Project to support the fiscal and tax reform in Indonesia

The Government of Indonesia has embarked on a fiscal and tax reform program which aims to guarantee the sustainable financing of investment and redistribution policy for vulnerable populations.

The Agence Française de Développement (AFD) has committed to support Indonesia's ongoing efforts to improve the quality of spending, strengthen revenue administration and enhance the tax policy through its contribution to the "Fiscal Reform Development Policy Loan (DPL)". It has mobilized two grants of € 0.3 million (DPL 1) and € 0.9 million (DPL 2) for Technical Assistance Projects. Expertise France has been charged of implementing the second project.

Within the framework of the Fiscal Reform Development Policy Loan, the second Technical Assistance project aimed to support the Indonesian Ministry of Finance and more specifically the Fiscal Policy Agency (BKF) and the General Directorate of Taxes (DGT), in its ongoing fiscal and tax reform. The objective was to move towards a more efficient, innovative, transversal administration focused on resources optimization, fight against global warming and adaptation to a complex international taxation context.

More specifically, the project aimed to:

• Strengthen the collaboration between DG Tax and BKF for a stronger tax administration and policy, given the contemporary tax challenges faced by Indonesia in relation to the digital economy (taxing online transactions) and climate change (environmental taxation and climate budget tagging);

• Strengthen the capacities of DG Tax and BKF in order to optimize public resources and broaden the tax base, improve the quality of services to users, business process reengineering and international tax issues.

To reach the above-mentioned specific objectives, the project has achieved four main results.

1. The Indonesian Ministry of Finance has been reinforced on issues related to the digital economy (strategy of taxing online transactions) and climate change (expansion of climate budget tagging and environmental taxation).

Activities included:

• Workshops on the two pillars of the Base Erosion Profit Shifting (BEPS) and their impact on Indonesia, especially regarding tax incentives
• A training to strengthen the effectiveness of tax audit in the e-commerce
• A workshop on how to implement General Anti-Avoidance Rules and Principal Purpose Test
• A seminar on environmental taxation which resulted in a benchmark and recommendations for Indonesia
• Support to the elaboration of a Communication Strategy for carbon tax and excise on plastic to the general public
• A report on social climate budget tagging as well as a seminar on the French experience of developing the Cross-cutting Policy Document on fighting against climate change

2. The Indonesian tax administration has been assisted in the development of indirect taxation (excise duties, VAT), and the analysis of shadow economy in order to help understand and support the implementation of tax policies adapted to national specificities.

Activities included:

• A benchmark study on tobacco and sugar-sweetened beverages excise duty
• Support to the Indonesian tax administration on the revision of the value added tax refund for tourists
• A workshop and study on tax aspects of the Indonesian informal sector and the shadow economy in the country
• Methodological support on tax gap measurement and analysis for tax compliance improvement
• A workshop to reinforce DG tax's capacities on tax audit and related processes

3. The administration has been consolidated in its change management strategy and in the information-sharing strategy between administrations.

A workshop has been organized on knowledge management of the Tax Administration; the business processes reengineering (planning and implementation); and the change management and evaluation of organizational effectiveness to improve the quality of taxpayers services.

4. DG Tax and BKF have strengthened their analysis on international tax issues regarding BEPS programs in coordination with OECD works.

A workshop has been organized on hybrid mismatch arrangement and derivative transaction; effective data processing and implementation of automatic exchange of information as well as transfer pricing.