VZCZCXRO5842
RR RUEHCHI RUEHCN RUEHDT RUEHHM
DE RUEHJA #3338/01 3410357
ZNR UUUUU ZZH
R 070357Z DEC 07
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 7299
RUEATRS/DEPT OF TREASURY WASHDC
INFO RUEHZS/ASSOCIATION OF SOUTHEAST ASIAN NATIONS
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHKO/AMEMBASSY TOKYO 1268
RUEHBJ/AMEMBASSY BEIJING 4558
RUEHBY/AMEMBASSY CANBERRA 1711
RUEHUL/AMEMBASSY SEOUL 4325
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 03 JAKARTA 003338 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
AIDAC 
 
DEPT FOR EAP/MTS, EAP/RSP AND EB/IFD/OMA 
TREASURY FOR OTA-MCDONALD, IA-BAUKOL 
SINGAPORE FOR TREASURY-BAKER 
COMMERCE FOR 4430-BERLINGUETTE 
DEPARTMENT PASS FEDERAL RESERVE SAN FRANCISCO FOR TCURRAN 
DEPARTMENT PASS EXIM BANK 
 
E.O. 12598: N/A 
TAGS: EFIN EINV ECON PGOV ID
SUBJECT: INDONESIA - FINANCE MINISTER'S DRAMATIC TAX REFORMS 
 
 
¶1. (SBU) Summary: Finance Minister Mulyani's reform efforts are 
achieving dramatic, substantive improvements at the Directorate 
General for Tax (DG Tax), formerly one of the most corrupt 
government agencies in Indonesia.  Reforms of business process, 
codes of conduct, internal controls and data processing are moving 
from rapidly from plans to implementation.  USG advisors are 
welcomed and having a positive impact.  Embassy recommends the 
continuation of assistance to DG Tax through at least 2009 (see 
paragraph 10), which is also supported by the GOI.  End Summary. 
 
Finance Minister Leads the Way 
------------------------------ 
 
¶2. (SBU) Finance Minister Mulyani, easily the most dynamic reformer 
in the Government of Indonesia (GOI), has been using bilateral and 
multilateral assistance strategically to assist in her internal 
reforms at the Ministry of Finance.  Key directorates, formerly 
plagued by corruption, incompetence or both, are being cleaned up. 
These include the important directorates of tax, customs, capital 
markets supervision, insurance regulation, debt management, and 
others.  The Directorate General for Tax (DG Tax) is undergoing one 
of the most remarkable changes in the entire Government of 
Indonesia. 
 
DG Tax: From "License to Extort"... 
---------------------------------- 
 
¶3. (SBU) Within less than a month of taking up her new post as 
Finance Minister in December 2005, Mulyani asked major donors for 
help with tax reform.  The previous Director General for Tax was 
notorious and tax problems were one of the most frequent complaints 
by the international and domestic business community.  Indeed, one 
European Embassy described DG Tax in early 2005 as having a "license 
to extort."  Recognizing the need for both symbolic and substantive 
changes, Mulyani urged donors to support her: "I want the best 
brains in the world to help me succeed in reforming DG Tax.  I want 
to restore trust," she said. 
 
...to "Transparency and Honesty" 
----------------------------- 
 
¶4. (SBU) DG Tax, which was previously a fairly grim, 
corruption-ridden agency, is now buzzing with new energy and 
enthusiasm since Mulyani's new Director General Darmin Nasution was 
appointed in mid-2005.  Donors have been pouring in the help, 
coordinated by the Intenational Monetary Fund (IMF).  USAID and the 
U.S. Treasury's Office of Technical Assistance (OTA) responded with 
advisors. USAID provided technical support for the development and 
implementation of the internal compliance and internal investigation 
sub-directorates.  Both sub-directorates are now operational and 
leading to significant positive reforms.  The internal Codes of 
Conduct are now well known throughout the organization, and tax 
officials even have bright yellow-and-blue buttons that read, 
"Transparency and Honesty." 
 
Most Dynamic Reform of 20 Countries 
----------------------------------- 
 
¶5. (SBU) IMF Senior Tax Advisor Rick Fisher remarked that in all the 
20 countries he has worked in, Indonesia's tax overhaul is the "most 
dynamic reform effort I have ever seen.  We are at that exciting 
turning point where tax officials are implementing what used to be 
theoretical recommendations, and taking ownership."  Fisher 
emphasized the importance of not losing momentum.  "Time is running 
out before 2009 elections.  We have to push through as many reforms 
as possible, but without overwhelming DG Tax's capacity for 
absorbing it all.  So far, we've got a good balance."  The main 
thing is, Fisher noted, that Mulyani has to show the Parliament 
(DPR) that she is getting results in terms of increased revenues. 
Without that, she may lose DPR support for her efforts. 
 
Increasing Efficiency and Internal Controls 
------------------------------------------- 
 
¶6. (SBU) A number of early audits and investigations in 2005 and 
 
JAKARTA 00003338  002 OF 003 
 
 
2006, including investigation on money laundering, have resulted in 
changes to DG Tax databases and systems, and serious disciplinary 
action against several DG Tax staff members.  Previously, there was 
no access control to tax databases, meaning any official could alter 
a file in response to a bribe.  Now within the DG Tax office, there 
is a new USAID-supported Directorate for Intelligence and 
Investigation.  This is the first government department devoted 
entirely to the identification and investigation of major criminal 
tax offenders.  We expect that significant gains will be realized in 
overall tax compliance and in tax revenues in the near-to-medium 
term from this change. 
 
Momentum Continues on Data Processing Center 
-------------------------------------------- 
 
¶7. (U) Treasury's Office of Technical Assistance Advisor David 
Gaugler has been working with DG Tax on a Data Processing Center to 
improve the efficiency of tax return filing in Indonesia. 
Previously, a majority of returns submitted were not processed in a 
timely manner.  To date, it has most of the building blocks in 
place, including the signed Ministerial Regulation, an IT support 
contract, a Human Resources (HR) contract, and a mostly completed 
facility.  The first simulation exercise begins in December, and the 
first practice with real documents in January 2008.  As part of 
phased implementation, Gaugler expects by February the project will 
be expanded to an entire tax office, by March to eight offices, and 
by the end of 2008 to all agents, offices and documents (VAT, 
individual income, corporate and land tax) in the greater Jakarta 
area. 
 
¶8. (SBU) Gaugler notes that a good, comprehensive business model for 
reform is now in place, which he has "never before experienced in 
any other country."  Additional tasks include finalizing procedures 
and training manuals, workload forecasts, sequential contract 
employee accession plans to staff the DPC, and tax office training 
schedules.  After this pilot project, the DGT plans to implement 
more DPCs throughout Indonesia. 
 
Public Affairs Assistance Needed 
-------------------------------- 
 
¶9. (SBU) DG Tax advisors, in a December 6 meeting with the Embassy, 
also feel strongly that DG Tax needs a public affairs strategy. 
With 170 Small Taxpayer Officers (STOs) set up in 2007, and another 
120 planned for 2008 (along with Large and Medium Taxpayer Offices 
already established), DG Tax is undergoing so many changes so 
rapidly, that not everyone is keeping up, even internally. 
Education and communication of DG Tax staff about the direction and 
new expectations of the agency are essential.  Even the DPC is a 
well-guarded secret, Fisher noted.  "It will be hard to implement 
new procedures without a public outreach strategy." 
 
Extended Treasury OTA Assistance Requested 
------------------------------------------ 
 
¶10. (SBU) The Embassy requests that Treasury OTA seriously consider 
funding ongoing assistance to DG Tax at least through Phase 3 in 
2009 (complete report sent separately to Treasury OTA).  This is 
also strongly supported by DG Tax officials, who note that, "The 
transition period between the pilot and full implementation will be 
much more difficult without the presence of the advisor.  We would 
like the advisor to continue to help through the implementation 
phases."  OTA Assistance to the Data Processing Center is expected 
to continue on the following implementation schedule, steadily 
expanding VAT, income tax and withholding tax processing to more and 
more offices: 
 
-- Phase 2: Early-2009 
-- Phase 3: Mid-2009 
-- Phase 4: Early 2010 
 
In addition, Embassy recommends that additional assistance to DG Tax 
in the area of public affairs, both for internal communication 
between DG Tax offices, and outreach to the public. 
 
 
JAKARTA 00003338  003 OF 003 
 
 
HUME