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Panama Papers underscore need for fair tax systems

Sri Mulyani Indrawati's picture

High-rises and hotel buildings in Panama City, Panama. © Gerardo Pesantez/World Bank

The so-called “Panama Papers” scandal reminds us that concealing wealth and avoiding tax payments is neither uncommon nor — in many cases — illegal. But the embarrassing leak exposes something else: The public trust is breached when companies, the rich and the powerful can hide their money without breaking the law. If this breach is left unaddressed, those who aren’t rich enough to hide money will be less willing to pay and contribute to the social contract in which taxes are exchanged for quality services.

As finance minister in my home country of Indonesia, I saw firsthand how a weak tax system eroded public trust and enabled crony capitalism. Shadow markets arose for highly subsidized fuel, family connections secured jobs, and bribes helped public servants beef up their salaries. Tax avoidance among the elites was common and the country couldn’t mobilize the resources we needed to build infrastructure, create jobs, and fight poverty.

Introducing the concept of transparency and accountability into that broken system was hard and came with political opposition and setbacks. We worked on technical improvements that might seem basic but did not then exist, including better audits, stronger internal controls, and new computer systems to minimize personal interaction and the opportunity for taking bribes. We also created incentives for civil servants, boosted their morale, and imposed discipline.

Indonesia is just one example of how a broken social contract hampered development. In fact, mobilizing resources for services and development is a global challenge in which many countries lack both a strong tax base and the capacity to create one. Fifty percent of developing countries raise less than 15% of their gross domestic product in taxes, and many of them are highly dependent on natural resources. By contrast, the OECD average is about 34%.

Five years after starting our reforms, the number of taxpayers in Indonesia went from 4.35 million to nearly 16 million. Tax revenues grew by about 20% each year. With this income, we bolstered our budget, decreased our debt, and increased Indonesia’s capacity to provide essential services like roads, clean water, and health care. A strong economy helped, but we also built the trust the private sector needed to invest and create jobs.

The fallout from the Panama Papers could inspire a stronger and fairer international tax system based on sound tax systems, good institutions, and integrity. There are encouraging efforts by the G20 and other international fora to create solid tax reforms and promote binding international cooperation. Now may be the moment to turn words into action.

To meet our global goals of ending poverty and promoting shared prosperity, we need to help countries to overcome extraordinary challenges in tax policy and administration. Our clients grapple with a wide range of problems: businesses — both foreign and domestic — that don’t comply with tax regulations, large numbers of informal businesses that aren’t on the books, weak revenue administrations, poor governance, and the public’s mistrust.

The World Bank supported the reforms I led in Indonesia, and the institution is increasing its capacity to do more. A recently formed Global Tax Team is gathering insights into the specific problems our clients face and is working with them to find solutions. We hear that they would like assistance with international tax issues, such as transfer pricing — a practice that international companies can use to shift profits between subsidiaries and minimize their tax burden. They are also looking for help with tax policy, including for value-added tax, and issues related to transparency, including tax data collection and disclosure of natural-resource incomes. Our teams are already working with the governments of Pakistan, Colombia, and several countries in Eastern Europe to make improvements.

We will feed our findings into joint initiatives with the IMF, the OECD, the UN and others. These initiatives are designed to help countries strengthen their tax systems, coordinate global tax-related aid, and ensure that the interests of developing countries are heard in the growing international dialogue on tax reform.

As a former finance minister, I know too well that trust is a vital part of the equation. Nobody likes to pay taxes and that aversion only grows if people feel their contributions are wasted or stolen. Tax reforms are a vital piece of building equitable societies in which elites follow the rules. They can enable governments to spend efficiently, protect the poor and vulnerable while fighting corruption.

We may not make people and companies enjoy paying taxes, but we should create systems that make it a lot harder to hide wealth and avoid paying their dues. It is a critical part of the fight against poverty.

Comments

Submitted by John M. Cunningham on

I agree with you Indrawati.

We also know that any change will require the United States, and the United Kingdom's participation.

I also follow this story in Iceland, Panama and the United States,to understand who benefits from tax havens here:

https://www.linkedin.com/pulse/giant-leak-offshore-financial-records-exposes-global-array-john-m-?trk=pulse_spock-articles

Submitted by Arnold Mamesah on

I am not in fully disagreement to your thought. Rather, in Indonesia case, as the government is committed to adopt the stimulus fiscal policy since the 2015 annual budget, it implies that the tax revenue would not increase significantly in anyway.
Beside, the balance sheet recession problem that hammered the corporation as caused by the IDR depreciation to USD since 2013, then pushing tax collection would cause the corporation reduce or even refrain of new investment yet avoid bank investment loan though low interest being offered accordingly.
In this particular situation then the government shall consistently push the investment especially in the infrastructure sector to attract private to invest or at least loosen their expenditure. Having this situation in place, would at least sustain the employment level with some additional new jobs creation which subsequently cause demand to increase.
Well ... not an easy road to follow but at least in line to the stimulus strategy instead.

Submitted by SINO.AS on

KATA KUNCI: EMPEROR MISSION 2016
TITLE: MATA UANG DUNIA

SELAMAT DATANG
THE WORLD BANK GROUP
DALAM FORMAT BARU

STATUS: BANK SENTRAL DUNIA
NAMA: THE WORLD BANK RATU MAS KENCANA ROOM
MATA UANG: ESTWO MATA UANG DUNIA (KURS 225 US-DOLLAR)
NEGARA: KERAJAAN DUNIA
NAMA: NEO THE UNITED KINGDOM OF GOD SKY EARTH

Yang perlu di pahami jika di seluruh dunia melanda krisis global, dimana mata uang menjadi komoditi dan dari rakyat biasa karyawan, pegawai negeri sipil, karyawan bank, swasta lainnya, anggota DPR, anggota TNI-POLRI dan Pemerintah semua di landa Utang, saya melihat bahwa faktor pajak bukan penyebab melandanya krisis global. Bagai mana sistem bahkan di balik semua ini ada yang tidak di jelaskan bahkan oleh bank dunia yang selama ini sesungguhnya tidak beda dengan Koperasi dengan nama World Bank.

Mari kita buka kembali tatanan dari Cikal Bakal terkait sistim tradisional dan modern yang telah banyak merekayasa bank yang menimbulkan stagnasi global tanpa ujung pangkal, sedangkan persoalan sesungguhnya adalah penjamin jaminan cetak mata uang standar sah bayar dunia.

Regulasi, Tehnologi dan Perubahan Holding yang tidak bertanggung jawab selama ini dimana seolah para pelaku perbankan/karyawan maupun sektor swasta lainya hingga pemerintahan yang sesungguhnya adalah para kontraktor per-lima tahun dalam sistim tender PEMILU telah mengakibatkan budaya korupsi di seluruh lini dan penjajahan terhadap rakyatnya sendiri yang tiada akhir melalui Perbankan dengan tingkat suku bunga yang terus membunuh kehidupan berbangsa dan bernegara dan turut merusak moral dan melahirkan generasi dan mewarisi Utang kepada bayi-bayi yang belum lahir.

Bagimana jika Pemerintah Indonesia memiliki Utang mencapai RP. 4.000.000.000.000.000,- dan Asset Bank Indonesia RP. 1.800.000.000.000.000,- dan sebuah negara hanya mampu mengandalkan kenaikan pajak dengan ribuan aturan regulasi dimana semua mencari celah cara menjerat retribusi/pajak warga negaranya/menaikan harga minyak sebagai andalannya, maka niscaya itu sama akan mengakhiri sejarah-sejarah peradaban seperti kaum sebelumnya.

ESTWO Mata Uang Bank Sentral Dunia dapat segera di luncurkan sebagai jawaban dan tantangan dunia melalui sistim pembayaran Distribusi payment Order 1-11, selaku Billion Bank Transaction melalui SWISSINDO WORLD TRUST INTERNATIONAL ORBIT dan PERUBAHAN STATUS HOLDING-WORLD BANK menjadi THE WORLD BANK RATU MAS KENCANA ROOM dan NEO THE UNITED KINGDOM OF GOD SKY EARTH (THE COMMITTEE OF 300-THE INTERNATIONAL ORGANIC AGENCY-THE UNITED NATION ORGANIZATION) selaku The World Key Master Government Center "G to G" 2016.

EXHIBIT'S AB
DEWAN IKATAN DOKUME INTERNASIONAL
OWNER STATES M1

Submitted by Saidou on

I fully agree with the Analysis of our MD. But for the Domestic Revenue Mobilization agenda to succeed it's critical to get the political will of developing countries leaders because most of the time, tax policies and tax collections systems are captured by some Elites and vested interests who encourage revenue leakage and prevent countries to fully benefit from their fiscal potential . Thus the DRM agenda should go hand and hand with the Transparency; Accountability and Citizens engagement Agendas. Best regards

Submitted by ENDANG SUKANDAR M R (alumni FEUI 82) on

Setuju dgn Analisa Ibu bagus sekali dan untuk Negri kita tercinta ada hal khusus yang tampaknya perlu segera diperbaiki Ibu guna meningkatkan Tax Ratio ini guna kepercayaan dari rakyat atau segenap komponen bangsa. Adapun yang perlu segara diperbaiki yaitu maaf tentang perilaku legislatif (DPR) yang terkesan sebagai broker proyek APBN yang minta fee dari setiap proyeknya. Sehingga kepercayaan rakyat unt bayar pajak kurang bagus - relatively less trust to pay tax. Saya sendiri sebagai broker investasi suka menghimbau ke teman2 agar bayar pajak pada negara apalagi sekarang Pemerintah kita sedang giat2nya membangun infrastruktur dan mulai membangun Indonesia dari pinggiran atau tak terkonsentrasi lagi di P Jawa. Unt thn 2016 bagus Pemerintah indonesia telah menetapkan unt profesi : Broker (Investasi, Asuransi Propert- dll) setara dgn Dokter, Akuntan, Lawyer dgn Kep No 15/PJ/2015 dikenakan PENDAPATN NETO sebesar 50 % dari Total Gross Pendapatan sebagai basis pengenaan pajak sehingga terasa ada keadilan. Karena profesi2 tsb di atas belum tentu ada income setiap bulannya sedangkan over head pasti keluar setiap bulannya. Semoga perilaku Legislatif, Eksekitif dan Yudikatif serta rakyat Indonesia termasuk para pengusahanya semakin baik sehingga Tax ratio juga quality servicenya naik. Salam sukses Ibu Sri Mulyani dan salam buat keluarga.

Submitted by Sabaruddin Siregar,CA on

I agree with you Ms. Sri Mulyani, and Indonesia continued to push the Tax Reform in the spirit of Asean Economic Community (AEC). Moreover, could increase as much as 20% WP. Indonesia now requires more WP new taxes, how do you view the latest to pass the tax reform in Indonesia after you held the position of managing director of the World Bank. Papers to Panama, it seems we must caution (prudence) as there are rumors it blow up by GS and his gang. It should be noted in case of speculative attacks struck the countries affected directly by panama papers. If this happens, it is wrong but should be anticipated should not serve as a murky pond, so they can make like the proverbial Indonesia, fishing in the pond keruh.-

Sabaruddin Siregar,CA
CEO of Jassmh dan Partner

Submitted by yudha perwira on

Selamat siang bu sri mulyani...mohon informasi dari panjenengan bu...apakah world bank ada program kerjasama untuk pembangunan rumahsakit di wilayah indonesia...terimakasih..

Submitted by Martin N. AYABA on

I like and agree with your outspokenness and activism on this cheating and corruption by the rich and powerful who dodge away from taxes. As a citizen of The Cameroons, I would equally like that you take the same position by using your high office to openly investigate, identify and condemn unscrupulous public servants who continue to pray on the backs of dangerously poor citizens by embezzling and stashing billions of tax payer revenue in these same tax heavens revealed by The Panama Papers. In the case of most Sub-Saharan African countries this thievery is carried out by the same people who are supposed to be the custodians of the public trust. It is a travesty and economic injustice that well known individuals are abusing their offices by taking money from their poor citizens and hiding it in bank accounts in rich countries while their people are perishing in poverty. In the meantime, the World Bank and other donors who have the ability to use their leverage to positively influence this situation is continuously giving all kinds of financial assistance to prop up these very corrupt dictators. Think about the economic damage that has been done to many African economies by well known five star dictators on the continent. Think about the amount of wealth that has been dilapidated by the likes of Joseph Mobutu,Paul Biya, Omar Bongo, Gnassimbe Eyadema, Sani Abacha and many more. They stole tax payer money, including loans from donors and kept it in mostly western banks. Don't tell me that no body knew that these were stolen monies.
Please let the World Bank use it office to protect the poor, by holding these leaders accountable and calling them out for what they are doing to their own people. Why continue to give financial aid to leaders whom after 35 years in power as in the case of Cameroon, are still asking for help?

Submitted by frankie cunes on

Nice commentary ! I loved the details ! Does someone know where my company might be able to access a fillable Canada T1 General Form copy to use ?

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