A tax amnesty is a rule or law issued by the government to forgive taxpayers’ tax debts of previous years. Through this measure the government provides a benefit to taxpayers by allowing them to rectify mistakes or omissions in tax returns without fear of legal actions.
In other words, the government sacrifices the penalties for past non-compliance (and often the tax owing itself) in exchange for improved compliance in the future. The amnesty is usually established for a fixed period of time.
Governments of all kinds have increasingly turned to tax amnesties as part of their fiscal programs. An amnesty typically allows individuals or firms to pay previously delinquent taxes with reduced civil and criminal penalties. A tax amnesty is a policy that is expected to reduce problem of tax evasion.
Many countries have implemented tax amnesty programs over the past three decades. They include Argentina, Australia, Belgium, Colombia, Ecuador, France, Honduras, India, Ireland, Italy, Panama, Philippines, the US, Denmark, Mexico, Netherland, Norway, Peru, Sweden and former West Germany.
The US has never had a federal tax amnesty program, but some states have implemented tax amnesties: Alabama, Arizona, California, Colorado, Idaho, Illinois, Kansas, Louisiana, Minnesota, Missouri, New Mexico, New York, North Dakota, Oklahoma, South Carolina, Texas and Wisconsin. Participation in the tax amnesty program in Massachusetts is by invitation for taxpayers that meet certain criteria.
For those taxpayers that qualify, they receive tax amnesty notices showing the tax and interest due, along with the penalties to be waived. Qualified taxpayers that pay the tax and interest shown on the bill before due date will have any unpaid penalties waived.
Taxpayers that participate in the tax amnesty are also prohibited from participating in future tax amnesty programs for the next consecutive ten years, beginning in calendar year 2015. The mechanism that is implemented in Massachusetts might be appropriate for taxpayers who are already in the system, but inadvertently underpaid their taxes.
The Colorado tax amnesty was similar to those in most other states. The amnesty was designed as a legislated, one-time opportunity for individuals and businesses to pay any unpaid back taxes without penalties or criminal prosecution.
The amnesty program was advertised as a last chance for delinquent taxpayers to comply with tax laws before civil and criminal penalties for noncompliance were increased.
In all, the bill authorizing the amnesty contained 51 new or increased penalties.
In addition, personnel and other resources devoted to tax law enforcement increased after the amnesty.
The advertisement for the amnesty program was publicized widely through virtually all forms of media, from radio and television spots to placards on the sides of buses. All carried the same message: “Don’t Say We Didn’t Warn You”. And cautioned that the amnesty was a one-time opportunity to clear up any previous nonpayment problems.
The government implements tax amnesties to raise revenues from three main sources. The first source is the large amount of revenue in the domestic economy that goes unreported because it is circulating in the underground economy.
Tax amnesties are designed not only to increase current tax revenue but also to reduce permanently the amount of economic activity occurring in the underground economy, thereby increasing future tax revenues as well.
According to research by Enste and Schneider (2002), the size of the underground economy in developed countries was approximately 14-16 percent of gross domestic product (GDP), while in developing countries it was approximately 35-44 percent of GDP.
The second source of potential revenue is capital flight. Governments use amnesties as an inducement for citizens to repatriate sums of money, often very large, that have been illegally transported abroad. A substantial amount of potential tax revenue is lost yearly, especially in developing countries, because of massive capital flight.
Debates on a tax amnesty for capital repatriation were started in 2005. Capital that could be repatriated, according to then coordinating economic minister Aburizal Bakrie, was approximately US$50 billion, mostly owned by Indonesian businessmen and saved in many banking and financial institutions in Singapore.
Most of those funds came from export activities in the form of foreign currency that was saved by internal transferring.
Exporting companies based in Indonesia had branches overseas, then accounted their income in overseas banks, therefore avoiding domestic tax income.
The third and final source of potential revenue is the payment of back taxes by those who inadvertently underpaid taxes but never reported this mistake because of the penalties associated with tax evasion. Tax amnesties encourage full repayment by eliminating or lessening such penalties.
Proponents of amnesties argue that compliance may actually increase after an amnesty, if the amnesty is followed by greater enforcement efforts and better taxpayer services.
But critics suggest that post-amnesty compliance is far more likely to decline, since honest taxpayers may view the amnesty as an unfair tax break for tax cheats.
Individuals may expect another amnesty to be given in the future, and the mere announcement of the amnesty may make taxpayers aware of the widespread presence and ease of noncompliance.
In practice, tax amnesties have been coupled with enhanced enforcement efforts, a feature that seems essential to preserve the legitimacy of the tax code. An amnesty and enforcement program twists the schedule of expected tax penalties, lowering them temporarily but raising them later, thus providing a strong incentive for offenders to come forward.
A tax amnesty is a policy that in the long term is expected to create tax compliance and openness among taxpayers. This new beginning created more conducive circumstances for mutual trust between tax officers and taxpayers. The taxpayer database also becomes strengthened and enlarged for future tax revenue.
In the short term, a tax amnesty will increase tax revenue, as happened in Indonesia in 2008. The directorate general of taxation implemented a sunset policy as one form of tax amnesty in 2008. Tax revenues increased by 30 percent during that period.
But to be effective a tax amnesty should be based on clear-cut criteria. Rules and regulations must be well designed. As regards capital repatriation from abroad, a tax amnesty should be given in all aspects, except for money related to drugs and terrorism.
A good tax amnesty scheme will encourage people to withdraw and repatriate their funds deposited in foreign countries like Singapore, Malaysia, Hong Kong, Macau or Switzerland.
But we must also be vigilant against efforts by neighboring countries like Singapore which certainly will make an effort to keep the funds owned by Indonesian citizens in Singapore because a massive capital flight could cause severe liquidity problems in the banking system. The Finance Ministry should take concrete measures to cope with any attempt by Singapore to hinder capital repatriation to Indonesia.
The design for tax amnesty policy must be well coordinated with all law enforcement institutions. The House of Representatives, especially Commission XI overseeing finance, gives strong support to the government to prepare the tax amnesty policy.
An amnesty and enforcement program twists the schedule of expected tax penalties…
The writer is a member of Commission XI at the House of Representatives from the Golkar Party.