Legal Alert: DGT Receives Authorization to Access Financial Information for Tax Purposes
Authors: Narada Kumara, Fikri Muhammad Ilyasa
The transparency of financial information has become one of the most highly anticipated programs to be implemented by the Indonesian Government since 2015. The wait is finally over, as President Joko Widodo recently enacted Government Regulation in Lieu of Law (Peraturan Pemerintah Pengganti Undang-Undang or Perppu) No. 1 of 2017 on Access to Financial Information for Tax Purposes (“GRL 1/2017”), which came into effect on 8 May 2017.
In essence, GRL 1/2017 authorizes the Director General of Tax (“DGT”) to access financial information of taxpayers directly from financial institutions in banking, capital market and insurance sectors (among others), without any conflict with secrecy obligations. GRL 1/2017 was also created in order to fulfill the Indonesian Government’s commitment toward the implementation of the Automatic Exchange of Financial Account Information (“AEoI”), which requires Indonesia to have a legal basis that allows access to financial information for tax purposes, by no later than 30 June 2017.
We set out the key points of GRL 1/2017 below.
Prior to the issuance of GRL 1/2017, the DGT had the authority to access financial information for tax purposes based on Article 41 (1) of Law No. 10 of 1998 on Banking. However, this provision is not effective, since the DGT is required to obtain prior approval from the Minister of Finance (“MoF”) and the Central Bank of Indonesia (“BI”).
In order to simplify the process and eliminate secrecy obligations by financial institutions (such as banks) that will be in conflict with the implementation of GRL 1/2017, the regulation revoked the following provisions:
- Articles 35 (2) and 35A of Law No. 6 of 1983 on General Provision and Tax Procedure, as lastly amended by Law No. 16 of 2009;
- Articles 40 and 41 of Law No. 7 of 1992 on Banking, as lastly amended by Law No. 10 of 1998;
- Article 47 of Law No. 8 of 1995 on Capital market;
- Articles 17, 27, and 55 of Law No. 32 of 1997 on Futures Trading, as lastly amended by Law No. 10 of 2011; and
- Articles 41 and 42 of Law No. 21 of 2008 on Sharia Banking.
The foregoing not only expunges the secrecy obligation by financial institutions in banking and capital market sectors, but also simplifies the process, since the DGT is no longer required to obtain approvals from the MoF and BI, in order to collect information for tax purposes (such as tax audit, tax collection, and tax crime investigation). It means that now the DGT has direct access to financial information from financial institutions.
What information Must be reported?
GRL 1/2017 stipulates financial institutions shall submit reports on financial information (for the period of one year) for tax purposes to the DGT, which at least contains the following: 1) identity of the account holder and the financial institution; 2) account number; 3) account balance information; and 4) information on income related to the account.
In addition to the above report, the DGT is also authorized to request any further information or evidence from financial institutions, which will be used to create a database by the DGT. Additionally, please note that since GRL 1/2017 adopts the standard of exchange of information according to the AEoI that applies Common Reporting System, which set the account amount of US$250,000 as the threshold for reporting, any account with a balance/value amounting to US$250,000 or more will be automatically reported to the DGT.
Who is affected?
The report of financial information does not only cover domestic account holders but also foreign account holders, individuals and entities.
Is there a verification process?
In order to meet the reporting standard of AEoI, financial institutions shall conduct proper identification procedures to verify the account, such as domicile of the account holder, account controller/holder and activities of such account. Financial institutions shall also verify that such information is reportable under the international tax agreement standard.
Please note that financial institutions are prohibited from opening new accounts or from performing new transactions for pre-existing accounts if the account holder refuses to cooperate in the identification process.
How Does the report work?
The financial institutions shall submit financial information through the Financial Services Authority (Otoritas Jasa Keuangan or “OJK”) or directly to the DGT. The period of submission of financial account information may vary depending on the financial information provided, from at least 30 days up to 60 days before the deadline for AEoI reporting.
Furthermore, in accordance with the implementation of Minister of Finance Regulation No. 39/PMK.03/2017 on the Procedures for Exchange of Tax-Related Information based on International Treaties (“MFR 39/2017”) (which came into effect on 6 March 2017), the financial information of taxpayers, which has been gathered by the DGT, may be exchanged with the other countries’ tax authority for the purposes of EoI.
In essence, MFR 39/2017 regulates the mechanism of EoI performed by the tax authority in Indonesia and other countries (namely: EoI based on request, Spontaneous EoI and/or Automatic EoI), which shall be performed in a reciprocal principle.
Is there a sanction for non-compliance?
The financial institution and/or its management/staff who fails to comply with GRL 1/2017 and (among others) does not provide a financial account information report and does not perform the appropriate identification procedures, shall be charged with a penalty of Rp1,000,000,000 (maximum) or imprisonment for one year (maximum).
Meanwhile, GRL 1/2017 provides immunities for the Minister of Finance and its employees, as well as the head and employees of the OJK and DGT while carrying out their reporting and exchange of information obligation under GRL 1/2017, from any civil or criminal prosecution.
Taxpayers who participated in the Tax Amnesty program but did not disclose all of its assets to the DGT, should anticipate that the undisclosed assets shall be deemed as additional income at the time of finding and will be subject to income tax according to the prevailing tax regulation, plus an increment of 200% of the tax due. To conclude, it is hoped that the implementation of GRL 1/2017 will boost voluntary disclosures of concealed assets and encourage taxpayers to disclose all tax-related information.
“The Authors would like to acknowledge the contribution of our Legal Assistant, Irene Nindya Laksmi, in preparing this Legal Alert.”