Indonesia finance minister says to tackle tax avoidance by MNCs

JAKARTA (Reuters) – Indonesia will sharply lift its tax collection and work with other nations to develop new rules to tackle the “aggressive” tax planning by multinational corporations, the Southeast Asian country’s finance minister said on Wednesday.

An increasing number of companies in the digital space have exploited loopholes in the domestic tax system to minimize their tax liabilities, Sri Mulyani Indrawati said in a speech at the International Monetary Fund (IMF) conference in Jakarta.

The corporate tax avoidance has put Indonesia’s local businesses that comply with regulations at a competitive disadvantage, said Indrawati, who was previously a managing director at the World Bank and an executive director at the IMF.

“Aggressive tax planning is part of MNCs’ core business,” Indrawati said.

“This is not good, not only for tax revenue but (also) injuring and damaging the sense of justice. And I know, coming back to Indonesia (from the World Bank), this is maybe the most important feeling that needs to be addressed,” she added.

Indonesia’s government has been pushing multinational technology firms to incorporate locally, arguing that the practice of setting up small business entities to provide “auxiliary” services allows them to get away with minimal taxation, while booking most of their revenue from the country elsewhere.

Last month, Indonesian officials said Alphabet Inc’s (GOOGL.O) Google Asia Pacific headquarters had agreed on future tax payments after a months-long dispute with the government, paving the way for a shake up in the way similar firms operate in the country.

Separately, the country’s investment chief said last month social networking giant Facebook Inc (FB.O) was in the process of setting up a domestic unit in Indonesia.

‘Unwanted Side Effects’

IMF’s deputy managing director said the expansion of economic integration and cross-border investment has produced some “unwanted side effects”, including the “aggressive tax planning by multinational and regional companies.”

The fund is working with countries to find ways to counter the artificial shifting of profits and assets to low-tax locations and to resist “damaging tax competition”, Mitsuhiro Furusawa said in a speech at the IMF conference in Jakarta.

Furusawa also said that in much of Asia, the tax-to-GDP ratio “consistently” falls below the 15 percent ratio “associated with a significant acceleration of growth and development.”

Indrawati said that Indonesia’s current tax-to-GDP ratio of 10.3 percent was “hard to swallow” and she is committed to raising that ratio to 16 percent by 2019.

“It is a very ambitious target and I know my colleagues from IMF and World Bank both say it is impossible, so it is a challenge,” she said.

“But I’m sure I love the challenge. If not I’d rather stay at the World Bank and do my old job,” she said.