Indonesia and the Panama Papers

Posted: 12/04/2016 

The recent leak of the Panama Papers, which shook the world, also raises the political temperature in Indonesia. Included on the list are a number of Indonesian business tycoons who have been involved in different legal cases in Indonesia.

Among the 2,961 Indonesian businessmen featured in the document, the most highlighted is an oil tycoon, Riza Chalid. Once one of the most important individuals in Global Resource Energy, he had long been a target of criticism by the Indonesian public; in particular, following a transcript of his phone conversation with the Head of the People's Representative Council and the President Director of Freeport Indonesia being leaked to public. The recording reveals astonishing facts related to his involvement in influencing the renewal process of PT Freeport, one of the world's largest gold mines, located in Papua. Moreover, during this time, Chalid was a businessman with strong links to the authorities. Over the years, he managed to control Petral, a subsidiary of Indonesia's oil company in Singapore and reported to have cost the state a vast amount of resources related to crude procurement.

Another Indonesian tycoon listed in the Panama Papers is Joko Candra. He fled the country one day prior to being found guilty by the Indonesian Supreme Court in the Bank Bali case, worth 904 billion Indonesian Rupiah.

Also included is Sukanto Tanoto; the owner of palm oil firm, Asian Agri. This company has a long history of tax avoidance in Indonesia. Evidence shows that Asian Agri engaged routinely and systematically in tax avoidance practices with transfer pricing methods. Among those methods is the establishment of a fictitious company in Hong Kong Macau and BVI.

Another shocking name on the list is that of James Riady; 

the owner of one of the country's largest conglomerates. Moreover, he currently serves as the vice chairman of the Indonesian Chamber of Commerce and Industry. While never revealed publicly, Riady is one of the benefactors of President Jokowi in Indonesia's presidential election two years ago. Firms owned by Riady have also been suspected of being involved in falsifying the financial statements of Bank Lippo, which caused the crisis of foreign trusts. Additionally, Billy Sindoro, one of the subsidiaries of Lippo Group, has been proven to have bribed the Chairman of the Business Competition Supervisory Commission, known in Indonesia as Komisi Pengawas Persaingan Usaha (KPPU), in 2008.

Of equal importance is Anthony Salim, who was allegedly involved in the case of the fund liquidation of Bank Indonesia in 1998.

The final individual discussed in relation to the Panama Papers is Solihin Kalla, the son of Indonesia's current Vice President, Jusuf Kalla. Last year, this man was subject to intense criticism from the public after being selected by Indonesia's state oil company, Pertamina, for the project of managing LNG in Bojonegoro.

The list of Indonesian individuals in the Panama Papers has triggered intense public criticism against the government in Jakarta. The Vice Chairman of the House of Representatives, Agus Hermanto, demanded the government instigate immediate investigations into these individuals. This pledge makes sense as some of these individuals had indeed been involved in a number of legal cases in Indonesia, particularly those pertaining to tax avoidance.

In 2010, the Data Justice Network revealed that Indonesia is one of the 10 largest countries with financial assets in tax haven countries. Indonesia became the only country in Southeast Asia with total assets of around US$331 billion. More importantly, the flow of illegal Indonesian funds into those tax havens countries wasestimated at US$188 billion.

In 2014, the ratio of tax revenue to GDP in Indonesia stood at only 10.8 per cent, which is among the lowest in the world and far below Malaysia and Thailand, with 17 and 15.5 per cent respectively. What is worse is the fact that of 50 million wealthy individuals in Indonesia, only 23 to 24 million pay taxes regularly. This has resulted in severe economic inequality in Indonesia.

Currently, the rate of Indonesia's economic inequality is among the fastest in the world, exceeding even the pace of economic inequality in the US. Last year, it wasreported that the economic inequality in Indonesia reached 0.42 per cent, the highest level since 1966. Simultaneously, the wealth of Indonesian tycoons increased many folds. The International Credit Cruise estimates that the number of wealthy Indonesians will increase rapidly, reaching 54% by 2020. The leak of the Panama Papers strengthens further the notion that one of the reasons behind the increase in the amount of wealth of the rich is their tax avoidance practices.

The Indonesian government, through the Coordinating Minister for Political, Legal, and Security Affairs Luhut Pandjaitan, declared that Jakarta will soon conduct investigations into the names listed in the Panama Papers.

Furthermore, in order to attract the assets of its wealthy populations, the Indonesian government has made plans to implement a tax amnesty policy. Ideally, this policy will attract assets of Indonesian businessmen that have been stored overseas.

Nonetheless, the Panama Papers should serve as a warning to Indonesia; whereby the main reason wealthy individuals save their assets abroad is not for efficiency, but rather for reasons of privacy and an attempt to hide assets to avoid greater tax assets.

It is also important to note that the individuals listed in the Panama Papers are proven to have strong links to the ruling government. This will certainly complicate the process of investigations into the alleged cases. Therefore, it makes sense if the public is pessimistic and questions the government's ability to collect taxes from these conglomerates.