Building A Foundation for Tax Compliance in The Time of The COVID-19 Pandemic

The COVID-19 pandemic has had a significant impact on the economy, including the taxation sector. This tumultuous period for taxpayers and the Government can be a golden opportunity to transform the system and institutional governance to create a firm foundation for increasing tax compliance and by extension, tax revenue. This paper examines strategies that are necessary to face spate of changes and uncertainty caused by the COVID-19 pandemic as well as laying the framework for post COVID-19 reality that is characterized by sustainable tax compliance. The results of this study reached the conclusion that the basic concept of the relationship between the Government and taxpayers as a social contract or fiscal contract should underpin the three phases of the formulation of changes in tax policy. For changes to have long-term and sustainable impact, there is need to strike a balance between the three pillars in tax administration, namely, enforcement, facilitation, and trust.


INTRODUCTION
How can the Government formulate strategies to dealing with uncertainty? This is an important question that must be answered as the Government prepares itself for the future. And the most urgent time to answer this question is during a global pandemic.
Prior to the COVID-19 crisis, a combination of rapid technological change, increasing economic interdependence, and the rise of political instability has heightened uncertainty about the future. Uncertainty is so pervasive that to truly know the dimensions of the problem at hand, many experts and researchers have coined such terms as the term VUCA (volatility, uncertainty, complexity, and ambiguity) and TUNA (turbulent, uncertain, novel, and ambiguous) to portray the increasingly unpredictable conditions.
Amid the COVID-19 pandemic, changes that used to take several years are now occurring in the span of a few months. Therefore, to answer current and future challenges, this study aims to explore the strategies that should be developed amidst rapid changes and uncertainty attributable to the COVID-19 pandemic while at the same time laying the foundation for Indonesia to achieve the 2045 vision of becoming a developed country (Indonesia Maju 2045). During the pandemic period, there is need to lay the strategic foundation for increasing tax compliance. This is because the government must increase tax revenue to meet the drastic increase in the government spending on health, social protection and financial support for key economic sectors including the small and medium sector. In future, the expectation is that Indonesia will be in position like developed countries where tax revenues make a significant contribution to state revenues, contributing more than 30 percent JKAP (Jurnal Kebijakan dan Administrasi Publik) Vol.25(2), November 2021 -----journal.ugm.ac.id/jkap of GDP. Currently, Indonesia's tax-to-GDP ratio is still very low, in the range of 10-11 percent, which is far below  countries, the BRICS (Brazil, Russia, India, China, South Africa) and OECD countries.
The paper is presented as follows.
Section one presents statistics on Indonesia's tax revenues and comparison with ASEAN-5 countries and BRICS. Section two discusses a 3-pillar approach, which the Indonesian government can use in taking measures of increasing tax compliance to meet the challenges created by the pandemic crisis.
The third section describes various projected developments in the post pandemic realities which the government should take into consideration because of the direct influence they are likely to have on taxation policies.
Finally, the paper formulates steps that are based on a 3-pillar approach, which the government should take to establish a firm foundation for sustainable tax compliance.
The overarching theme of the paper is the argument that tax is a form of social contract or fiscal contract between the Government and taxpayers. The following section discusses the theoretical framework of the concept of tax as both a fiscal contract and tax compliance paradigm.

Tax as a social contract
The  Levi's (1988) influential historical analysis of the power to tax. Levi (1988) argues that limiting state predation has historically played a role in encouraging "quasivoluntary" compliance with the state.
A number of economists have studied the contractarian approach, for example Buchanan (1975) who argues that rules should be designed in such a way as to limit Government intervention in matters that require universal agreement as proposed by Wicksell (1958). This approach requires procedural and constitutional rules that can be enforced on their own, a problem that is explored in Weingast (1997); (Weingast, 2005) in the context of repeated games. Kotlikoff, Persson, and Svensson (1988) explore how social contracts can be maintained when there are issues of overlapping intergenerational commitment.

The three paradigms in tax administration
Alm (2019)

ASEAN-5, and BRICS
To formulate steps to encourage increased tax compliance in response to the COVID-19 pandemic crisis, it is necessary to look at tax revenue data and its percentage of reports tax-to-GDP ratio data covers the Considering the tax-to-GDP ratio as an indicator of the effectiveness of a country (effective state), a conclusion can be made that Indonesia still has a huge potential to increase the contribution of taxation to state revenues.
Collectively, this approach uses the term "moral tax" to capture the various reasons for paying taxes (Törgler, 2007;Luttmer and Singhal (2014) Instead, the Government should take a long-term perspective and seek to build on the goodwill generated in the first phase, which will be critical to achieving a higher level of compliance in the third phase. One Phase 3: Resilient Recovery. In the recovery phase, the economy will slowly start to recover. In this phase, the Government will most likely try to reduce the budget deficit by raising taxes or expanding the tax base. If the Government uses the first two phases to strengthen legitimacy and secure taxpayer trust, higher tax rates and reduced tax exemptions will receive broad support from taxpayers.
Increasing taxation will be easier if it is supported by a strategy that seeks to foster trust. The push to expand the tax base into the informal economy must be averted, as the sector will be hard hit by the crisis. On the other hand, fairness in the tax system can be increased-for example, by closing domestic and international gaps for high-income individuals and companies. Tax policies that contribute to "green recovery," such as carbon taxes, are also likely to receive broad support.
In short, difficult pandemic condition may provide lessons that can help to improve tax compliance. If the Government can take advantage of this rare opportunity to redefine fiscal contracts through "smart" and balanced taxation, it can build a more cooperative relationship with taxpayers, which supports long-term change.

The development of a new post-crisis reality
After going through a period of recovery from the crisis, the business world and all stakeholders including the Government will enter a new reality phase, where various policies and restrictions during the pandemic will have to be changed, which will impact social and economic conditions of society at large. Various developments during the pandemic will bring changes that shape new life with a new reality. KPMG (2020) predicts that there are at least 10 trends that are expected to occur and affect taxation practices around the world.
First, the taxation of non-residents on sales within the customs area will increase. This is a natural reaction to the phenomenon that occurs, especially for VAT. The