Authors: Muhammad Rafi Bakri and Nabila Qurota Annisa*
As the leadership era came to a close, Mr Joko Widodo still proposed some controversial policies. The Coordinating Minister for Maritime Affairs and Investment, Luhut Binsar Pandjaitan, has clarified that the government is currently reviewing the establishment of a family office, a practice commonly seen in advanced countries. The Indonesian government actively seeks to attract ultra-rich people by offering them the opportunity to invest their wealth with the benefit of being exempt from taxation. On the other hand, Indonesia will request that the managed funds be directed towards government projects and real sectors. This will create employment opportunities and enable the government to gather taxes from the workers involved.
In brief, the family office is a platform for affluent ultra-rich people to allocate their wealth assets and utilize them to fund government initiatives. These individuals will receive a portion of their deposit money from a profit-sharing program. In brief, this family office resembles a company that manages wealth funds.
Like in China, Beijing has been selected as the hub of the Family Office due to its focus on economic pragmatism and its success in transforming China into a global economic powerhouse. This naturally appeals to ultra-rich people looking to invest and manage their wealth in China. China has successfully overseen family office funds totaling over US$5 billion. Furthermore, Singapore holds the top position as the world’s family office centre, managing approximately Rp1,068 trillion or 59% of global ultra-rich funds.
Drawing from the examples of other countries, utilizing a family office can prove to be highly lucrative in funding government expenditures. The Minister of Tourism and Creative Economy, Sandia Uno, revealed that the family office oversees an impressive amount of funds, totaling approximately US$11.7 Trillion. By accommodating just 5 percent, the state will gain totaling Rp8,178 trillion. This amount of money is sufficient to fund the government’s expenses for two years, making this policy an appealing solution to address the limitations in revenue generation.
However, this allure should not fool people. The public must understand the risks of creating a family office in Indonesia.
First, ultra-rich people who entrust their assets to the company will benefit from tax incentives. Tax incentives are frequently used to entice people to invest in the government. Singapore offers a 10% reduction in tax rates for corporations that deposit money into the country, compared to the standard rate of 17%. Hong Kong even offers exemptions from taxes on the income of family office corporations that meet specific requirements.
This tax incentive undoubtedly causes injustice to folks who are not ultra-rich. This injustice might cause distrust among ordinary citizens, prompting them to cease paying taxes. Not to mention the numerous changes to present tax regulations, such as the TER Rate for Income Tax and the VAT Rate of 12%, which will make people feel stomped on.
Second, this family office is prone to become a hub for money laundering. This concern is likely to arise in a country where corruptors can roam freely, such as Indonesia. Moreover, the family office can accept funds from ultra-wealthy people from foreign countries. They may put money in Indonesia without establishing a subsidiary or branch company there. The perpetrators can use other people’s names to transfer funds from unlawful activities to Indonesia, where they are laundered.
Singapore, the country with the world’s fifth-highest corruption perception score, is still oblivious to laundering funds in family offices. According to the Business Times, this case led to the blocking of assets worth Rp36 trillion. The perpetrators dispersed ownership of these assets among 17 foreigners who remain fugitives.
Last, the family office was expected to boost the economy, but it turned out to be the reverse. The funds must be converted and applied to real-world projects to make the company’s investment worthwhile. The government must develop a lucrative public-private partnership (PPP) strategy. Not only is it profitable, but it can have a substantial multiplier effect on the economy. If this scheme does not exist, a family office would be no different from a bank that simply gathers funds.
In addition to the issues with the fund management scheme, the government could benefit from some self-reflection. Ultra-rich people will be more inclined to put their money in countries with promising prospects and conditions that align with their preferences. Due to the stability of the business and economic climate, countries like Singapore, Hong Kong, and Luxembourg are highly appealing to wealthy individuals. Meanwhile, Indonesia is experiencing a period of government transition and business uncertainty due to various policy changes.
Instead of catering to the needs of the ultra-rich, the government should prioritize implementing fair taxation for them. A wealth tax can serve as a means to address societal wealth disparities and promote fairness. This topic is widely debated globally and is often a focal point of discussions by the government. Implementing a wealth tax can help address the state’s budget deficit and provide a boost by generating additional revenue.
Several European countries have introduced wealth taxes, targeting overall wealth and specific assets. Norway imposes a tariff of 0.95 percent on the net worth of individuals exceeding NOK1.7 million or Rp2.5 billion. Spain also applies varying wealth tax rates depending on the region. Regions with developed economies tend to have higher rates compared to other areas. Furthermore, France, Italy, and Belgium have implemented wealth taxes targeting certain assets. Both have achieved remarkable outcomes in boosting the country’s revenue.
Given the numerous challenges and similar strategies that yield identical results, it is worth considering whether the government will persist in establishing a family office. Is this policy genuinely aligned with the country’s needs, or is it merely a reflection of the government’s fear of taxing the ultra-rich?
* Nabila Qurota Annisa, staff member of the Directorate General of Treasury, Ministry of Finance of Indonesia.
