Page 8 - Working Paper (Asymmetric Information & Its Impact On Tax Compliance Cost In Indonesia)

DDTC Working Paper 0113 DDTC Working Paper 0113
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Figure 5 - Interaction model layer 4 which may cause further increasing effect in the
asymmetric information situation. In such situation
corporate taxpayers will attempt to minimize risks
by for example hiring an external adviser, incur
X
additional expenses for interaction with the tax
authorities (information costs), or incur other
expenses in connection with uncertainties (i.e.
delayed decision by the tax court). In the end, this
OP WP results to an accumulation of expenses that the
corporate taxpayer must incur, thus increasing
the compliance cost. In Indonesia specifically,
corporate taxpayers will most likely incur high
KP mandatory cost as well as voluntary cost.
Theoretically, high compliance cost will affect
the economic output in a non-optimal result.
This is because compliance cost will reduce the
potential of companies to expand and increase its
PP output (both private as well public goods) into the
economy. As a result, the economic potential will
aggregately not reach its maximum capacity. Figure
Notes: X = Regulation; OP = Tax Authority; WP = Taxpayer; 6 below, illustrates the production possibility curve
KP = Tax Consultant; PP = Tax Court; Points encircle interaction model of the economy formed by both private and public
shows external parties who also contributes in creation of asymmetric goods. The presence of high compliance costs will
information
affect to the production possibility of private and
In interaction model layer 4, it could be observed public goods i.e. will fall down from PV to PV* and
that the public is flooded with information from from PB to PB*. As such, the PPF will shift into a
both the press and opinions of public figures new lower combination of production, PPF with
(represented with the points that encircle (high) compliance cost. Further, the decreasing
interaction model iii). Notwithstanding the above, availability supply of both public and private goods
publication of information and opinions are most will result into a relative low position of social
often contribution to asymmetric information utility (below the optimal level).
situations because both the press and public figures
It should be noted however, that a decrease of
are also entrapped in a asymmetric information
compliance cost does not automatically result to
situation created in the previous interaction model
an increase of both private and public goods, but at
and/ or due to lack of knowledge in taxation issues.
least will result to an increase of production of one
The relevance of compliance cost in the context of the two types of products.
of interaction model layer 4 lies in the fact that
Figure 6 - Effect of compliance cost to the output of
public opinion that is formed by inaccurate the economy
information could potentially distort or intervene
indirectly to parties in a transaction. This most PB
often result to losses for the taxpayers, due to
psychological expenses, vindication, or penalties PPF - Normal
expenses due to decisions that are not balanced PB*
due to the influence of the public opinion above the
facts. 16 PPF - with high
compliance cost
4. The implication of compliance cost in
Indonesia and proposed policy for its
solution
PV* PV
All parties in the interaction models have the
potential to possess incomplete information, In the context of economics of development,
compliance cost is one of the factors, which triggers
high cost economy of a country and considered as a
16 Court decisions should always be neutral and free of public opinion disincentive to taxpayers in complying with the tax
as stipulated in accordance with article 3 paragraph (1) of Law No. 48, system. Besides the above, high compliance cost
Year 2009 regarding the powers of courts which states that judges should
maintain his/her independence in courts is also closely connected to the phenomena of tax