Indonesia's financial center plan faces tax avoidance concerns

The Indonesian government and parliament are moving to enact the bill on the Indonesia International Financial Center (PFII), offering special incentives such as tax exemptions to attract investors. However, experts are raising concerns that these measures could inadvertently facilitate tax avoidance practices.

Rahma Gafmi, a professor at Airlangga University's Faculty of Economics and Business, stressed the need for robust, multi-layered oversight to prevent PFII from devolving into a tax haven. She emphasized that effective supervision should encompass preventive, detective, and corrective measures. "The crucial oversight mechanism to prepare is the implementation of economic substance rules. This is the most effective first defense," Rahma stated.

Rahma explained that companies operating within PFII must demonstrate genuine economic activity. This includes having a physical office, employing a sufficient number of local staff, and incurring operational expenses that reflect actual business activities in the area. "Entities that are merely paper companies without real activity must be rejected for registration or not be eligible for tax incentives," she added.

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The crucial oversight mechanism to prepare is the implementation of economic substance rules. This is the most effective first defense.

Transparency regarding ultimate beneficial owners (UBO) is also critical, as layered ownership structures are a significant avenue for tax evasion. Rahma advocated for a centralized registry where the disclosure of beneficial owners is real-time and transparent to tax and financial authorities. This UBO data should be accessible to law enforcement and tax authorities to map whether incoming capital is genuinely foreign or represents domestic funds being rerouted through "round tripping."

Furthermore, Rahma highlighted the importance of cross-authority supervision through an integrated framework, given that tax evasion often involves complex cross-border financial transactions. This necessitates data integration among institutions. She proposed developing an automated reporting system linking the Financial Services Authority (OJK), Bank Indonesia (BI), and the Directorate General of Taxes (DJP). This system should automatically flag suspicious fund flows, such as domestic money entering PFII and then exiting as foreign direct investment.

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Entities that are merely paper companies without real activity must be rejected for registration or not be eligible for tax incentives.