Bank transparency, data matching for tax purposes

The government’s plan to issue a regulation in lieu of law (Perppu) concerning banking transparency, which includes allowing the tax authority to access taxpayers’ bank data, has sparked hot public debate.

The proponents argue that such an initiative is critical, outlining the fact that the government has to comply with the Automatic Exchange of Information (AEOI) program, a global move that contains new standards to tackle global tax avoidance.

In addition, the supporters also believe that the new regulation will greatly help the tax office pursue tax dodgers, especially when the tax amnesty ends later this month.

On the other hand, the opponents contend that scrapping banking secrecy and requiring banks to share their data with the tax authority could frighten investors and thus could have an adverse impact on Indonesia’s investment climate.

As an urgent Perppu on banking transparency is imminent, an overarching question is how this move will help the tax authority catch tax cheats in Indonesia? Furthermore, how will the tax office prepare so it can get the most out of banking transparency?

At the moment, there is no official draft as details are still being deliberatedo. As such, we cannot assess how the new regulation will effectively support the tax office in detecting tax dodgers. However, we are still able to learn from other countries that have implemented such initiatives.

This includes Australia, a country where I have been resident for tax purposes for the last three years.

The ability to access third party data from banks and other financial institutions has enabled the Australian Taxation Office (ATO) to maintain its high tax compliance rate.

The main benefit of granting tax office access to third-party sources is the ability to match and verify taxpayer returns (the data matching process).

Indeed, the data matching process at the ATO is now a key feature of the Australian tax landscape. Apart from banking, the program has also covered, for instance: property and share sales, investment income, car registration records, offshore bank accounts and social security payments.

Now, the ATO is also targeting taxpayer data from the digital economy, such as Ebay sellers, Uber drivers and Airbnb hosts.

But how does banking transparency and data matching for tax purposes actually work in Australia? Let me give you an illustration on how the ATO matches taxpayer interest earned on saving accounts with the income reported on tax returns.

Suppose that a taxpayer in one fiscal period earned US$1,000 interest from a bank that gave 5 percent interest annually on a savings account. This would indicate that the taxpayer had approximately $20,000 on deposit in the bank (i.e., $1,000 interest earned based on the 5 percent interest rate). With that information to hand, the ATO then checks how much the taxpayer has actually declared as income on their tax return and analyzes whether he/she has unreported or underreported income. The failure to disclose income — carelessly or deliberately — increases the odds of getting a “please explain” letter from the ATO.

Or, in the case a taxpayer does not lodge a tax return because he/ she is unemployed, the ATO can still ask the taxpayer questions akin to the following: “You seem not to have worked for the last few years, but you now have $20,000 in the bank – how did that happen?” Certainly, the onus is on the taxpayer to explain the situation.

The method that I explained earlier may look trivial, yet it has proved to be very effective in detecting undisclosed taxpayer income. Indeed, when the ATO began matching information on bank interest earnings with tax returns in the late 1980s, it discovered a $4 billion discrepancy between the interest earned and what was reported on returns. In 2010 to 2011, the level of underreporting had dropped to $192 million.

This data matching process is made even easier as the bank requires its customers to provide tax file numbers (known as TFN, the same as the NPWP in Indonesia) when opening a bank account. If the customer refuses to provide the TFN, the bank adds an extra cost by charging the account holder the highest tax rate (49 percent) on the interest they earn.

In short, making banking more transparent and providing the tax office with access to simple banking data, such as interest earnings, could open Pandora’s Box of taxpayer non-compliance and thus help tackle the rampant tax avoidance problem in Indonesia.

Should taxpayers worry with this development? For those who already report their income correctly, there is no reason to be concerned as the data matching process will easily verify the income reported on their tax returns.

Conversely, for those who have not disclosed their income accurately, this bank transparency and data matching process could easily detect their transgressions.

Finally, the bank transparency and data matching process will require a major upgrade to the Indonesian tax office’s capability of joining the data dots.

Consequently, the need for a massive computer system to store all the data, as well as the ability to mine data, is paramount and should be the central platform for the tax office’s compliance program in the future.