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Cablegate: Indonesia - Finance Minister's Dramatic Tax Reforms

VZCZCXRO5842
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #3338/01 3410357
ZNR UUUUU ZZH
R 070357Z DEC 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 7299
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 1268
RUEHBJ/AMEMBASSY BEIJING 4558
RUEHBY/AMEMBASSY CANBERRA 1711
RUEHUL/AMEMBASSY SEOUL 4325
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 03 JAKARTA 003338

SIPDIS

SENSITIVE
SIPDIS

AIDAC

DEPT FOR EAP/MTS, EAP/RSP AND EB/IFD/OMA
TREASURY FOR OTA-MCDONALD, IA-BAUKOL
SINGAPORE FOR TREASURY-BAKER
COMMERCE FOR 4430-BERLINGUETTE
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR TCURRAN
DEPARTMENT PASS EXIM BANK

E.O. 12598: N/A
TAGS: EFIN EINV ECON PGOV ID
SUBJECT: INDONESIA - FINANCE MINISTER'S DRAMATIC TAX REFORMS


1. (SBU) Summary: Finance Minister Mulyani's reform efforts are
achieving dramatic, substantive improvements at the Directorate
General for Tax (DG Tax), formerly one of the most corrupt
government agencies in Indonesia. Reforms of business process,
codes of conduct, internal controls and data processing are moving
from rapidly from plans to implementation. USG advisors are
welcomed and having a positive impact. Embassy recommends the
continuation of assistance to DG Tax through at least 2009 (see
paragraph 10), which is also supported by the GOI. End Summary.

Finance Minister Leads the Way
------------------------------

2. (SBU) Finance Minister Mulyani, easily the most dynamic reformer
in the Government of Indonesia (GOI), has been using bilateral and
multilateral assistance strategically to assist in her internal
reforms at the Ministry of Finance. Key directorates, formerly
plagued by corruption, incompetence or both, are being cleaned up.
These include the important directorates of tax, customs, capital
markets supervision, insurance regulation, debt management, and
others. The Directorate General for Tax (DG Tax) is undergoing one
of the most remarkable changes in the entire Government of
Indonesia.

DG Tax: From "License to Extort"...
----------------------------------

3. (SBU) Within less than a month of taking up her new post as
Finance Minister in December 2005, Mulyani asked major donors for
help with tax reform. The previous Director General for Tax was
notorious and tax problems were one of the most frequent complaints
by the international and domestic business community. Indeed, one
European Embassy described DG Tax in early 2005 as having a "license
to extort." Recognizing the need for both symbolic and substantive
changes, Mulyani urged donors to support her: "I want the best
brains in the world to help me succeed in reforming DG Tax. I want
to restore trust," she said.

...to "Transparency and Honesty"
-----------------------------

4. (SBU) DG Tax, which was previously a fairly grim,
corruption-ridden agency, is now buzzing with new energy and
enthusiasm since Mulyani's new Director General Darmin Nasution was
appointed in mid-2005. Donors have been pouring in the help,
coordinated by the Intenational Monetary Fund (IMF). USAID and the
U.S. Treasury's Office of Technical Assistance (OTA) responded with
advisors. USAID provided technical support for the development and
implementation of the internal compliance and internal investigation
sub-directorates. Both sub-directorates are now operational and
leading to significant positive reforms. The internal Codes of
Conduct are now well known throughout the organization, and tax
officials even have bright yellow-and-blue buttons that read,
"Transparency and Honesty."

Most Dynamic Reform of 20 Countries
-----------------------------------

5. (SBU) IMF Senior Tax Advisor Rick Fisher remarked that in all the
20 countries he has worked in, Indonesia's tax overhaul is the "most
dynamic reform effort I have ever seen. We are at that exciting
turning point where tax officials are implementing what used to be
theoretical recommendations, and taking ownership." Fisher
emphasized the importance of not losing momentum. "Time is running
out before 2009 elections. We have to push through as many reforms
as possible, but without overwhelming DG Tax's capacity for
absorbing it all. So far, we've got a good balance." The main
thing is, Fisher noted, that Mulyani has to show the Parliament
(DPR) that she is getting results in terms of increased revenues.
Without that, she may lose DPR support for her efforts.

Increasing Efficiency and Internal Controls
-------------------------------------------

6. (SBU) A number of early audits and investigations in 2005 and

JAKARTA 00003338 002 OF 003


2006, including investigation on money laundering, have resulted in
changes to DG Tax databases and systems, and serious disciplinary
action against several DG Tax staff members. Previously, there was
no access control to tax databases, meaning any official could alter
a file in response to a bribe. Now within the DG Tax office, there
is a new USAID-supported Directorate for Intelligence and
Investigation. This is the first government department devoted
entirely to the identification and investigation of major criminal
tax offenders. We expect that significant gains will be realized in
overall tax compliance and in tax revenues in the near-to-medium
term from this change.

Momentum Continues on Data Processing Center
--------------------------------------------

7. (U) Treasury's Office of Technical Assistance Advisor David
Gaugler has been working with DG Tax on a Data Processing Center to
improve the efficiency of tax return filing in Indonesia.
Previously, a majority of returns submitted were not processed in a
timely manner. To date, it has most of the building blocks in
place, including the signed Ministerial Regulation, an IT support
contract, a Human Resources (HR) contract, and a mostly completed
facility. The first simulation exercise begins in December, and the
first practice with real documents in January 2008. As part of
phased implementation, Gaugler expects by February the project will
be expanded to an entire tax office, by March to eight offices, and
by the end of 2008 to all agents, offices and documents (VAT,
individual income, corporate and land tax) in the greater Jakarta
area.

8. (SBU) Gaugler notes that a good, comprehensive business model for
reform is now in place, which he has "never before experienced in
any other country." Additional tasks include finalizing procedures
and training manuals, workload forecasts, sequential contract
employee accession plans to staff the DPC, and tax office training
schedules. After this pilot project, the DGT plans to implement
more DPCs throughout Indonesia.

Public Affairs Assistance Needed
--------------------------------

9. (SBU) DG Tax advisors, in a December 6 meeting with the Embassy,
also feel strongly that DG Tax needs a public affairs strategy.
With 170 Small Taxpayer Officers (STOs) set up in 2007, and another
120 planned for 2008 (along with Large and Medium Taxpayer Offices
already established), DG Tax is undergoing so many changes so
rapidly, that not everyone is keeping up, even internally.
Education and communication of DG Tax staff about the direction and
new expectations of the agency are essential. Even the DPC is a
well-guarded secret, Fisher noted. "It will be hard to implement
new procedures without a public outreach strategy."

Extended Treasury OTA Assistance Requested
------------------------------------------

10. (SBU) The Embassy requests that Treasury OTA seriously consider
funding ongoing assistance to DG Tax at least through Phase 3 in
2009 (complete report sent separately to Treasury OTA). This is
also strongly supported by DG Tax officials, who note that, "The
transition period between the pilot and full implementation will be
much more difficult without the presence of the advisor. We would
like the advisor to continue to help through the implementation
phases." OTA Assistance to the Data Processing Center is expected
to continue on the following implementation schedule, steadily
expanding VAT, income tax and withholding tax processing to more and
more offices:

-- Phase 2: Early-2009
-- Phase 3: Mid-2009
-- Phase 4: Early 2010

In addition, Embassy recommends that additional assistance to DG Tax
in the area of public affairs, both for internal communication
between DG Tax offices, and outreach to the public.


JAKARTA 00003338 003 OF 003


HUME

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