Beyond Self-Assessment: A New Model for Fair and Modern Tax Administration in Indonesia

Let’s imagine this condition: two parties must cooperate to achieve a fair outcome, yet one holds far more information than the other. One side knows every detail of its position. The other must rely on trust, estimation, or costly verification. What would happen?

In game theory terms, the above case is a textbook example of information asymmetry—a situation that often leads to adverse selection, moral hazard, and ultimately, an equilibrium where both sides lose.

When one player hides or selectively reveals information, the other tends to respond with suspicion, defensive strategies, or strict enforcement. The result is higher compliance costs, more disputes, and declining trust.

So, how do we achieve an optimal condition?

Game theory shows that the optimal condition—the only way both players win—is a full-information equilibrium, where information is shared openly, and decisions are made cooperatively. Under these conditions, cooperation becomes rational, conflicts decrease, and outcomes improve for both sides.

During a recent seminar at the University of Indonesia, I explored the lessons this concept holds for Indonesia’s tax administration and its broader investment climate.

The Drawback of Self-Assessment

The self-assessment approach originally emerged because it is highly efficient in terms of balancing the supply and demand for administrative resources. On the supply side, institutions—from banks to tax authorities—can only process a limited volume of declarations. On the demand side, taxpayers, borrowers, job applicants, and suppliers continuously submit information that requires evaluation.

Because manual verification at the outset would overwhelm capacity, the system shifts the initial responsibility to the ‘demand side’, allowing individuals and firms to self-declare their information. The assumption is that users will report honestly, disciplined by the possibility of a future audit.

This logic explains why self-assessment has been adopted widely in processes such as credit scoring, insurance underwriting, procurement, and even job recruitment—all of which rely on applicants presenting their own information upfront. In larger institutional systems, the same principle underpins tax administration globally, including Indonesia’s system since 1983: taxpayers themselves calculate, report, and declare their obligations, while the authority intervenes only through selective verification.

Yet the self-assessment paradigm sets a perfect stage for information asymmetry. Taxpayers hold all the details, while the tax authority must depend on post-filing audits or third-party data to verify accuracy. This creates the exact non-optimal equilibrium predicted by game theory above: distrust, high compliance costs, and prolonged disputes.

Data shows that the number of litigation cases in Indonesia remains steady (around 12,000–14,000 cases per year) and that the Directorate General of Taxes (DGT) wins less than 50% of them. This highlights the uncertainty caused by audits and the costly relationship between the tax authority and taxpayers. Both parties are forced to invest in expensive processes of clarification and audit, creating uncertainty.

For large companies, uncertainty translates directly into financial risk, unstable strategies and hesitancy to invest. An unpredictable tax environment becomes a barrier to the investment Indonesia urgently needs for long-term growth. To build confidence and attract investment, Indonesia must move toward a system that reduces uncertainty and balances the information gap.

Full-Information Equilibrium Through Collaborative Compliance

Many countries have addressed this challenge through the Collaborative Compliance Program (CCP), a modern model that encourages transparency before tax returns are filed. This includes Australia, the Netherlands, the UK, the US, Singapore, and Malaysia.

While each country’s CCP has unique features, the general structure follows a similar three-stage process. I propose this straightforward scheme for Indonesia:

1. Establishing a Tax Control Framework (TCF)

The first step is to define the company’s internal tax governance, known as the Tax Control Framework. The TCF demonstrates the company’s ability to identify and manage tax risk—the possibility that a taxpayer or authority will face financial, legal, or reputational consequences due to mishandled tax obligations.

Many jurisdictions follow the OECD’s six TCF principles covering governance, risk assessment, control activities, information flows, monitoring, and improvement. I call this the “gene” of tax compliance. The hypothesis is simple: once taxpayers have a sound TCF, they are more likely to comply. It lays a crucial foundation for tax compliance. In some countries, companies even engage an independent assurer to review the TCF, further strengthening confidence that internal systems reliably manage tax risk.

2. Conducting General Ledger (GL) Tax Mapping

Once the TCF is in place, I propose a more detailed process called GL Tax Mapping. In this process, each account and transaction is discussed and assigned the appropriate tax law interpretation and treatment. This exercise places both parties on equal footing, enabling a shared understanding of tax positions at a granular level.

Although intensive at first, technology—and increasingly AI—can dramatically accelerate GL mapping. Crucially, it is typically a one-time effort. As long as the company’s business model does not shift significantly, only incremental updates are needed. GL mapping becomes the factual foundation for cooperation and reduces the ambiguity that often fuels disputes.

3. Reaching an Arrangement

The insights from GL mapping form the basis of a pre-filing agreement or arrangement. This agreement does not need to cover every account at once. Companies and authorities can proceed gradually, focusing first on high-value or high-risk areas.

Where both parties agree, the tax treatment is settled upfront. Where they disagree, the unresolved areas simply remain open for audit. This flexible structure preserves the authority’s oversight while providing businesses with much-needed certainty.

A Paradigm Shift: Self-Assessment vs. Collaborative Compliance

Unlike self-assessment, which relies on historical data and after-the-fact corrections, CCP emphasises real-time understanding and preventive clarification. This reduces information asymmetry, lowers compliance costs, and minimises disputes. For businesses, CCP delivers greater certainty and more predictable tax outcomes, supporting long-term planning and investment. For governments, it enables more reliable revenue forecasting and a more stable compliance environment. Overall, CCP represents a structural improvement that strengthens trust, efficiency, and economic competitiveness.

The matrix below shows how CCP improves on traditional self-assessment by shifting the tax relationship from a reactive, audit-driven process to a proactive, cooperative framework.

Self-Assessment Vs CCP

Future Development and Challenges

CCP is a core component of Tax Administration 3.0, a modern model built on cooperation, digitalization and real-time engagement. By reducing reliance on audits and fostering early clarification, CCP shifts Indonesia closer to the full-information equilibrium predicted by game theory. This equilibrium is not merely a theoretical ideal; it is a practical foundation for strengthening investor confidence.

A tax environment that minimises uncertainty, accelerates decision-making, and reduces disputes is essential for Indonesia’s ambition to attract investment and sustain economic growth. Moving toward collaborative compliance may be the most significant evolution of the self-assessment system since 1983 and a necessary step to level the playing field: ensuring that both taxpayers and the tax authority operate with equal access to information, clear expectations, and consistent application of the law, rather than relying on asymmetry and retrospective enforcement.

However, the potential benefits are accompanied by real challenges.

The arrangement under CCP requires a form of advance ruling. This is limited in jurisdictions like Indonesia that follow civil law. Nevertheless, we have seen similar practices in tax administration, such as Advance Pricing Agreements.

Another potential challenge is that this initiative requires a paradigm shift within the tax office. The audit-centric environment that has been forged over time has positioned tax auditors as ‘cops’, and this must shift toward a collaborative role that helps taxpayers.

Implementation may require a phased, segmented approach. Because collaborative compliance is resource-intensive, it would be practical to begin with large taxpayers—similar to Australia’s Annual Compliance Arrangement (ACA), which covers its 100 largest taxpayers—or with state-owned enterprises, before gradually expanding the program to other segments.

In the end, the question is no longer whether Indonesia can continue to rely solely on traditional self-assessment, but whether it can afford to. As the economy becomes more complex and competition for global investment intensifies, tax systems must evolve from enforcement-driven models to trust-based institutions. Collaborative Compliance offers Indonesia a practical pathway to reduce disputes, strengthen certainty, and align the interests of taxpayers and the state. If implemented carefully, it can become more than a technical reform—it can be a strategic foundation for a more competitive, credible, and investment-ready Indonesia.