Indonesia is coming close to its legal debt limit, and the government is out to raise tax revenues. One manifestation of this is their recent Indonesia tax amnesty, which aims to get wealthy Indonesians to send billions in hidden assets home. While this is causing headaches in the wealth management industry, it provides a momentary reprieve for luxury property. The question is, will it last?
What is the Indonesia tax amnesty about?
Tax amnesty provides a limited time for tax dodgers to come clean and declare their assets. In return for this, they may be charged a one-time fee for the declared assets, which is lower than the usual tax rate. With regard to Indonesia, the tax rate for previously undeclared assets ranges from two to 10 percent, depending on how quickly the asset holder makes the declaration, and whether the assets are repatriated to Indonesia.
In addition, those who declare their assets are guaranteed protection from criminal prosecution, and usually do not pay “back taxes” (this can amount to several years of unpaid tax).
On the other hand, those who do not respond to tax amnesty will face harsher penalties after the offer ends. In Indonesia’s case, tax dodgers will pay a punitive 200 percent tax rate on their assets, if caught later.
Why now, after so many years?
Tax amnesty is usually declared when a country faces an urgent need for tax revenues. In Indonesia’s case, the country is running a budget deficit of 2.7 percent of its Gross Domestic Product (GDP). Indonesia must raise revenues quickly, as it passed a law in 1998 (the aftermath of the Asian financial crisis) preventing its deficit from exceeding three percent of GDP.
In addition, there is a global forum due in 2018, when 101 countries are expected to agree* on an Automatic Exchange of Information (AEOI). This means the participating countries will share financial data, such as information on the assets of non-residents. This will expose tax evaders, and result in harsh penalties for those who don’t take advantage of the Indonesia tax amnesty while it’s offered.
(*Singapore and Indonesia have not yet agreed to all the terms of the AOEI. It is not guaranteed that either country will be part of the exchange).
Why is Singapore especially affected?
On 20th September 2016, Indonesia’s Minister of Finance Sri Mulyani Indrawati stated that some $340 billion had been hidden offshore by wealthy Indonesians, and about 80 percent of this wealth is kept in Singapore.
There is currently no bilateral agreement between Singapore and Indonesia to exchange financial data. In addition, the wealth management industry in Singapore has long been a favourite of Indonesians, due to products such as trust funds (which are not available in Indonesia). And following the May 1998 riots, when many Indonesians rushed to moved their wealth to more politically stable climates, Singapore stood out as one of the best options in South East Asia. Culturally, Singapore is also closer to Indonesia than Hong Kong, which is our closest rival in terms of financial services. These qualities have combined to make us a favoured haven for wealthy Indonesians.
But many Indonesians may hesitate to make a declaration, and put money into Singapore property instead
The lower tax rates and protection from prosecution are not, as one might imagine, a powerful lure.
Many Indonesians have moved their money offshore not just to avoid taxes, but as an issue of trust . They feel that Singapore is more stable politically, and their assets are safer here compared to back home. This includes concerns regarding government corruption.
Also, the low tax rate is a one-time offer. Wealthy Indonesians know that, sooner or later, they are going to have to go back to paying regular taxes; and this can amount to as much as 30 per cent income tax for the wealthiest. For those with significant net worth, such as Indonesia’s billionaires, this could amount to millions lost in taxation later on.
The solution? Luxury property in Singapore.
Regarding the 2018 AEOI agreement, many Indonesians believe (rightly or not) that the information exchange will be restricted to bank data. That is, their bank accounts, deposit box facilities, and credit might be exposed or extrapolated by investigators; but not their ownership of assets such as property. This has led to a surge in demand for luxury properties, specific to Indonesian buyers.
We do not have exact numbers on how many Indonesians are buying (it is not mandatory for property buyers to disclose their nationality, and many of these buyers are understandably hesitant to do so). However, according to the Straits Times, Indonesians bought 30 properties valued at $5 million or more, between the start of this year and 17th August.
For the whole of last year, there were only eight such deals.
According to data from Cushman & Wakefield, property sales to Indonesians, from January to June 2016, stands at 189 transactions. This is a 23 percent increase, from the same period in 2015.
Besides the impending risk of the data exchange, Indonesian buyers seem undeterred by measures such as the Additional Buyers Stamp Duty (ABSD). A 15 percent tax is a small price to pay, in contrast to the millions that the buyer would have to fork out in taxes. And with prices currently low due to the property slump, the property prospects are more appealing than ever.
The Indonesia tax amnesty is a small relief for the luxury housing segment, which has seen declining interest from Chinese and Malaysian buyers.
Will it affect the property market as a whole?
We are confident that the answer is no. The small numbers, which have mostly been restricted to luxury properties, do not signify much for our wider property market. 189 transactions, in niche luxury housing, is going to be irrelevant to the average Singaporean home buyer.
If you’re a regular Singaporean on the lookout for a house, good news: the prices are not going to start rising across the board anytime soon, and housing will remain affordable for a while yet (visit 99.co to check out the current prices, and you’ll see many are still well within most budget ranges).