Indonesian Tax Amnesty May Trigger Outflow from Singapore’s Wealth Industry, Reports Reuters

By Saeed Azhar and Marius Zaharia

SINGAPORE – Singapore’s wealth management sector is expected to experience a significant impact as affluent Indonesians repatriate some of their funds to benefit from a new tax amnesty. However, the actual outflow of money is anticipated to be less dramatic than Indonesian officials predict.

Private banking sources estimate that around $200 billion of Indonesian funds that may not have been declared to tax authorities are currently held in Singapore. This represents a significant share of the approximately $470 billion in assets managed by private banks in the city.

Experts in the field, including consultants, lawyers, and bankers, forecast about $30 billion could return to Indonesia due to the amnesty introduced recently, which allows individuals to rectify previous tax evasion by paying a tax of up to 5 percent on the disclosed funds.

This projection is considerably lower than the Indonesian government’s estimate of $76 billion and the central bank’s expectation of $42 billion. At a recent news conference, the managing director of the Monetary Authority of Singapore expressed that large outflows are not anticipated and affirmed that no specific measures would be implemented to prevent such transfers.

Even so, revenue from taxing the projected $30 billion could reach three times the amount collected during a previous Indonesian tax amnesty in 2008, which yielded roughly $500 million in tax.

One critical factor influencing this situation is that Singapore is becoming an increasingly challenging place to conceal funds from tax authorities globally, and the Indonesian government is likely to become more aware of any money held there. This change is partly due to intensifying pressure on Singaporean banks to combat money laundering linked to corruption and enhance transparency.

The global drive for cooperation against tax evasion has also intensified, particularly following revelations of offshore shelters used by high-ranking officials and businessmen in the Panama Papers. Additionally, the involvement of Singaporean banks in the alleged misappropriation of billions from Malaysia’s 1MDB fund has heightened scrutiny and regulatory pressures.

According to industry analysts, the current tax amnesty presents unique risks as there may be a significant likelihood of information sharing with tax authorities. This has raised concerns that the impact of the current situation might be more pronounced than in previous instances, with expectations of approximately 10-15 percent of the undeclared funds being transferred back to Indonesia.

Despite the appealing prospect of paying a modest tax to avert heavy penalties for past evasion, some provisions of the amnesty are deterring many potential participants. One key stipulation is that any repatriated funds must remain in Indonesia for at least three years, exposing individuals to the volatility of the Indonesian rupiah, which has depreciated over 20 percent against the U.S. dollar in the past three years.

Additionally, the available investment options are limited to a predetermined list, including government bonds and real estate, which some see as a drawback.

Concerns about being tied to investments for three years lead some clients to hesitate, despite the potential security of moving their wealth back to Indonesia. Moreover, any new income generated in Indonesia would be subject to higher tax rates compared to Singapore, which could further discourage repatriation.

The private banking environment in Indonesia does not match the sophistication of services available in Singapore, leading many to question whether returns could be as favorable.

The influx of Indonesian wealth into Singapore’s banking system began after the 1998 attacks on ethnic Chinese businesses and the subsequent fall of the Suharto regime—indicating that the motivations extend beyond just tax considerations.

While outflows related to the current amnesty are predicted to be modest, the initiative has already impacted the behavior of Indonesian clients, who have been less likely to invest new funds in Singapore over the past year. If clients are looking for investment opportunities, they often express the need to consider the ramifications of the tax amnesty first.

Looking ahead, the landscape may become increasingly challenging for those with funds in Singapore, as the city is embracing a global standard for automatic tax information exchange, which is expected to come into effect in the near future. This may encourage some individuals to pursue the tax amnesty while prompting others to move their funds to jurisdictions less affected by forthcoming transparency measures.

In light of various high-profile scandals, including the 1MDB case, Singapore is taking a firm stance against financial malfeasance. Leaders in the industry advocate for a commitment to maintaining a clean and compliant banking environment to ensure the sustainability of Singapore as a financial center.