The Architecture of Tax Legal Framework

Paying tax is one of our civic duty, an obligation required by the law. This ‘taxpayer action’ performed an integral part of citizen responsibility to society. Instead, this obligation is not automatically provoking people to be aware of the importance to pay the ‘fair share’ amount of tax. People tend to avoid to pay their fiscal obligation or try to minimise their tax burden to pay less contribution to the government and society.
Why is so important to pay 'fair share' amount of tax?
Theoretically speaking, the tax has a function of 'social-welfare'. Individual and/or legal entity will contribute to the government revenue by paying tax from its income/ profit. This revenue then 're-distribute' by the government to the vital sector of public service or facilities, thus can be enjoyed- not only by the taxpayer that already paid - nonetheless enjoyed by the whole society.  This is what we called with 'Benefit-Received' principle.
Nevertheless, this function will be failed if the taxpayer never paid their 'fair share' amount of tax, impacting the public sector such as education, healthcare, public transportation thus shifting the tax burden to the 'poorest' member of the society, maximizing the economic gap between the member of society.
How come not paying our fair share amount of tax can affect another member of our society?
Let me explain this.
Developing countries like Indonesia heavily relied on tax revenue. In 2020 Indonesia State Budget (APBN/ Anggaran Pendapatan dan Belanja Negara), expected total revenue will be Rp. 2.233,2 Trillion ($ 160 Billion) consist of Rp.1.865 Trillion ($ 132 Billion) from tax revenue which is more than 83% state budget revenue is from tax revenue[i]. Another source will come from customs duties, a state-owned enterprise, capital revenue, foreign aid or foreign debt and grant funds (dana hibah). Tax revenues were derived from 31% of other taxes on goods and service, 22% from Corporate Income Tax (CIT), 19% of Personal Income Tax (PIT),  12% from Value Added Taxes (VAT) of good and service, 12% from other taxes and 3% of social security contribution[ii].
Imagine if many of the Corporate taxpayers choose to minimise their tax burden by shifting the profit to other low tax jurisdiction, moreover paying a little amount of tax from what they are supposed to pay (fair share of tax) in Indonesia, eroding the revenue base. As we know, the high-income earners such as Multinational Enterprise/Company (MNEs) can simply performing tax planning more than those of Small-Medium Enterprise (SMEs) who have lower income.
This creating a gap as the MNEs will receive the benefit from the public facility at the same time with SMEs even without MNEs paying the 'fair share' amount or the amount that they supposed to contribute to the government and will affect the business competition. With the eroding tax revenues, the government must exploit another source of revenue which is usually the 'foreign debt'. However, foreign debt has a significant negative effect on the economic development of the country in the future, just like a 'domino effect', debt crisis can lead to the financial and economic crisis of the countries, lesson learns from Greek Debt Crisis in 2009.
Owing to the fact, it is important to maintain taxpayer compliance to contribute to the 'fair-share' amount of tax, not just simply 'already' paying the tax without clarifying the 'fair share amount'.

'Supply and Demand' Analogy
It has been a long-debated about ‘how to determine the fair share amount of tax’ or ‘what is the amount that considered as a fair share to pay tax’. The fair share tax is one of the indicators that determine that the taxpayer already acts in a fiscally ethical manner to the community.
An analogy that often use to determine the ‘fair share’ is the ‘supply and demand’ principle in microeconomy. To achieve the ‘fair share price’, first, we must analogically identify the ‘equilibrium’ situation. There must be demand from the government of ‘how much the reasonable amount to paid the tax’ and then the taxpayer as a supplier will contribute ‘the reasonable amount of tax’ from their version. When a reasonable amount from the two parties (government and taxpayer) are converging, it will create an equilibrium or balance situation that considers as a fair amount of tax.
 
In this situation, the government will do the ‘check and balances’ function of the fair amount of tax that already paid by the taxpayer. However, the taxpayer has a right to obtain a legal certainty from the government ‘check and balances’ action. If this is working, the taxpayer will pay the fair amount of tax and fulfilling the obligation to contribute to society. On the other hand, the government will receive the expected amount of revenue and then redistribute it to vital public sectors such as healthcare, education, infrastructure, environment and national security.
To create this ideal situation, we should not just depend on the taxpayer consciousness or the government approach toward taxation. Despite that, we must create a legal framework that systematically accommodates both the taxpayer and government concern regarding taxation and provide legal certainty. Thus, permitting all of the parties involved in carrying out obligation and receive the benefit from taxation on a greater good basis.
First, Construct the Foundation of the Legal Structure

The first things that we should do to designing the tax legal structure are to create a ‘foundation’ of the legal certainty. In order to build a strong tax groundwork, we take into consideration five criteria base on ‘Ottawa Framework’, a broad taxation principle that usually applied to construct digital economy taxation. This framework consists of these five criteria. First, neutrality, where the business consideration should be motivated based on economic rather than tax purpose. Second, efficiency that goal is to minimise the compliance cost for taxpayers and administrative expense for tax authorities.
Third, certainty and simplicity which the regulation must be understandable. Thus, the taxpayer can predict the tax consequences. Fourth, effectiveness and fairness in which tax should generate the right amount of tax at the appropriate time, and minimise tax avoidance and evasion. The last criteria are the flexibility and dynamic character to ensure that the tax system evolves in line with the digitalisation and modern development. Try to put this framework into ‘tax legal structure’, the foundation to ‘renovate’ the legal framework must be implemented in the domestic and international tax system.
The first proposal to achieved the ‘ideal tax situation’ is to construct a domestic tax administration regulation that promotes efficiency and transparency, strengthen to broaden the tax base, and has the power to combat the tax avoidance and evasion in national level.  At the same time, the regulation must convey a sustainable growth-friendly fiscal consolidation, establish additional revenues without harming entrepreneurship and innovation and of course, stimulate high rates of compliance. Thus, satisfying both government and the taxpayer as a key player of the system, at the same time fulfilling the neutrality criteria by accommodating both key player tax concerns.
Therefore, many works have to be done to set up this proposed foundation on the right path. The efficiency and transparency come with the visibility that allows the taxpayer to know the actual cost of the transactions and the activity of their business operation, they must be able to detect the total tax liability and in which level the government will tax it. The tax regulation should provide certainty and specify the person’s tax liability that enables the taxpayer to conclude the subject/ object of tax, the tax base and tax rates reasonably based on the nature of business transactions.

As a result, the tax administration can be delivered on the precise guidance, understandable and accessible to the taxpayer on time. This simplicity and certainty in the system can gain the taxpayer respect and trust toward government. It will help the tax authorities to carry out the effective and efficient tax administration process for the reason that the taxpayer can comply with their tax obligation correctly, thus in a costly-efficient manner. When the taxpayer already arrived at the stage of ‘respecting and trusting’ government, they became aware of their obligation and fulfilling their duty genuinely. It can help to maintain mutual cooperation in the future situation.
As an illustration, in the COVID-19 some of the countries such as Denmark, Germany and France grant a ‘wage subsidy’ or ‘business support fund’ to help the affected worker and ensure the liquidity of the enterprise to access to finance their business to aid their faster recovery from the crisis pandemic[iii]. One of the criteria to get this benefit is the compliance of taxpayer in the past few years. This illustration was the example of mutual respect and support between taxpayer and government.

Another step is to expand the tax base. The broad tax base can be achieved by eliminating or constraining tax expenditures as capital income preferential treatment, exemptions, credits, and deductions or reducing the disparity of between tax rates impose on wage income against capital gains and investment income. Broad tax base can lead to lowering the tax rates in the future.
The lower tax rates will escalate consumers spending power which increase the accumulate demand, contribute to higher economic growth. Moreover, we can start exploring alternative tax that can be imposed other than heavily relied on income tax or direct taxation. However, we must anticipate the reduced government value as a side effect, but the spending power can simultaneously increase productivity, thus counteract the revenue depreciation.

All of this method is to create a domestic legal framework where enable the government to regulate the timing and amount tax collections to have an appropriate degree of stability, reliability and predictability in the system. Consequently, this tax legal framework must have a dynamic and flexible nature, to be able to adapt to the changing business model in this modern-technological oriented era.
It was expected that the system will convene the existing revenue needs and capable to generate appropriate income while adapting to the new business situation and development. However, this approach must be reviewed regularly to ensure that this system supports both tax key player’s goal (the government and taxpayer) and maintain their right and obligation.
Second, Establish the 'Ceiling' that will Protect the Domestic Legal Structure
After setting a ‘foundation’ of tax legal framework on a domestic basis, the second proposal would be to establish a ‘ceiling’, a legal framework in the global tax system. Our domestic proposal of tax legal framework would be wasteful if it is not supported by the international tax system that might be open to the avoidance and evasion scheme that were benefiting from preferential tax regime in other countries.
In a worldwide basis, the main problem is the harmful tax competition. Harmful tax competition encourages the aggressive tax planning by using the combination and different treatment in tax laws in various jurisdictions to get benefit in the form of low rates taxation and legal or administrative system that promotes secrecy and restrict the exchange of information without transparency.
This tax competition created an opportunity for the taxpayer to behave not in the fiscally ethical manner and creating a treat and potentially harming the other jurisdiction tax base. Our proposed tax legal framework is to create a multilateral approach that will tackle the harmful tax competition. This approach would be a minimum standard to a global basis. It will facilitate the transparency and exchange of information between countries, and assess the preferential tax regime thus identify the type, nature and features of this regime that can promote base erosion and profit shifting.
Therefore, our last proposal is to create a standard in the concerns of substantial activity requirement for the business entity to establish in low/zero tax jurisdictions. Hopefully, this proposal can monitor the practice of such harmful tax regime and prevent it from eroding the other countries tax base and amending or abolishing such harmful system in the future. In the final analysis, to create the tax legal framework that promotes fiscally ethical behaviour, we must combine the domestic and global tax system and at the same time collaborate the government and taxpayer behaviour. This behaviour is an important factor to achieve the ‘ideal archetype’ that will provide legal certainty of taxation. (MYK)
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Endnote:
[i] Indonesia Ministry of Finance/Kementerian Keuangan Republik Indonesia (Kemenkeu), ‘Indonesia State Budget 2020’ (Kemenkeu,2020), https://www.kemenkeu.go.id/apbn2020 accessed on Wednesday 10 June 2020 at 10:24 am.
[ii] Organization of Economic Co-operation and Development (OECD), ‘Revenue Statistics in Asian and Pacific Economies 2019- Indonesia’, (OECD,2019), https://www.oecd.org/tax/tax-policy/revenue-statistics-asia-and-pacific-indonesia.pdf accessed on Wednesday, 10 June 2020 at 10:39 am.
[iii] C. Enache et al., ‘Tracking Economic Relief Plans Around the World during the Coronavirus Outbreak’, (Tax Foundation, 2020), https://taxfoundation.org/coronavirus-country-by-country-responses/ accessed on Friday, 5 June 2020 at 07:44 pm.