Tax haven: The devil is always in the detail 
  a.. Lachlan Evans 
  Australian banking and finance lawyer 

Sydney | Tue, October 11 2016 | 01:18 pm 
 An activist displays a newspaper headlining on the 'Panama Papers' revelations 
during a banking managers meeting, in Paris, France, April 14.(AP/Francois 
In July 2016 the then Indonesian finance minister Bambang Brodjonegoro, in 
conjunction with the launch of the widely publicized tax amnesty program (TAP) 
for undeclared offshore assets, also laid out less publicized plans for a new 
tax haven on the islands of Bintan and Rempang (Proposed Tax Haven). 

A key rationale for the Proposed Tax Haven is to provide attractive investment 
opportunities for funds repatriated to Indonesia under the TAP. 

Once the three-year limitation on how these repatriated TAP funds can be 
invested expires, the government fears they may again be moved abroad.

The response to the Proposed Tax Haven has been mixed, with some commentators 
raising concerns including its potential to aid criminal activity, a hostile 
global environment toward tax havens and social equity issues around the amount 
of tax being paid by wealthier Indonesians and their companies. 

What exactly is a tax haven, how meritorious these concerns are and whether the 
establishment of a tax haven will further the government’s stated rationale 
deserves closer attention.

Tax havens have traditionally offered two unique attractions to investors and 
criminals — high levels of secrecy around the identity and operations of people 
and entities based in the tax haven and very low or zero rates of tax on 
economic activity conducted outside the tax haven. 

Economic activity inside the tax haven is usually (but not always) taxed at a 
significant rate in the ordinary course of funding local government spending.

Secrecy is permitted by tax havens in various ways, including the use of 
nominee (third-party) directors and shareholders by companies to conceal the 
identity of the true directors and shareholders; the issue of “bearer shares” 
by companies where share ownership simply rests with holders of share 
certificates and is not recorded on a public register; the widespread use of 
legal “trusts” where the true beneficial owner of assets, rather than the 
notionally registered legal owner, cannot be identified; and little or no 
financial information sharing by the government of the tax haven with foreign 

The secrecy (as opposed to tax rates) of tax havens is increasingly being 
targeted by other countries and global organizations including the G20, of 
which Indonesia is a member, and the Organization for Economic Co-operation and 
Development (OECD). 

For example, the G20 and OECD have published a “blacklist” of those tax havens 
that permit a high level of secrecy. Entities based in countries on this 
blacklist face high withholding taxes levied on their financial transactions in 
foreign countries.

If the true identity of company directors and shareholders and asset owners is 
recorded and made available to legitimate enquiry, the low or zero rates of tax 
on economic activity should be of no concern. For example, a company 
incorporated and domiciled in the Cayman Islands and its Indonesian 
shareholders may face no local company or income taxes on the company’s 
worldwide income or dividends paid. 

Under Indonesia’s income tax laws and related anti-avoidance legislation, 
income tax would still be payable to Indonesia by the Indonesian shareholders 
on profits of the company, regardless of whether or not they are actually 
distributed to them as dividends. Provided the relevant information is 
available to the Directorate General of Taxation it will be able to enforce 

Of course, if their identity and operations are no longer secret, criminals 
have no incentive to use tax havens and launder illicit money through financial 
institutions based in them.

As a respectable and good global citizen, Indonesia, through its membership of 
the G20 and good-practice approach of its tax office would presumably not allow 
the identity and operational secrecy traditionally permitted by tax havens in 
the Proposed Tax Haven. It certainly should not do so. 

The announcements made so far have focused on lower rates of company tax, 
infrastructure development and cutting regulatory burdens which should, at 
least until more detail is provided, allay fears around its potential to aid 
criminal activity and deal with concerns related to the hostile global 
environment toward tax haven secrecy.

A key rationale of the Proposed Tax Haven is to encourage the money repatriated 
to Indonesia under the TAP to remain in the country. 

How the lower rates of company tax in the Proposed Tax Haven will achieve this 
remains unclear and it is here that significant complexity will emerge and 
legitimate concerns related to social equity issues and the amount of tax being 
paid by wealthier Indonesians and their companies will likely arise.

As noted above, tax havens traditionally have offered low or zero taxes on 
economic activity conducted outside the tax haven, whilst taxing economic 
activity inside the tax haven at normal rates. 

Will existing Indonesian companies be permitted to reincorporate in the 
Proposed Tax Haven, cutting the company tax they pay on their foreign earnings? 
What about Indonesian earnings outside of Bintan and Rempang? Or will existing 
Indonesian companies be able to incorporate new subsidiary companies in the 
Proposed Tax Haven and shift business activity across to these new subsidiaries 
with a similar result? 

If not, does the government intend new companies incorporated in the Proposed 
Tax Haven to have a significant and potentially unfair competitive advantage 
over existing Indonesian companies as only they will enjoy the lower tax rate?

Meanwhile, the reduced company tax payable represents forgone tax revenue that 
is badly needed to fund social programs and pay down the fiscal deficit, among 
other priorities. 

Will the increased tax receipts from the expanded “tax base” generated by the 
TAP and Proposed Tax Haven at least offset the reduced company tax payable 
under the lower rates? 

Finally, while the pragmatism and potential longer-term benefits that underpin 
the TAP may be justified, despite the moral hazard of waiving punishment for 
breaking the law, pragmatism must have its limits. 

Having already escaped punishment under the TAP for illegally hiding assets 
abroad, should these would-be-criminals then further receive special tax 
advantages on their repatriated assets? 

The answer may well be no and instead, Indonesia should strengthen its 
information sharing partnerships and efforts with foreign countries and focus 
on punishing those who break the law and require them to pay the full tax owed 
on their assets and income.

The writer, an Australian banking and finance lawyer, has practised law at 
major international law firms in the UK and Australia for almost six years.

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