Page 8 - Working Paper (Asymmetric Information & Its Impact On Tax Compliance Cost In Indonesia)
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DDTC Working Paper 0113                                                                                                DDTC Working Paper 0113

                           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
                                                                    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
                                                                    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
                                                                                            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
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