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The negative impact of the FATCA implementation in Indonesia
To prevent American taxpayers from evading taxes through offshore investment in foreign financial institutions (FFIs), the US government has issued the Foreign Account Tax Compliance Act (FATCA), which will take effect on 1 July 2014. FATCA requires FFIs to annually report to the IRS the data of certain US account holders. Non-compliance to FATCA results in a penalty of 30% of the taxes levied on the payment from the US to the foreign entity. Taxand Indonesia discusses the impact of FATCA on FFIs that are operating in the jurisdiction.
A country's rule of law, such as FATCA, cannot be directly enforced in another country. This is because in other countries, such as Indonesia, there are existing laws that govern banking secrecy. Banking secrecy inIndonesia prohibits banks from providing any information about their customers and their accounts, including any information about the persons or entities that avail of the bank’s services relating to the flow of money, both inside and outside the country.
In Indonesia, customer data information and their accounts can only be obtained by certain institutions such as the Directorate General of Taxes, the police, or the attorney general’s office with the permission of the Minister of Finance. The permission to provide the customers’ data is only granted in cases where the bank’s customers or financial institutions are being audited or investigated for criminal offences.
Discover more about the difficulties of implementing FATCA in Indonesia
Also published in Thomson Reuters' Taxnet Pro, 8 May 2014
FATCA implementation outside the jurisdiction of the US will encounter resistance. So far, in Indonesia there has been no discussion regarding the intergovernmental agreement (IGA) with the US. If there is still no IGA with the US and Indonesia by 1 July 2014, the FFIs and the multinational companies operating in Indonesia must be ready to be imposed with the 30% withholding tax.
To avoid this, the FFIs are advised to prepare an agreement with the US account holders regarding the provision of data to the IRS, without violating the existing bank secrecy law in Indonesia.