Accessing third-party data for better tax compliance in Indonesia

Extensive literature shows that third-party data is an important tool to improve tax compliance. Such data is useful for tax administrations to verify taxpayer declarations, creating the right incentives for voluntary compliance. For Indonesia, addressing constraints to the accurate and timely reporting of third-party data could help the country close its tax gap , which we earlier estimated to be at 6 percent of GDP in 2018.

Here is a simple example to demonstrate how third-party data can improve tax compliance: Assume that Person X has filed an income tax return that is currently being audited by a tax official. The official will have no means to verify the return in the absence of third-party data such as bank statements, real-estate ownership, and car registration. In this case, if Person X under-declares their income, the tax official won’t be able to challenge it.

Let’s now consider an alternative scenario, where the tax officer has access to asset ownership data and has found out that Person X bought expensive real estate worth $1 million. Yet, they have declared annual earnings of only $200,000, didn’t sell any assets, or take any loans that year. With access to third-party data—in this case, asset ownership—the tax department can challenge Person X’s self-declaration.

This, however, is easier said than done. The main challenges to the accurate and timely reporting of such data are administrative in nature; a matter that remains less explored.

Let’s take another simplified example to illustrate this: Assume that the land agency in the country has real-estate data and the police department has access to car ownership/registration data. This data can be accessed by the tax authority, but only if it is made available to them by the land agency and police department in an accurate and timely manner. Administrative constraints to data reporting, such as conflicting laws and regulations, can delay or prevent data sharing with the tax authority.

World Bank Assistance

The World Bank provided technical assistance to the Government of Indonesia to help address this critical issue as part of the Public Financial Management, Multi-Donor Trust Fund.  We focused our work on personal income tax and conducted a comprehensive regulatory review related to data sharing and incorporated stakeholder perspectives. We documented some of the main constraints and our recommendations in the Indonesia Economic Prospects, December 2022 ( pp 29-30).

The following constraints stand out:

• Regulatory Challenges: Conflicting laws and regulations on data sharing mean that data is often not shared by important third parties. For example, the police do not share car ownership data with the tax authority, citing an exception to the Freedom of Public Information Law and an internal police regulation. Hence, it is important for the government to synchronize the regulatory framework for data sharing.
• Misaligned Incentives: Third parties often do not have a strong incentive to share data (or disincentive not to share data). For instance, some key third parties do not have signed memorandum of understanding (MoUs) or cooperation agreements with the Directorate-General Tax on data sharing with a clear incentive structure. This challenge can be addressed by having MoUs with key third parties with clear data-sharing incentive structures.
• Lack of Awareness of Data Use and Data Quality Concerns: Lack of awareness of data use, combined with concerns about data security, hampers voluntary compliance of data sharing.  Lack of automation in data sharing means that the tax authority must manually check data quality, which is a time-intensive task. These constraints can be addressed by investing in awareness campaigns and in IT systems that allow automated data sharing/data security.

By addressing these issues, Indonesia could improve its tax compliance function significantly, and close its tax gap. Our analytical work provides concrete tax administration levers for the government to improve taxpayer compliance.