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December 29, 2016

The hottest topic in Indonesian politics right now is undoubtedly the tax amnesty program. Despite early reports that “confessions” and both domestic and repatriated funds were only trickling in, there was a flood of applications at the last minute. Truly Indonesian style!

The newly declared money’s impact will first be felt in increased infrastructure spending. Over the medium term, it means stronger confidence in the real-estate sector—not least because the planned infrastructure will open up investment opportunities along newly created roads, rail and ports.

Indonesia’s economy, ticking along at an annual growth of five percent, is the key driver of the property market. Yet tax amnesty will feed through in other important ways. Tax revenues have historically been paltry, and rampant evasion hampered the government’s ability to budget for needed spending.

With the first round of the amnesty closed at the end of September, we won’t know how many actually used it, as the paperwork will take some time to process. However, any fresh funding for infrastructure would be a positive.

Clearly, the Joko “Jokowi” Widodo administration is serious about reform. It cut in half a home sales tax as of September, thus bolstering the residential market. Home sellers will pay a final tax of 2.5 percent of the transaction price, down from five percent. For homes under 36 square meters, the tax is only one percent, to support low-income citizens. The tax office head Ken Dwijugiasteadi was quoted saying: “One of the people’s primary need is to own a house.”

The official said on October 3 that the amnesty program had already collected Rp 97.2 trillion (US$7.5 billion) in the first round, or 59 percent of the initial 165 trillion rupiah (US$12.7 billion) target. The scheme runs through March 2017, with three three-month sessions. For the last three months of 2016, the redemption rate for newly declared assets overseas now rises from two to three percent, and from four to six percent for domestic money.

Tycoons such as Anthoni Salim and James Riady have reported assets, as well as Tommy Suharto, setting an example for others. These declarations may have a snowball effect, encouraging others to report. The vast majority of the assets recouped are domestic. Repatriations are anemic, at only 13.6 percent of the Rp 1 quadrillion target, with 57 percent coming from Singapore. The government is targeting Rp 4 quadrillion in newly declared assets within Indonesia.

There’s added impetus for declarations in the second window, as businesses and rich individuals have sufficient time to prepare the paperwork. In the last “window” for the first three months of next year, the rate on domestic funds rises to a hefty 10 percent of assets, and repatriated to five percent. Singapore, now ensnared in the 1MDB scandal, has an incentive to push banks to aid the amnesty program, to bolster its international reputation for integrity. The Monetary Authority of Singapore managing director said in July that the 1MDB affair was “a dent in our reputation as a clean and trusted financial center.”

Todd Lauchlan, Country Head, Indonesia, JLL
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