VZCZCXRO7562
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 
 
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