonetaryFund(IMF)and theWorldBankonreformofthetax sys-tem.Inthe1960s and1970s,yearafter year,theirreportsgaveattentionto prob-lemsinthetaxarea,butthecomments were generally broad and the advice general.Organisationssuchasthesehad
an immediateinterestinreforming In-donesia’s tax system. Since Soeharto came topowerinthemid1960s, Indo-nesiahaddependedsignificantlyon for-eign aid,and themultilateral agencies wanted somecertainty that Indonesia wouldbeabletorepaythisdebt.In1970, an international taxexpert and public finance specialist, Richard Musgrave, preparedanextensiveassessmentofthe taxsystem,whichwasreviewed byan IMFmissionin1974.TheGerman gov-ernmentinitiatedatechnicalassistance studyonorganisationalreforminthetax areain1978–79.Thiswasfollowedbya Germandevelopment aidprojectto re-organiseandcomputerisepartofthetax system.Germanassistanceintax admin-istration cameonthesceneonceagain inthe1980swiththeimplementationof the1983taxreform.
Asearlyas1979,thenfinance minis-ter Ali Wardhana acknowledged the need fortaxreformtoreduce depend-encyonoilrevenue(Winters1996:164).2 Tohavetakensuchaviewinthemiddle of theoilboom was indeedfarsighted (Lerche1986:172).WhileWardhanawas the initiatorof thetax reform process, thereformwouldnothavebeen possi-blewithoutthenPresidentSoeharto’s in-principlesupport.3
do-mesticconsultants, academicsand busi-ness people had beenincluded inthe process.
THEESTABLISHMENTOFTHE TAXREFORMSTUDYPROJECT
Inearly1981Wardhana,whoas Min-ister of Finance had oversight of the Directorate Generalof Taxation,took the initiativeto overhaulthetax sys-tem.Thegovernment(andWardhana inparticular)wasanxiousnottogive theimpressionofbeingunduly influ-encedbyanysingleorganisationsuch astheIMF,ortorelyonthe modelof onecountryordonor.
Preparations forthereformofthetax systemtookplace onthreelevels: pro-fessional/technical,politicaland admin-istrative (Harberger 1989: 33). The reform’s major purpose was to raise non-oil tax revenue. It also aimed to streamlinethetaxlawsandtoimprove serviceandefficiencyintax administra-tion.Afurthergoalwastoremove tax-induceddistortions intheallocationof resourcesandachieveeconomic neutral-ity.Finally,thereformersaimedtoensure thatthepoorwerenotmadeworseoffas aresultofthereform(Asher1990:16).
Wardhanarequestedtheassistanceof theHarvard Institute for International Development (HIID).TheInstitutewas a logicalchoice, becauseithada track recordinadvisingtheIndonesian gov-ernmentoneconomicissues.4Italready had several advisers, among them MalcolmGillis,basedintheMinistryof Finance in Jakarta. Wardhana asked HIID,andGillisinparticular, to organ-isea team ofexperts from around the world to assist in draftingcompletely new taxlegislation andimproving tax administration (Williamson 1984).One couldarguethatIndonesiadidnothave therequired local expertise and there-forehad littlechoice but torely onan organisationsuchasHIID.However,the
Vietnamesegovernmentmadevery dif-ferentchoiceswhenitreformedits tax systeminthelate1980sandearly1990s. Vietnam was determined not to have advisers from justoneorganisation or country setting its tax law reform agenda. Although the Swedish aid agency SIDAplayed a major role as facilitator inthetaxreformprocess, del-egations from the Vietnamese tax de-partment conducted study visits to Sweden,thePhilippines, Singapore, In-donesia, Thailand, China, Malaysia, SouthKoreaandHungary.Vietnam re-ceivedfurtherassistancewithitstax re-formfromtheAsianDevelopmentBank, the UnitedNations Development Pro-gramme, the International Monetary Fund,andFrenchandGermanaid agen-cies(SIPU1993:1–22).
HIID’sapproachwasunusual,inthat itnotonlymaderecommendations,but also drafted thelaws themselves. The team workedwithstaffofthe Directo-rateGeneralofTaxationandthe Minis-try o f Financ e for three years, formulating optionsfortaxreformand preparing the draft laws.5 Cheryl Williamson wastheresident coordina-torinJakarta.Thirtytofortymembers ofthetaxdepartmentwereinvolved,not allofwhomspokeEnglish.Most corre-spondenceanddiscussionbetweenthe advisoryteamandIndonesianofficials was conducted in English, without translation or interpreters, effectively excluding a large numberof potential Indonesianparticipants.
involved were American-based and educated.The overallapproach to the taxreformreflectedthebackgroundof theseadvisers.
There was a steering committee of seniorofficialsfrom theMinistryof Fi-nance, including Wardhana, Director GeneralofTaxationSalamunand com-mitteesecretaryHaryono.This commit-tee formally took part in all decisions thatdealtwithkeypolicymatters.
Inaddition,severalsubcommittees of ministry officials were established to dealwithincometax,valueaddedtax, andtaxadministration.Memosfromthe timeclearlyillustrate thatthe subcom-mittees had little influence in discus-sions with the articulate and highly experienced foreignadvisers.The sub-committees’ memos often in part de-fended existing procedures and regulations, inanattempttobalancethe recommendationsmadebyforeign ad-visory reports. Atthe same time they echoedtheforeignadvice,while tailor-ingittotheIndonesiansituation.
STAGEI:DESIGNOFTHE REFORM(JANUARY–JUNE1981)
Atthebeginningof1981,nine ministe-rial-level decisions were made about appropriate strategiesandtactics(Gillis 1985:228).Thoseinvolvedwerethe min-istersineconomicsandfinance portfo-lios,buttheyreceived informaladvice and a wealth of information fromthe HIIDadvisers,andGillisinparticular.8 Thesedecisionswerebasedpartlyonthe lessonslearntfromtaxreforminother countries. They echo tax policy ap-proachespopularintheUSinthe1960s and70s.Theinternational casestudies used, especially that from Colombia, hadbeenpreparedtoalargeextentby thesameAmerican-educatedeconomic advisersthatwerepartoftheHIIDteam. First,itwasdecidedthatitwas cru-cialto allow enough time to complete
thetask;monthswouldnotbeenough: instead,yearswereneededtomakethe reformasuccess.9Theministerialgroup did not expect any revenue shortfalls untillate1983,whichgavethem signifi-canttimetorevampthetaxsystem.
Second,itwasdecidedthat Indone-sianfundsonlyweretobeusedtopay for international advice and research. This wasdesignedtoavoidany tiesor bias through fundingby external do-nors.Thetotalcostoftheadvisoryteam wasapproximately $2million.
Third,onthebasisofthe1968tax re-form experience in Colombia, it was decidedthattaxpolicydecisionsneeded tobeconvertedintolawsimmediately, inordertoavoidanytechnicalproblems lateron(Lerche1986:180).Inthe proc-ess of drafting, any inconsistencies or problems thatarose could be resolved immediately.Thus,afterthesecondyear of technicalstudies,a teamof lawyers wasscheduledtoconvertthepolicy de-cisionsintolegislation. Envisagingthat alltechnicalstudieswouldbecompleted within two and a half years, theteam allocatedanadditionalthreemonthsfor drafting.Theentirereformprocesshad a33-monthschedule(Gillis1985:228).
Thefourthdecisionrelatedtotheuse offoreignadvisers.Onthebasisofthe Colombian experience, the group de-cidedthattoensureappropriate imple-m entation of the new law s it w as importanttoinvolve seniorofficialsin the reform process. The steering com-mittee of senior government officials fromvariouspartsoftheMinistryof Fi-nance was set upto monitorand par-ticipate in the work of the expatriate technicalteam.
resident consultants—Williamson for thespecificlegalissuesandGillisforthe mainpartofthework.TheHIIDexperts would workona‘fly-infly-out’ basis, andwereofteninIndonesianolonger thanoneortwoweekstoassessthe situ-ation,mainlyintheperiod 1981–83.In mostcases,Gillissummarisedtheadvice from thevarious foreign advisers and sentthe summaries to Wardhana and Salamun.
An implication of this low-key ap-proachwasthattherewasnopublic dis-cussion.Theforeigneconomistsonthe teamagreedwiththisstrategy,because they believed such discussion would onlycomplicatethetaskandincreasethe risk of theirproducing lesssimple tax laws,asaresultofgroupslobbyingfor particular tax incentives. But the real pressuretotreatthedraftlawsas‘state secrets’camefrom thegovernment, in-cludingWardhana.HIIDhadworkedin manycountries,insomecaseswith ex-tensivepublicdebateduringthereform process(forexample,initsvarious con-sultancyprojectsinAfrica).
Asixthdecisionconcernedthe train-ingofofficialsintaxadministration.The project’slongtimeframeallowedthetax departmenttosend20–30peopleabroad inthelate1970sandearly1980sto pre-pareforthetaxreformpackage.Mostof theseofficialsreceivedtheirfurther edu-cationinEurope(especiallythe Nether-lands)andtheUS,andmostreturnedin 1984.10 They wereheavily involved in theimplementationofthe1983reform, butwere notkeyplayersinthepolicy makingphase.
The seventh decision was to start ‘fromscratch’,abolishingmostexisting taxlaws.Therewereveryfewelements intheoldtaxsystemthatneededtobe maintained.
Theeighthdecisionwasanother ben-efitofthelongertimeframe—toaddress proceduralandadministrative issuesas
well asimplementation within the re-form framework.Forthispurpose,the teamoftechnicaladvisersneededto in-clude data communication specialists, tax administrators and accountants. A significant featurewastheintroduction ofataxpayeridentification schemeand acomputerised information system.
Thefinaldecisionwasthat,incontrast withmanytaxreformprojects,therewas not onefinal report.Instead,technical studies on particular issues were pre-sented tothepolicy makersas soonas they were completed. This immediate feedbackmeantthatadjustments could be made. According to Lerche (1986: 180),nopreconditions orlimitswereset for tax innovations, and this allowed roomfornewideasandexperiments.
STAGEII:
FORMULATIONOFPROPOSALS (JUNE1981–OCTOBER1982)
Duringthisstageandespeciallyinthe periodJunetoOctober1981,arangeof foreign consultants on theteam made briefinformation-gatheringvisitsto In-donesiabeforeformulating theiradvice. FromNovember1981toOctober1982, further analyses weremadein theUS and Jakarta,with several consultants revisitingIndonesiaforfurtherresearch. Duringthisperiod,theconsultants pro-ducednumerousmemosonavarietyof taxissues.TheseweresenttotheHIID teamleaders,Gillisand/orWilliamson, butitwasmainlyGilliswholiaisedwith theMinistryofFinance,andWardhana inparticular.
Discussions onthe NewIncomeTaxLaw
among the foreign consultants them-selvesorbetweenWardhanaandoneor more foreign consultants (interview with S.Cnossen, 16/3/98). Gillis and Williamsonwerethemaininterface be-tweentheforeignadvisersandthekey Indonesian players, and most foreign advisersdidnotcommunicate directly with the Indonesian experts involved. Instead they would report back to WilliamsonorGillis.Itwasnot uncom-monforGillistoorganiseameeting be-tw een Wardhana and two foreign consultantswhohelddifferentviewson aparticularincometaxissue.Itwasthen lefttoWardhanatomakethefinalchoice (interviewwithS.Cnossen,16/3/98).
Becausethereformprocesswas con-ductedina verylow-keymanner, out-side groups had little opportunity to exercise much influence. This would havebeenadelicateprocessinanycase, aspoliticaloppositionwasnottolerated andmanyplayersdependedon govern-ment goodwillin oneway or another. ThecroniesofthenPresidentSoeharto wereundoubtedly littleworriedabout the changes inincome tax legislation: Soehartowouldbeexpectedtoprotect them.AsAdam Schwarzlaterpointed out(1994:65),‘protectionfromthetax office is one form of patronage that Soeharto uses to secure the loyalty of influential membersoftheIndonesian elite’.
KeyRecommendationsonthe NewIncomeTaxLaw
In 1982, HIID presented its summa-risedrecommendationstothesteering committee.11 Consistentwith the ob-jectiveofkeepingthenewlawsimple and deflecting problemsthat proved ‘too difficult to deal with’, the new income tax law gave significant dis-cretion to the Ministry of Finance to issue further guidelines on interpre-tationintheformofdecrees.
AUnifiedIncomeTaxLaw. Theforeign advisers’recommendationthatthe cor-porate and individual incometax sys-tems beunified under oneincome tax law wasunusual:most countrieshave separatelawsforthesegroupsof taxpay-ers.Themove,drivenlargelybythe de-sire for simplicity, was supported by Wardhana.Theincometax subcommit-teewasconcernedthattoolittleresearch had been doneto justify themove to-wardsaunitarysystem,butWardhana agreed with the foreign advice, and hencethe1983IncomeTaxLawcovered bothtypesoftaxpayers.
TaxIncentives. Intheirearlymemos, theconsultants advisedtheabolitionof mostincentives, includingtaxholidays and exemptionsfromdividend taxfor foreigninvestors,accelerated deprecia-tion schemes, generous carry-forward provisions, andreducedratesfor com-paniesgoingpublic.12Theadviserswere convinced that simplicity and lower rateswerethekeystosuccess,andthat itwasunnecessarytooffertaxincentives ortaxholidays,whichtheysawas play-ing only a limited role inthe decision makingprocessesofmobileinvestors.13 TheirviewwasinlinewithUSthinking inthe1970s.Tosupporttheirargument they used the findingsof a survey of AmericaninvestorsinIndonesia,which indicatedthattaxincentivesdidnotplay an importantrole inattracting foreign investment.14
USsubsidiaries activeinIndonesia,but nootherforeigninvestors.
This is notto say that theadvisers’ view on taxincentives wasnot valid: researchhas sofar given noclear evi-dencethattaxincentivesareamajor con-siderationforforeignordomesticdirect investment. Foreigninvestors,oftenin jointventureswithlocalpartners, under-stand thattheIndonesianwayof pay-ing taxes is o ften via ‘taxatio n by negotiation’—an areawheretheirjoint venture partner would take charge, knowingtherulesofthegame.15 If in-formalincentivescanbenegotiated any-way,thiscastsdoubtontheusefulness offormaltaxincentives. Moreover,tax holidaysorincentives donotdiminish theoftencostlyadditionalcharges lev-iedbyvariousgovernmentofficials, in-cludingtaxofficials.16
Winters (1996: 168) states that the tax reform planners andpolicy mak-ers were very concerned about reac-ti o n s f r o m m o b il e i n v e sto r s to cancellationofspecifictaxincentives. Inreality,thisconcernwasexpressed mainlybytheIndonesianparticipants inthereformprocess.Largedomestic and foreign investors, hearing ru-mours about the proposed changes, pressedpolicymakerstolistentotheir views.17 Smaller private investors werelessworried, sincetheyviewed the tax incentives as principally fa-vouring foreign investors. The sub-c o m m i tt ee o n i n c o m e t ax r ai se d objectionstothecancellationofalltax incentives,butdidnotsucceedin per-suadingWardhana.Reservationsfrom the Indonesian side were expressed again when the laws were tabled in parliament. The then Minister of Fi-nance, Radiu s Prawiro, who suc-ceeded Wardhana in 1983, defended the move byechoing the opinionsof theforeignconsultants,asdidofficials involvedinthereform.
The parliament accepted the minis-ter’sarguments,and thenew 1983tax lawsabolishedallincometaxincentives. Those incentiveswith unlimited dura-tion thatwereinforcepriortothenew lawexpiredinJanuary1984.However, thenewlawdidnotprematurely termi-nate pre-existing incentives that hada limitedduration.
LowerTaxRates. Theuseofhighertax ratestoincreaserevenuewasnever con-sidered(Gillis1985:222).Thiswasmuch inlinewithtaxpolicyviewsintheUSat thetime.AccordingtoWilliamson, the existing sharply progressive tax rates provided a strong incentive for wide-spread tax evasion (Williamson 1984: 7).18 Undoubtedly these views were sharedbymost,ifnotall,the American-trained advisers on the team. Gillis stresses,though,that:
Incometaxratesunderthenew
Indone-sian systemare… comparableto those
contained inthe Bradley–Gephardtbill
proposed in1983 forthe UnitedStates.
Inspiration fortheIndonesianincometax
reform, however, arose not from any
worldwide movement toward flat-rate
incometaxes,butrecognitionofthe
futil-ity, intheIndonesian context,of
unen-forceable highprogressive rates oftax
(Gillis1985:222)
Thelowering ofcorporateand indi-vidualincometaxratesbecameoneof the key features of the new law. The formercorporatetaxlawhadthreetax rates up to 45%, while the individual incometaxlawhad19differentratesup to 50%. Underthe new law, three tax bracketswereintroduced, taxedat15%, 25% and 35%.For individuals, thetax threshold was doubled, so that the numberoftaxpayers wouldbegreatly reduced. The advisers rightly argued thatbroadeningofthetaxbaseand bet-terlaw enforcement would more than compensate for reduced tax rates in overalltaxrevenue.Thesubcommittee on income tax didnot agree with the proposed changes, however. It com-mentedthat‘theprogressive rates pro-posedarenotsteepenoughandarenot fulfilling thespirit ofthecorporate in-cometaxtoimposeprogressive taxasa tool to redistribute income’(undated memosignedbyMansury, then Direc-tor of Direct Taxation). Moreover, the subcommitteewasconcernedthatlower taxrateswouldnotgeneratetherevenue required from the corporate world. However,itdidnotsucceedin influenc-ingWardhana,andthefinalversionof thenewtaxlawaccordedwiththe pro-posalsoutlinedbytheforeignadvisers. Deductible Costs and Fringe Benefits. Undertheoldcorporatelawsthecostof fringe benefitssuch as company cars, housing,recreational activitiesandclub memberships was deductible by the employer(andnottaxableinthehands ofemployees). Undertheproposalsof theadvisoryteam,fringebenefitswere no longer tax deductible at corporate level (but were still nottaxable inthe handsofemployees).19 Thiswasa ma-jorsimplification oftheoldsystem,but atthesametimeaconcernformany cor-poratetaxpayers(Awanohara1983:56). As the new rules on fringe benefits would haveno effectfor government
bodies,theadvisoryteampushedquite hardtohavein-kindbenefitsprovided togovernmentofficialsincludedinthe taxable income of civil servants. This advicemadesense,asitwouldtax dif-ferent kinds o f individual income equally. However, its adoption would havecreatedsignificantupheavalwithin thecivilservice.Fringebenefitssuchas freeeducation anddomesticand over-seastripsformanimportantpartofcivil servants’ remuneration packages.The salary itself is often barely enough to supportanaveragefamily,andside rev-enuefromotheractivitiesisusedtomeet the shortfall. Wardhanaknew thathis powerwaslimited,anddecidedagainst this aspectoftheproposal, sotaxation offringe benefitsforcivilservantsdid not appearin the final version of the proposedtaxlaw.
Butthenewproposalsdidprovidefor taxation offringebenefitsfornon-civil servants, creating concern when the draft law was tabled in parliament. Membersofparliamentsuggestedthat thisrancontrarytoIndonesia’s paternal-istictradition,inwhichitiscommonfor employerstoprovidehousing,carsand travel.Theeconomicministersand sen-ior bureaucrats argued,however, that theproposalwasacorepartofthenew law and would enhance a policy of ‘cleanwages’(Williamson 1984:17–19), andMinisterPrawiropersuaded parlia-menttoaccept thenew fringebenefits taxsystem.
Inpractice,foundationsneverregistered forincometaxpurposes,andwerethus useful vehicles for avoiding tax. The draftincometaxlawdidnotreallysolve thisproblem,althoughitwasmore spe-cificinexemptingfromtaxcertainforms ofincomereceivedbyfoundations, and nolongerexemptedthem from the re-quirementto file atax return.20 While foundations areonlytaxableinrespect ofprofitsfromabusinessorenterprise notexclusively servingthepublic inter-est,theterm‘publicinterest’isnot de-finedinthelaw.Williamson(1984:32–4) pointedoutthatdefiningthistermis‘a taskthatwillbeimportantinthefuture for limiting abuse of this exemption’. Herreportindicatesthat it was politi-cally not feasible to introduce a more stringenttaxregimeforfoundations.21
For cooperatives, asimilarsituation existed:formally treated as taxpayers underthe old regime,in practicethey werevirtually taxexempt.Forthefirst fiveyearsofoperation,theirprofitswere tax exempt, and during the next five years they had access to reduced tax rates.Thetaxofficelackedinstruments toinvestigate andexercisecontrolover the cooperatives, and this resulted in largetaxevasionschemes.Theadvisory team suggested treating cooperatives like companies, with one exception: a deduction wouldbe given forrefunds madetomembersofincomeearned ex-clusivelyfrommemberservices.Butthe finalversion tabledin parliamentwas quite different:a taxdeduction on in-comefrom memberserviceswould be availablebeforeanyrefundsweremade tomembers.Therewasthusnofiscal in-centivetopayoutthisincometo mem-bers.Thismeantthatcooperativescould accumulate large amounts of profit withoutpayingany tax.Cooperatives, often linked to government depart-ments,haveahigh status,eventhough theydonotformanimportantpartofthe
economy.Policymakersarealltooaware that theyneedto treatthis investment formwithgreatcare.
SimplerPay-as-You-Earnand Withhold-ingTaxSystems.Withholdingtax mecha-nismsformedacornerstone ofthenew system. Employers were required to withhold taxes uponpaymentof sala-ries to their employees, and organisa-tionswererequiredtowithholdtaxfrom anypaymentintheformofdividends, interest,rent,servicefeesandroyalties madetoanyotherentity.These propos-alswerenotcontroversial.Althoughthe income tax subcommittee was con-cernedaboutsomeofthedetail,itagreed withtheunderlyingprinciples.
Taxation of Civil Servants’ Income. Undertheoldtaxregime,civilservants were effectively exemptfrom paying incometax.22 Formally,bylaw,the gov-ernment paid income taxon behalf of itsemployees.Inaddition,thelatter re-ceived significant benefitsinkind that were also tax exempt. Under the pro-posed legislation, civil servantswould be fullyliable forincome tax.The for-eign advisersargued thatthose work-ing for thegovernment should bethe first,ratherthanthelast,topaytax.This wasacceptedinthe newlaw,butwith fringe benefitsin the formofhousing, travel and food, often a major part of remuneration, not includedin taxable income. Civil servants received a pay rise to compensate for the taxation of theirincome.
theproposedtaxontermdeposits, giv-ingintopressurefromfinancialcircles. Althoughtheinterestremainedtaxable in principle, a provision was inserted leaving the issueof thetaxation of in-tereston time and savingsdeposits to be decidedby government regulation. Thisbecametheonlyconcessionmade topressuresfromtheparliament. A de-creewaslaterissuedthatexempted in-terestontimeandsavingdepositsfrom incometaxuntilfurthernotice,thus per-petuatingamajordistortioninthe sys-tem,sincedividendsweretaxed.
Conference, October1982
On22–23October1982,HIIDhelda con-ferenceintheUStodiscussaspectsofthe newtaxlawswithconsultantsand Indo-nesianofficials(mainlythoseonthe steer-ingcommittee). During theconference, consensuswasreachedonanumber of topics.Muchtimewasspentin discuss-ingtheexistingsalestaxsystemandthe proposedvalueaddedtaxsystem.
Agreement was reachedat the con-ferencethatanincometaxlawforboth individuals andcorporations neededto haveasimpletaxratestructure.Italso neededawithholding taxsystemwith ratesofaround15%,andasystemoffull indexation for inflation in relation to capitalgainsandinterestincome.Itwas agreedthatcivilservantsshouldbe sub-jecttoincometax,butthattheywould becompensated throughahighergross salary level. Fringebenefits should no longer bedeductible forprivatesector employees,butthisrulewouldnot ap-plytothepublicsector.Insummary,the conference outcomes largely reflected theopinionsandviewsexpressedbythe foreignadvisersintheirreports.
STAGEIII:FINALISATION (NO-VEMBER1982–SEPTEMBER1983)
During this stage, final adjustments weremadetotheconsultantreports,and
theentiresetoftaxreformproposalswas discussed withthesteeringcommittee. The committee,underthestrong lead-ership and influenceofAli Wardhana, hadbeenkeptinformedthroughoutthe reform process, and accepted the pro-posals. Thedraftingteamsbegantheir work,andthedraftlawswerefinalised bymid1983.
According toGillis (1989),Juneand July 1983 werecritical monthsfor the reform process. Themajor hurdlewas theproposedabolitionofcorporatetax incentives. Arguingagainstanyformof corporate taxincentivesseemednotto beeffective,sinceretention ofthese in-centives was widelyperceived as use-ful. Instead, Gillis and his colleagues suggestedpresentingthenewtaxlawas offeringamoreeffectiveformoftax in-centivebecauseofitsoveralllowertax rates.TheMinisterofCooperatives es-peciallyopposedthenewproposals.The team,aswellastheeconomicministers, fearedthatifhesucceededinobtaining specific incentives for cooperatives, otherinterest groups wouldtryto fol-lowsuit.Therefore,thefirststepwasto securehissupport.Agreatdealof per-suasion wasrequired toconvince him that, even without specific tax incen-tives,most cooperatives wouldpayno taxes.Followinghisapproval,theteam obtained the support of the president and the rest of the cabinet before the draftsweretabledinparliament.
APPROVALBYTHEPARLIAMENT
totheHouseofRepresentatives (DPR), duringwhichhegavehissupportforthe draftbills. Hestated that ‘with the re-form,thesystemwillbemorefairand fittingwhilethenumberoftaxpayers willgrowlarger ’.InlateAugust1983, h e m e t w i th D P R Sp e ak er A m i r -machmudandurged him togive the deliberationofthetaxbills top prior-ity (JP,2/9/83: 1).The message was clear:thepresident hadgivenhis im-primatur to the reform package, and DPRmembersknew whatthismeant i n te r m s o f r o o m t o m ak e m aj o r changestothedraftbills.
In November 1983, the parliament formedaspecialcommitteethatworked for35daysandapprovedthethreebills, with onlya fewsignificant changesor additions.Eachcommitteemember re-ceived Rp 500,000 forhis or her serv-ices.24 Members did not have much roomtomanoeuvre,giventheclear sup-port of thepresidentfor the new law. Moreover, there was little time for lengthy discussion orto garnerpublic support, such as one might assume would be needed for such drastic re-form.Theproposalswerepresentedto parliamentinearlyNovember1983,and it was announced that the new laws wouldapplyasof1April1984.The par-liamentarycommitteeheldsome discus-sions with the finance minister, but accordingtolawyerGregChurchill (in-terview, 10/12/97), the debates were characterised by an attitude that ‘the expertsknow best’.Whenmembersof thecommitteequestionedthedraftlaws, theyweretoldthatthe expertadvisers hadsaidthatthiswasthebestway,and ithadtobeaccepted.25HIIDassuchwas notoften mentioned.Instead,Prawiro statedinpressconferences thatthe gov-ernmenthadhiredtaxexpertsfrom vari-ouscountries,includingColombia,West Germany, Canada, the Netherlands andtheUS.
Oneofthesmallpoliticalparties,PDI (the IndonesianDemocracy Party), ar-gued that a clearly understood philo-sophical base should be included to increasetaxcompliance, andthat there-foreabasiclawwasneeded.Prawiro re-sponded that a basic tax law was not necessarybecausethethreetaxbills al-ready stipulated basic tax rules them-selves(JP,14/11/83:7).Therewereother concerns:
Inparliament, onepoliticalorganisation
has arguedagainstwhatitconsidersas
too few income brackets and too low
luxurytaxes,aswellasagainsttaxing
co-operatives.Othergroupsaskedforamain
tax law,which would providea
philo-sophicalunderpinning of alltaxlaw,as
wellasrequestingconcessions forsocial
or religious expenditures.Yet another
groupisworriedabouttoostrong
sanc-tions againstnon-compliance. Thereis
alsoa more generalised feelingthatthe
newlawswillonceagaingivetoomuch
discretionary powertothefinance
minis-ter andthe director-generalof taxation
(Awanohara1983:56).
But despite these concerns, in the second week of December the DPR passed the three bills. The timing of the new legislationwas fortunate,as the world price of oil had begun to slidegradually fromtheendof1982. Thismadetheintroductionofthelaws mucheasier.
REACTIONOFTHETAX ADMINISTRATION
Thetaxoffice,andallthevestedinterests
associatedwithit,foughthimtoothand
nail.Onlywith thefinancialcollapseof
thegovernmentsectorin1983washe
fi-nallyabletogainsomeground.
Manytaxadministratorsfeltthatthey werenotproperlyconsultedduringthe reformprocess, and thattheapproach had been‘top-down’.Ina letter tothe edit or of the newspaper Republika (2/3/93,translatedbytheUSEmbassy TranslationUnit),formerseniortax of-ficial,SuharsonoHadikusumo,wrote:
a In the firstphase,they madenew
bills/changes intheoldlawsinEnglish,
basedontheirownsurveys.Thebillswere
handedtotheDirectorGeneralofTaxes.
b TheDirectorGeneralofTaxeshadthe
billstranslatedintoIndonesian. Teamsof
directorate officialswereformedand
as-signedascounterpartsfortheconsultants.
c Eachteamvoiceditsopiniononthe
billsatmeetingswiththe Harvard
con-sultants.Veryfundamental opinionsand
originalproposalsfrom theteamswere
veryhardfortheconsultantstoacceptand
thefinalresultsshowedveryfewchanges
fromthedraftsmadebytheconsultants.
JustlookattheIndonesianversionofthe
laws:manypartsarejustclumsyandrigid
translations fromtheEnglish.
Itis truethatseniortaxofficials did feel left out. The internal memoranda show thatmost oftheforeignadvisers made noeffort todiscuss their advice directlywithmembersoftheIndonesian subcommittee onincometax.No trans-lationsweremadeandIndonesian sub-co mmittee members struggled to understandwhat itall meant,as illus-tratedbytheirreplies.These communi-cation processes could have been conducted in a mannermore likelyto obtainsupportfromseniortaxofficers. Stern’sclaimthattheadvisersbuiltup acloserelationship withseniordecision makersduringthereformprocessmay bemisleading(Stern2000:120,123):only
afewoftheseniordecisionmakerswere involved.However,Hadikusumo’s let-terdoesnotaddress thefactthatthere waslittleexpertiseinthetaxoffice, mak-ing in-depthtechnical discussions be-tw een fo reign advisers and the subcommittee difficult.
REACTIONFROMTHEPUBLIC
Indonesiain1983hadanauthoritarian regimethatdidnottolerateopposition, andthisofcourseinfluencedthepublic reaction.Thepress,understrict govern-ment control,hadtotakegreatcarein itsreporting,especiallywhenitinvolved sensitive issues such as the business dealingsofthepresident’sfamilyoran attack on a ministerfavoured by the president.Itwasnotuntillate1983that newspapersbegantoreportonthe forth-coming taxlaw changes, mainly sum-marising statementsby Prawiro about thebroad principles, thenewsystem’s simplicity, and the fact that lower tax rates would outweigh theabolition of taxincentives.
Even if larger businesses had had strongobjectionstothenewlegislation, theywouldhavefeltreluctanttoexpress them. Many, especially the larger do-mestic and foreign enterprises,27 were dependentongovernmentcontractsor licences (for example,in construction, aidprojects,thepress,andmining).By expressing criticism, they might have jeopardised futuregovernmentworkor licences.Moreover,businesswas domi-nated by influential corporateplayers, oftenethnicChinese,whowereusedto striking theirown taxation deals with government departments based in Ja-karta,orwiththepresident.
par-ticularlackedthepowerofsizeand con-nectionwithhighlevelbureaucrats that couldprotectthemagainstdemandsfor suchpayments.Thispartlyexplainsthe generallymildreactionfromsmalland medium enterprises to theannounced tax reform. Their financial burden wouldbarelychange,astheillegal lev-ieswouldnotundergoreform.In addi-tion, there were very few avenues to representtheinterests ofsmaller busi-nesses. The fact thatthe law-making processwas solow keyreduced influ-ence from this section of thebusiness community(asGillisandWardhanahad intended).
Someinthebusinesscommunityfelt that the simplification of the tax law couldreducethescopeforcreative in-terpretationbylocaltaxofficials.Butthe factthatsomuchdetailofthenewlaw waslefttothediscretionoftheMinistry ofFinance,throughtheissueoffurther guidelines, didnothelptoprovide clar-ity.Someoftheseguidelinestookyears tobeissued,whileothersneversawthe lightofday.
Atthesametime,somefearedthatthe abolitionoftaxincentivesandholidays would frightenoff potentialinvestors; others, such as V.G. Harink, a senior employee of a large international ac-countancy firm, laterargued that this had indeed been the case (H arink 1984:8).Harink’sviewisnotsharedby many,however,norisit supportedby much empirical evidence (Asher and Heij1999; Gillis 1985:237; Williamson 1984: 49–52).Approvedforeign invest-mentflowscertainlydiddrop dramati-callyafterthe introduction of thenew taxlaws:thefiguresforthefirsthalfof 1984showadeclinefrom$2.9billionto $1.1billion(Hammeretal.1985:366).But thesefiguresmay bemisleading. With theproposedtaxreformsontheway,tax advisers counselled potential foreign investorstosubmittheirinvestment
pro-posalstotheForeignInvestment Coor-dinatingBoard(BKPM)before1984,to determinewhethertheywouldbe eligi-bleforanytaxincentives.BKPMgranted provisional approvalsforalmost$3 bil-lion in the latter part of 1983 (Harink 1984: 8). During 1983,the Ministry of Financewasnotabletoclarifywhether theseforeigninvestmentprojectswould beeligiblefortaxholidays,butin1984 itbecameclearthattheywouldnot.As a result, most foreign investors with-drewtheirproposals.Thisexplainsthe highlevelofinvestmentapplications in 1983andthemuchlowerlevelin1984. However, investorsmaynothave can-celledtheirinvestmentplansaltogether, butmerelyhavedecidedthatnospeed wasrequired, sincenospecialtax ben-efits would be lost through postpone-ment.Inanycase,intheperiod1985–88, foreign investment applications in-creasedsignificantly.
Whiletherewasdebateoverthe abo-lition ofcorporatetaxincentives, there waslittleprotestaboutchangesto per-sonalincometax(apartfromdiscussion aboutthetaxdeductiblestatus ofcivil servants’fringebenefits).Lessthan5%of individualswouldactuallyearnenough to exceed thetax-free threshold. These individualsweremainlytheveryrichand employees from large corporations, whosetaxeswerewithheldmonthly.
MAJORINCOMETAXLAW DEVELOPMENTSAFTER1984
and the 1985 introduction of a value addedtax(replacingthesalestax).
The first major changesto the1983 Income Tax Law were introduced in 1990.Theeconomywasboominganda growingself-confidenceresultedinthe beliefthatforeignadvicetoimprovethe taxlawswasnolongerneeded,andthat someoftherecommendationsfromthe pastwere nolonger appropriate. This ledtothere-introduction ofincometax incentives to promote investments in Eastern Indonesia.28 The government alsobegantoincludeinterestfromtime deposits in the income tax base. This measurewasdesignedtoencourage in-vestmentthroughthestockexchange.29
In 1994 the government gave the companyTimor Putrasignificant tax incentivesto developa ‘nationalcar ’ (ManningandJayasuriya1996).30 These were abolished in 1998 after Soeharto steppeddownaspresident.From1 Janu-ary 1995, income tax incentives for certaincorporatetaxpayerswere intro-ducedintheformofaccelerated depre-ciation,extendedcarry-forwardoflosses to10years(underthe1983IncomeTax Lawtheperiod was5years),and a re-duction of withholding tax on divi-dends. The year 1995 saw also the loweringofthetopincometaxratefrom 35%to30%,andawideningofthe with-holdingtaxsystem.
In 1996the governmentannounced there-introduction ofcorporateincome taxholidaysforlarge investorsin spe-cificindustrysectors.Theincentives in-cludedcomplete relief from corporate incometaxandwithholdingtaxon divi-dendsforamaximumof10years,with apossibletwo-yearextensionforcertain newbusinessesestablished outsideJava and Bali. A ministerial team was ap-pointedtorecommendwhichindustries shouldbenefitfromtheholiday.Itwas notuntil1998thatspecificguidelineson this regulation were issued. ByApril
1999,asmallnumberoffirmshadbeen grantedthefacility,allofthemaffiliated with Soeharto (‘”Tax holiday” akan Ditinjau’,KompasOnline,27/5/98).
Anotherinterestingdevelopmentwas the introduction of a ‘poverty levy’ in 1996.Underadecreethatbecame effec-tiveon4December1996,a2%surcharge was levied on after-tax profits or in-comesexceedingRp100millionofboth companiesandindividuals.Therevenue from the surchargewas officially ear-marked forhelpingthepoor.The pay-m ents were c hannelled to charity foundations controlled by then Presi-dent Soeharto, and did not appear in governmentrevenuestatements,sothis levywasclearlynotabudgetary meas-ure. Thetax office was appointed col-lector of thepayments. This levy was abolishedin1998.
Afterexperiencing rapidratesof eco-nomicgrowthoveraprolongedperiod, Indonesia,togetherwithotherSoutheast Asian countries, entereda severe eco-nomiccrisisinlate1997.Asaresult,the government formally requested help fromtheIMF,andforeignadvisersare backinthetaxpolicymakingarea,with thegovernmentlockedintoastringent fiscalpolicydictatedbytheIMF.
Presently Indonesia’s tax policy is under serious economic and political pressure.Politicalinstabilityandthe cri-sishave led foreign investorsto avoid Indonesia,andthegovernmentiskeen toreversethistrend.Drasticchangesto the1983IncomeTaxLawmaybe intro-ducedinanattempttoluredesperately needed foreign capital. This would mean more tax incentives—an instru-mentofdoubtfulvalue,butone increas-inglyusedbyIndonesia’sneighboursin SoutheastAsia.Andbecauseofthe ma-jorpoliticalchangesofrecentyears,an authoritarian ‘top-down’ approach based on foreign advice only, as oc-curred in the 1983 tax reform, is no longer a realistic way for the govern-menttoshapeitstaxpolicy.
CONCLUSION
The 1983 tax reforms in Indonesia were initiated and formulated by a relativelysmallgroup,buttheycould only succeed because of the implicit support of then President Soeharto. Thereforms can beseen as a victory fo r the tec hno cr ats in Ind on esian policy making. However, those tax proposalsthatmighthavecreated so-cialunrestoreconomicorpolitical in-stability never made it into the final version tabledin parliament.For ex-ample,thetaxationoffoundationsand cooperatives,andthetaxationof ben-efitsin kind receivedbygovernment officials, touched sensitive nerves in thehighestgovernmentcircles.Itwas
therefore left to later ministerial dis-cretion todealwiththesematters.
roleinIndonesia’seconomicpolicy mak-ing,butthatpolicywassetbyagroup ofseniorandhighlycompetent Indone-sianpolicymakers(Stern2000),ishighly debatableinrelationtothe1983income taxreform.
The tax adm inistration was not widelyconsulted, andneitherwas the public.Thepresswasinnopositionto foster public debate,and political par-tieshad only limited room to exercise any influenceoncethelaw wastabled inparliament. Theonlyinterestgroups withpowerwerethoseclosetoSoeharto, andthelargeworkforceofcivilservants. Upsettingthelatter groupwouldhave createdtoomuchsocialunrestand po-liticalrisk.
AsIndonesiaprosperedintheearly 1990s, many of the foreign advisers w ent hom e, and the tax law s saw modificationsthatreflectedthe politi-cal direction of the time. Powerful vested interestsseemed to dominate the economic agenda, and reforms such as the 1983 tax reform would have been impossiblein the political climateoftheearlytomid1990s.IMF assistancetoIndonesiasawthereturn offoreignadviserstoassistwith dras-tic reform processes as part of the good governance agenda of the late 1990s.Buttheytoowillhavetowork within theframework ofthe various, andsometimesverypowerful,actors inthe taxpolicymakingarena.
NOTES
* Iamgratefultotwoanonymousreferees
forveryconstructive comments.Full
re-sponsibility for anyerrorsremainsmy
own.
1 In thesecondhalfof the1970s,oiland
gasrevenueaccountedformorethan10%
ofGDP.Non-oiltaxrevenuewasaround
8%.Followingthesecond oil boomin
1978,oilandgasrevenuerosetoover16%
ofGDPin1981,whilenon-oiltaxrevenue
fell to 6.6%.In 1981foreign aid
repre-sented3.4%ofGDP.
2 AliWardhana,MinisterofFinancefrom
1968to1983,ledthetaxreformprocess.
HehadreceivedaPhDfromthe
Univer-sityofCaliforniaatBerkeleyin1962as
partof a FordFoundation program to
traineconomists, and laterbecame
Co-ordinatingMinisterforFinanceand
In-dustry from1983to1988.Healsoheld
severalpositionswithintheWorldBank
andtheIMF.
3 Thethenpresident’ssupport was
con-firmedininterviewswithformer
Direc-torGeneralofTaxationandMinisterof
FinanceMar’ieMuhammad,withGreg
Churchill,ataxandlegaladviserin
In-donesiaforover 20years,andwith
re-tired se nior ta x official Suha rsono
Hadikusumo.
4 In the1960s, HIIDoperated under its
formername,theHarvardDevelopment
AdvisoryService.Indonesiabecameone
ofitsbiggestcustomers,earningthe
or-ganisationmillionsofdollarsper year
(Winters1998:308–9).
5 TheDirectorGeneralof Taxation from
1972to 1982wasSutadi.Although
for-mallyincludedintheexchangesof
infor-mationbetweentheadvisoryteamand
theMinistryofFinance,hedidnotplay
amajorrole.Therewerecallsforhis
re-placementaspartofaneffortto
restruc-ture theDirectorate Generalandcurb
ra mpant cor ruption. In m id 1982,
Wardhana replacedhim with thewell
respected Salamun, wh o w as m ore
closely involvedinthe reformprocess
thanSutadihadbeen.
6 InterviewwithS.Cnossen,Professorof
EconomicsatErasmusUniversity,
Rot-terdam,March1998. Cnossen
empha-sisedthatneitherHIIDnor Wardhana
wantedtoallowanyroomforcriticism
thattheteamwasdominatedby
Ameri-cans.
7 HIID’spolicyofmakingaconcerted
ef-forttorecruitadvisersonaglobalbasis
(Stern2000)seemstohavefailedonthis
8 Gillisgivestheimpressionhewasonly
one of many players in the reform
process.Forexample(Gillis1984:4):
TheIndonesiancaseisunusualinseveral re-spects,notleastofwhichwasthatthe gov-ernmenttooksteps,beginningin1981,to formulateacoherentreformpackagein an-ticipationoffiscalcrisis,insteadofawaiting itsarrivalandthenhastilyenactingadhoc taxpolicytoattackthesymptoms,notthe underlyingcauseofrevenuestagnation.
Therealitywasthathewasthemost
im-portantforeignadviser,andenjoyedthe
confidenceandrespectofkeyIndonesian
decision makers.He hadalso been
in-volvedintheoriginalinitiativeto
under-takethereform.
9 Thiswasincontrasttotheratherrapid
taxreformprocessesundertakenin
Co-lombia,Japan,BoliviaandLiberia(Gillis
1984:79).
10 Atfirstthistrainingprogramwaspart
oftheHIIDproject,anditlater
contin-uedasaseparateprogram.
11 Theoilsector wasexplicitly exempted
fromthenewlaw.Thissectorhaditsown
taxregime,whichwasoutlinedin
pro-duction-sharingcontracts.
12 Manyeconomistsbelievethattheuseof
taxas aresourceallocationmechanism
cancauseundesirable distortions inthe
economy. However,supporters ofthis
approachpointtowhattheyseeas
suc-cessfulexamplesofuseofthetaxsystem
toinfluencetheflowofresourcesto
pri-orityeconomicsectorsoractivities.
Swe-den isoftencitedasexemplifying such
policy(Steinmo1993:156–92).
13 InternalmemostoGillisandWilliamson,
e.g.fromWells(24/7/81and28/7/81);
andfromConrad(20/8/81).
14 Internalmemofrom Wellsand McLure
toGillis,summarisedbyGillisand
for-wardedtoWardhanaandSalamun.The
surveyreportitselfwasnotavailableto
theauthorsofthememo,whohadaccess
only tothe outcomes.The factors
af-fectinginvestmentdecisionsofforeign
investorssurveyedwere(inorderof
im-portance):politicalstability;sizeofthe
Indonesian market; economicgrowth;
production costs;government
develop-mentprograms;taxincentives;
govern-mentregulations; increaseinpercapita
income;accesstorawmaterials;
domes-ticcompetition;importsubstitution
poli-cies;fearoflossofexportmarkets;and
thesizeoftheAsianmarket.
15 In2001thisisstillthecase,inmy
experi-ence.Although foreigncompanies are
subjecttocorporate tax rules,thereis
considerable scopefornegotiation.
16 Foreigninvestorsinthelate1970s
com-plainedmainlyabout thelargesumsof
moneythathadto bepaidto customs
officials(WorldBank1980:47–8).
17 Inmyexperience,businessesarelikely
to say publicly that the level of tax
playsamajorroleintheirbusiness
de-cisions,though inrealityitisfarless
important.
18 Williamsonarguedthatthiswasthecase
inmanydevelopednations.Noone
dis-putesthat extremelyhigh incometax
rates(80%or90%)willincreaseevasion.
However,thereseemstobelittle
differ-enceintaxevasionindeveloped
coun-trieswhetherthetopindividualincome
taxrateis50% or40%, orwhetherthe
maximum corporatetaxrateis45%or
35%.Unfortunately, littleempirical
evi-denceis availabletosupportorrefute
Williamson’sview.
19 An exceptionwasmade forcompanies
activeinremoteareas.
20 Thismeantthattheycouldbeformally
auditedbythetaxdepartment.
21 Itisworthnotingherethattheaborted
trialofSoehartoin2000–2001relatedto
hisallegedabuseofayayasan.
22 Thissystemgoesbackto1905,whenthe
incometaxlawexemptedcivilservants
frompayingtaxontheirsalaries.
23 Thisexemptionwasbasedona1973
de-creeissuedbytheMinistryof Finance.
Therewere alsoexemptions for some
other forms of interest paym ents
(Williamson 1984), such as those on
bondsissuedbytheStateHighway
Au-thority.Itseemslikelythatotherforms
ofinterestpaymentswerenotreported
tothe taxauthorities, andtherefore
es-capedincometax.
24 Itisnotuncommonformembersof
par-liamenttoreceiveadditionalincomefor
Convertedattheexchange ratecurrent
atthattime,thepaymentforpassingthis
lawwasaround$200.
25 Thisattitudewouldbelesswelltolerated
intheearly1990s,asbecameclearwith
the1993/94taxlawchanges.
26 Inmostorganisational restructuresthere
isafearofchange(CleggandFitter1981).
However,thefearsofmanytaxofficials
haveinthisrespectprovedunwarranted:
in1999itwasstillcommon practiceto
makeadditionalpaymentstotaxofficials
toreducethetaxpayable.
27 In Indonesia a few large companies,
whetherprivate,state-owned,orforeign,
dominate many industries (Schwarz
1994:98–132).
28 Thiscould,however,beinterpretedas
a s ym bolic ge sture an d a politica l
movetoincludeEasternIndonesiain
the central government’s attempts to
attractinvestment,ratherthana
genu-ineattempt toattractinvestmentinto
thispartofIndonesia.
29 Thewithholding taxontimedeposit
in-terestpaymentsgenerated a welcome
windfallforthegovernmentduringthe
financialcrisisthatcommencedin1997,
wheninterestratesincreasedsharply;it
wasoneofthemajorreasonsthe1998/
99budgetdeficitwasnotashighas
origi-nallyforecast.
30 Thisconcessionwasclearlypushedby
President Soeharto tobenefit his son
HutomoMandalaPutra(‘Tommy’),and
wasnotfavouredbythethenMinisterof
Finance (interview with Ma r ’ie
Muhammad,June1998).
31 Thesameobservation ismadeby
Win-tersinregardtooveralleconomicpolicy
andtheroleofHIIDinIndonesia
(Win-ters1998:908).
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