Integrity Building in Tax Administration: Indonesia Context Tax and Corruption: An Asia Pacific Perspective Sydney, April 12 th -13 th 2017 Puspita Wulandari Assistant to Minister of Finance for Tax Oversight
INTEGRITY Define: Integrity The origin word: in-tangere (latin), meaning untouched Evolution from adjective integer (latin), meaning wholeness Refer to value of honesty, sincerity, reliability, respectability, objectivity, morality Refer to consistency among value system (beliefs), words, behavior Refer to situation of absence of fraud & corruption 2
Tax Administration Goal Promoting voluntary compliance Building public trust that non-compliance will be detected and effectively punished Corruption in Tax Context Lowering the public trust Tax compliance Tax collection 3
20.00% 18.00% 16.00% 14.00% 12.00% 10.00% Indonesia's Tax Ratio In 2003-2016 18.75% 18.05% 17.22% 17.50% 16.68% 16.27% 14.90% 15.11% 14.32% 14.59% 14.21% 14.39% 13.80% 12.92% 13.23% 13.52% 13.04% 13.31% 13.31% 12.68% 11.84% 12.17% 12.48% 12.46% 12.02% 12.22% 12.51% 12.25% 12.43% 12.11% 12.17% 11.80% 11.34% 11.62% 11.06% 11.16% 11.38% 11.26% 10.53% 10.85% 10.75% 10.36% 8.00% 6.00% 4.00% 2.00% 0.00% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Tax Ratio Tax Ratio (Exc. Natural Resources revenue) Tax Ratio (Exc. Natural Resources revenue and Local Revenue) 4
7.00% Indonesia s Economic Growth In 2003-2016 6.00% 5.00% 5.13% 5.60% 5.50% 6.30% 6.10% 6.10% 6.50% 6.23% 5.78% 5.02% 4.79% 5% 4.00% 3.00% 2.00% 3.66% 4.10% 4.50% Global economy still struggling IMF projected 3.4 3.6% in 2017-2018 Indonesia the third highest after India, China Weakend global trade More inward looking (domestic focus) 1.00% 0.00% 2003 2004 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Economic Growth 5
Tax Collection The Context Domestic Regional Global Tax policies Trade policies Digital economy BEPS Transfer pricing AEoI (OECD) 6
Targeted Tax Collection in 2017: US$ 98 Billion TAX IS 75% Indonesia State Budget In 2017 7
REPORTING PAYMENT MONITORING & ENFORCING Self Assessment System Potency of fraud REGISTRATION CALCULATING RP COLLECTING OBJECTION/ APPEAL
INDONESIA Population 262.826.536 Islands 17.504 Provinces 34 Marine Area (80%) 3.257.483 km2 Taxpayers 36.031.972 Regional Office 33 Tax Office 341 + 207 Tax Officer 39.834 9
NUMBER OF TAXPAYER VS TAX COLLECTION 2002 2009 2016 Number of Taxpayer 2,235,054 Tax Collection 176,323 billion Rp 62% State Revenue Number of Taxpayer 16,019,837 Tax Collection 544,533 billion Rp 68% State Revenue Number of Taxpayer 32,769,215 Tax Collection 1,105,252 billion Rp 72% State Revenue 10
TAX AMNESTY July 2016 March 2017 965 thousands more taxpayers 333 thousands more renewing compliance REDEMPTION MONEY 8.5 billion US$10 billion Termination of preliminary evidence/investigation 127 million Domestic Declaration 276 billion US$365 billion 1.4 billion Payment of tax debt as TA requirement 77 billion Repatriation 12 billion Foreign Declaration 11
TAX AMNESTY PERFORMANCE (1) The Amount of REDEMPTION MONEY (Percent of GDP) 0.96 0.62 0.58 0.04 0.15 0.20 0.17 0.12 0.04 Germany Belgium (2004) (2004) Italy (2009) Chile Indonesia (2015) (2016) India (1997) South Africa (2003) Spain (2012) Australia (2014) Tax Amnesty Program Performance during July 2016 March 2017 GDP 2017 use estimation GDP 13,6 quadriliun 12
TAX AMNESTY PERFORMANCE (2) Assets Declared (Percent of GDP) 42.2 2.1 3.9 8.3 5.2 3.6 0.3 India (1997) Spain (2012) Chile (2015) Indonesia (2016) Italy (2009) South Africa (2003) Tax Amnesty Program Performance during July 2016 March 2017 GDP 2017 use estimation GDP 13,6 quadriliun Australia (2014) 13
BEFORE & PASCA TAX AMNESTY Simplifying service E-registration E-filing E-billing (payment) E-tax invoice Simplifying paying tax for SME Integrating tax & customs ID Data collection from all parties Broadening tax base Integrating tax administration information system Integrating HRIS with tax administration Stengthening law enforcement process E-audit E-bank account checking Outreaching through MTU & MTO Improving performance reward linked with people movement/promotion Implementation of talent management Implementation of corporate university Stengthening structure of organization Strengthening internal control system, etc. 14
FRAUD Causes INDIRECTLY RELATED TO TAX COMPLIANCE DIRECTLY RELATED TO TAX COMPLIANCE Perceived unshareable FINANCIAL NEEDS RATIONALIZATION CAPABILITY Perceived OPPORTUNITY Ref: Fraud Triangle Theory of Donald Cressey 1973 & Fraud Diamond Theory of Wolfe & Hermanson 2004 15
Comparison between the number of punishment and the number of Employees In 2014, 2015, 2016 Severe Punishment imposed on DGT s employees in 2014 2016 decreased, from 1.02% in 2014 to 0.42% in 2016. 1.02% 0.76% 0.42% 2014 2015 2016 16
DESTINATION: Self Sufficient Country Critical Success Factor (CSF) 1. Integrity of tax administration & staff 2. Integrity of sectorial policy maker 3. Integrity of taxpayer (business society) 4. Integrity of justice system & the driver (police, prosecutor, court, judge, KPK, PPATK, BPK) Back 17
DESTINATION: INDEPENDENCE IN FINANCING THE STATE Sustainability: 7S McKinsey Approach The model s basic premium There are seven internal aspects in organization which need to be harmonized to achieve sustainable success. 18
THE MCKINSEY 7S ELEMENTS Shared Values: What does the organization stands for and what it believes in. Central beliefs and attitudes. Strategy: Plans for the allocation of a firms scare resources over time, to reach identified goals. Environment, competitors, customers. Structure: The way the organization s units relate to each other: Centralized, functional divisions (topdown), decentralized (the trend in larger organizations); matrix, network, holding, etc. System: The procedures, processes, and routines that characterize how important work is to be done: financial systems; hiring, promotion and performance appraisal systems; information systems, etc. Staff: Numbers and types of personnel within the organization. Skills: Distinctive capabilities of personnel or of the organization as a whole. Style: The top management leadership approach and the organization s overall operating approach. 19
Quote from Warren Buffet If you re looking for people to hire, you look for three qualities: integrity, intelligence, and energy. If they don t have the first, the other two will kill you 20
THANK YOU 21
APPROACH Well-balanced mix between repression & preventive Compliance Approach Negative approach (minimalize fraud) Rule based: imposed norms (law & reg.) Hard controls Opinion: people are bad Focus on preventing integrity violations Legal focus Repression/reactive Integrity Approach Positive approach (maximize integrity) Principle based: shared norms & values Soft control Opinion: people are good Focus on facilitating good behavior Managerial focus Preventive/proactive 22
IMPLEMENTATION Well-balanced mix between repression & preventive Compliance Approach Internal Compliance Unit (ICU) Leadership: formal, transactional Punishment One-way communication Fraud minimization, compliance encouragement (external driven) Improving internal rules consistently After something happen (shock) Integrity Approach Coaching & counselling mechanism Leadership: teamwork, transformational Awarding reward and appreciation Two-ways communication Learning encouragement, voluntary compliance (internal driven) Improvement of organizational system Before something happen (planned) 23
THREE LINES OF DEFENSE 1 Operational Management The Employee himself and direct superior using their professional judgement and competency based on regulations in order to get prudent, a well governed system, and punctual performance 2 Oversight Unit (ICU) Internal Compliance Unit: to support the effectivity of operational management by monitoring internal control implementation at a specific time 3 Auditor Monitoring internal compliance by external auditor 24
UNITS RESPONSIBLE FOR TAX INTEGRITY IN DGT Directorate of Internal Compliance and Apparatus Transformation (Dit. of ICAT) Internal Compliance Preventive Internal Investigation Reactive Organization Transformation Human Resource Management Development Employee Capacity Development 25
DGT Internal Control System Recommendation for disciplinary punishment & moral sanction Internal Compliance 26
VALUE NORMS MINISTRY OF FINANCE OF THE REPUBLIC OF INDONESIA Integrity Profesionalism Synergy Service Excellency Think Talk MoF Decree No. 312/2011 Behave Act Code of Conduct + The Moral Principles Back 27
COMBATING CORRUPTION, COLLUSION & NEPOTISM State Financial Loss Bribery Gratification Conflict of Interest in Procurement Swindling Act Embezzle of Money Because of Position Law No. 31/1999 on Corruption Eradication (amend by Law No. 20/2001) Centre of Money Laundering Transaction Analysis Board of Supreme Auditor Police, Prosecutor, Court, Judge Extortion Back 28
THREE STEPS TO BUILD INTEGRITY IN DGT Fraud Risk Identification (STEP 1) Integrity Control System Existence (STEP 2) Integrity Control System Maturity (STEP 3) 29
Step 1 Step FRAUD RISK IDENTIFICATION 1 Fraud Risk will cause Poor Public Service Leakage of Tax Revenue Low Public Trust 30
Step 1 FRAUD RISK IDENTIFICATION (CONTINUED) The Fastest Way to Identify Fraud Risk Vulnerable to breach and misconduct Identify Vulnerability Areas/System/Activity + Identify Vulnerability Enhancing Factor 31
Step 1 FRAUD RISK IDENTIFICATION (CONTINUED) Vulnerability Areas/System/Activity Contracting: procurement, tender, order Payment: subsidies, benefits, allowances, grants, sponsors Granting/issuance: permit, license, certificate, identity card, authorization Regulating: condition of permit, setting standard/criteria Inspection/audit: supervision, oversight, control, inspection, audit Enforcement: prosecution, justice, sanctioning, punishment Implementation tax administration business process, system and procedures Complexity: innovation/advanced (computer) system, complex legislation, special construction (legal/fiscal), bureaucracy, network of relation, lobbying, political influence/intervention/assignment Change/dynamics: young organization, frequently changing legislation, strong growth or downsizing, privatization/management buy-out, outsourcing, crisis, external pressure Management: dominant, manipulative, formal/bureaucratic, remuneration strongly dependent on performance, lack of accountability, ignoring advice/signals, defensive response to criticism or complaints Personnel: work environment, income dependent on performance, low status/lack of esteem/ low reward/low career prospect, poor working condition/high workload, group loyalty, power to obstruct, individual, having other interest, personal debt, lifestyle, personal secret, personal threats, addiction Problem history: complaints, gossip & rumours, signal (whistleblower), earlier incidents, administrative problems (backlog, inconsistency, extraordinary trend, etc.) Vulnerability Enhancing Factors Back 32
Step 2 INTEGRITY CONTROL SYSTEM EXISTENCE? Hard Control Regulation & technical system Integrity Control System Soft Control To Influence behaviour, work-atmosphere and culture General Control Mix of soft and hard elements Does the organization have an integrity control system? Does the integrity control system already work? Does the integrity control system work effectively? 33
Step 2 INTEGRITY CONTROL SYSTEM EXISTENCE (CONTINUED) GENERAL CONTROL HARD CONTROL 3. Responsibilities 4. Organisation legal framework 5. Integrity legislation & regulation 6. Internal control 7. Security 1, Integrity policy framework 2. Vulnerability/risk analysis 13. Recruitment & selection 14. Response to integrity violation 15. Accountability & transparency 16. Audit & monitoring SOFT CONTROL 8. Values & standard 9. Professional org standard 10. Integrity awareness 11. Management attitude 12. Organisational culture Back 34
Step 3 INTEGRITY CONTROL SYSTEM MATURITY Measurement Existence Measurement Design (Quality & Compatibility) Communicate to Employees and Employee s Awareness about measurement Measurement Acceptance Build measurement in planning and controlling cycle. The quality of measurement implementation and enforcement Information supply, accountability to implement, and measurement effectivity Measurement Evaluation and Improvement 35
Step 3 INTEGRITY CONTROL SYSTEM MATURITY (CONTINUED) 4 LEVELS No Measurement 1 2 There s Measurement But Is Not Implied There s Measurement, Implied, but observed Ineffective 3 4 There s Measurement, Implied, Observed, Effective 36
Moving forward: Integrity Control System toward Taxpayer Minimize taxpayer fraud (compliance approach) and promote voluntary compliance (integrity approach) The wholeness of integrity control system toward taxpayer Taxpayer formal and material compliance Reppresive: Strengthening law enforcement process Preventive: Provide ease for taxpayers doing their tax matter Basic Principle Objective Implemen tation Strengthening the tax administration for better quality (P-D-C-A) and good governance Back 37