Identifier
Created
Classification
Origin
06JAKARTA4964
2006-04-19 10:36:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Jakarta
Cable title:  

INDONESIA: TAX REFORM MOVES FORWARD

Tags:  ECON EFIN EAID PINR PREL PGOV ID 
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PP RUEHCHI RUEHDT RUEHHM
DE RUEHJA #4964/01 1091036
ZNR UUUUU ZZH
P 191036Z APR 06
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC PRIORITY 2946
RUEATRS/DEPT OF TREASURY WASHINGTON DC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUEHKO/AMEMBASSY TOKYO 9750
RUEHBJ/AMEMBASSY BEIJING 3374
RUEHBY/AMEMBASSY CANBERRA 9338
RUEHUL/AMEMBASSY SEOUL 3647
RUEAIIA/CIA WASHDC
UNCLAS SECTION 01 OF 03 JAKARTA 004964 

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AIDAC

DEPT FOR EAP/MTS AND EB/IFD/OMA
TREASURY FOR IA-ANNA JEWELL AND IRS RETTA JONES
DEPARTMENT PASS AID
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO

E.O. 12598: N/A
TAGS: ECON EFIN EAID PINR PREL PGOV ID
SUBJECT: INDONESIA: TAX REFORM MOVES FORWARD

REF: JAKARTA 610

UNCLAS SECTION 01 OF 03 JAKARTA 004964

SIPDIS

SENSITIVE
SIPDIS

AIDAC

DEPT FOR EAP/MTS AND EB/IFD/OMA
TREASURY FOR IA-ANNA JEWELL AND IRS RETTA JONES
DEPARTMENT PASS AID
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO

E.O. 12598: N/A
TAGS: ECON EFIN EAID PINR PREL PGOV ID
SUBJECT: INDONESIA: TAX REFORM MOVES FORWARD

REF: JAKARTA 610


1. (SBU) Summary. Finance Minister Sri Mulyani Indrawati
told donors on April 19 that President Yudhoyono would sign
a decree very soon appointing two prominent Indonesians,
Ma'rie Muhammad and Marsilam Simanjuntak, to help steer the
Ministry of Finance's (MOF) tax and customs reform efforts.
Both Muhammad and Simanjuntak have reputations for being
clean and outspoken on anti-corruption. Mulyani said the
MOF's planned tax reforms are wide-ranging and require a
dedicated effort. Priorities include improving audits and
speeding up value-added tax (VAT) refunds, strengthening
internal controls, reducing arbitrariness in interpretation,
improving public relations, and modernizing the Directorate
General of Taxation's (DGT) computer and personnel systems.
Mulyani said she needs lots of help in the form of long-term
resident advisors, not short-term missions that leave thick
reports. We expect Mulyani to make a strong pitch for USG
assistance during her April 21-23 meetings in Washington,
and encourage Washington agencies to respond favorably. End
Summary.

Mulyani Needs "Quick Wins"
--------------


2. (SBU) Finance Minister Sri Mulyani Indrawati told donors
on April 19 that President Susilo Bambang Yudhoyono (SBY)
will announce very soon two "prominent persons" to assist on
tax and customs reform. The two are former Finance Minister
Marie Muhammad and former Attorney General and Minister of
Justice Marsilam Simanjuntak (biodata paras 7-8). Both have
excellent reputations as clean, reform-minded and outspoken
on anti-corruption. Mulyani did not specify the precise
roles or positions the two would hold, or whether they would
head a "Tax Reform Steering Committee" the IMF and other
donors have encouraged her to create. Mulyani also said
that the work of an internal DGT "Tax Modernization Team",
whose mandate ran out last December, would continue. Tax

reform is very time intensive, she noted, "and would take
too much of my time to manage personally." It is important
to show results and have "quick wins" especially in areas
companies have complained about such as audit and VAT refund
procedures.


3. (SBU) Mulyani said she will outline her tax reform
strategy and seek U.S. assistance during April 21-23
meetings in Washington. She said she seeks a focused
discussion on strategies Indonesia could use to move
forward, and said a senior DGT official will accompany her.

Donors Pledge Support for Tax Reform
--------------


4. (SBU) Mulyani emphasized her wish for long-term resident
advisors, rather than short-term experts who would drop in
for a week or two and write a thick report "that goes
straight into the garbage. I need people working with us
long-term, pushing and shaping the reform process," she
said. Donors welcomed Mulyani's commitment to push tax
reform forward, and pledged a range of support. The IMF
Senior Resident Representative offered a long-term resident
advisor to work with Muhammad and Simanjuntak, provide
advice on tax policy questions, and coordinate donor
assistance. The World Bank, Australia, Japan, Sweden, and
the U.S. all assured Mulyani of commitment to help her
goals. Mulyani emphasized the need for donor flexibility
since the tax reform process is both wide-ranging and
dynamic--unseen challenges may emerge. She suggested
regular quarterly meetings with donors for tax reform
updates.

Tax Modernization: What Does it Look Like?
--------------


5. (U) The DG Tax modernization team presented five
priorities for 2006: upgrading human resource management;
strengthening information and communication technology,
improving the audit and VAT refund processes, reviewing the

JAKARTA 00004964 002 OF 003


performance of existing "modernized" tax offices, and
improving communication. The team grouped improvements
under three main goals:

A) Compliance:

--Improving service by simplifying procedures, delivering
fast and friendly service, and disseminating tax policy
effectively.
--Combating non-compliance through intensification
(increasing collections from existing taxpayers),
"extensification" (increasing the number of registered
taxpayers) and improved data.
--Improving legal certainty through uniform and consistent
tax interpretation of tax code.

B) Efficiency: Making tax systems and administration more
reliable through re-organizing tax offices on functional
lines, better using technology, and developing simple and
clear working procedures.

C) Integrity and Good Image:

--Developing professional staff with integrity, instituting
a fair human resource management system based on performance
and strict and consistent implementation of a code of
conduct.
--Developing a good corporate culture with strong values.
--Accountable and Transparent Organization: Systematizing
internal controls and effective complaint management.
--Improving stakeholder communications.

With the persons named and the committee formed, donors will
have designated interlocutors for tax reform assistance.


6. (SBU) Comment: Donors have strongly encouraged Mulyani to
appoint a high-profile, public-private steering committee to
guide what will surely be a very difficult and controversial
reform effort. Although it is not clear what sort of
structure she envisions setting up, the appointment of
Muhammad and Simanjuntak will be a significant step forward,
and put two very credible individuals at the head of the tax
reform process. It is also encouraging that Mulyani wants
to score "quick victories" on two of the most frequent
complaints of the foreign business community-- non-
transparent tax audits (often accompanied by rent-seeking)
and lengthy VAT refunds. We expect Mulyani to make a strong
pitch for USG support for the GOI's tax reform program
during her April 21-23 meetings in Washington, and encourage
Washington agencies to offer all appropriate assistance.

Bio Data: Mar'ie Muhammad and Marsilam Simanjuntak
-------------- --------------


7. (SBU) Mar'ie Muhammad: Mar'ie Muhammad, 67, is currently
head of the Indonesian Red Cross. He served as Finance
Minister under former President Suharto from March 1993 to
March 1998. Widely known as "Mr. Clean" when he was
Finance Minister, Suharto removed him from the cabinet after
Muhammad voiced strong opposition to a plan to institute a
currency board. One of the most controversial decisions
during his tenure involved closing 16 ailing commercial
banks, including those owned by Suharto's half-brother
Probosutedjo and son Bambang Trihatmodjo. Probosutedjo and
Bambang filed and later dropped lawsuits against Mar'ie and
the Bank Indonesia Governor at the time over the closures.
Muhammad set up the Indonesian Society for Transparency in
1998 to focus on good governance and anti-corruption. A
student activist during the late 1960s, Muhammad graduated
from the University of Indonesia's School of Economics in
1969, and has served in government positions since 1970.


8. (SBU) Marsilam Simanjuntak: Served as Cabinet Secretary
from 1999 - 2000 under President Abdurrahman Wahid (Gus
Dur),Minister of Justice from 2000 - 2001, and Attorney
General in 2001. After leaving government, Simanjuntak
served on the Advisory Board of Commissioners of state-owned
airline Garuda from May 2003 - August 2004. He graduated

JAKARTA 00004964 003 OF 003


from the University of Indonesia with a degree in medicine
in 1971. During the 1970s, Simanjuntak became actively
involved in the Anti-Corruption Commission. Simanjuntak
spent 17 months in military detention without trial for his
alleged involvement in the Malari incident (massive anti-
Japan student riots) in January 15, 1974. After his release
Simanjuntak was appointed Chief of Health at Garuda
Airlines. He retired early after refusing to join the
Indonesian Civil Service Corps (Korpri),which could be
viewed as an anti-Soeharto stance. Simanjuntak obtained a
law degree from the University of Indonesia in 1989.

PASCOE