Intricacies of the tax audit process in Indonesia
Numerous tax litigation cases occur because of improper handling of the tax audit process, not because the auditee has been incompliant. Ahdianto and Fabian Abi Cakra of GNV Consulting share some experiences in preparation of a tax audit.
It is widely understood that under a self-assessment tax regime, a tax audit is for the tax authority to assess the tax compliance of the taxpayer. Meanwhile for the taxpayer, as the auditee, such a process is unavoidable and is the moment of truth for some. Tax audit findings are carried out by the tax auditor and disagreements may take place. Further, the process could subsequently lead to a tax dispute/litigation stage(s), i.e. tax objection and tax appeal or lawsuit in the tax court.
Nonetheless, aside from the tax technical aspects and administration, many of the litigation cases in Indonesia arise from the intricacies created by the tax audit process itself. Additional underpayments arising from a tax audit/assessment result triggers various tax administration penalties – as discussed in 'Be prepared for the new wave of tax controversy cases'. Therefore, managing the intricacies of a tax audit is very important to avoid unnecessary risks.
Be aware of formal procedures
In Indonesia, most tax audits are conducted to verify a claim for tax overpayment refund made by the taxpayer, or to close the statute of limitations of tax years open for audit.
The tax audit procedure should be conducted properly by both the Indonesian Tax Authority (ITA) (as the auditor) and the taxpayer (as the auditee) within a given timeframe, i.e. generally within 12 months.
The rights and obligations of both parties have been set by the regulations issued by the Ministry of Finance (MoF) and the ITA up to a certain level. Nonetheless, some of the detailed aspects on the execution of the process have been left undefined and are still subject to interpretation.
Although the ITA is expected to carry out all the tax audit procedures in a fully professional manner and objectivity, in most cases the ITA also faces limitations of time and data/documents, while the administration system in Indonesia is notoriously paper-oriented. As a result, some of the formal procedures are combined altogether to a certain extent or, in more extreme cases, even postponed or skipped. However, in every tax audit process, there are certain mandatory and irreplaceable steps/procedures that are critical.
For example, the delivery of the tax audit instruction letter (SP2) and the tax audit findings notification letter (SPHP). In this case, one should always ensure that these steps are properly executed by the ITA; otherwise, the validity of the tax audit result may be jeopardised. This may create uncertainty for both the tax auditor and the auditee.
Please note that the prevailing MoF Regulation allows the ITA to send formal letters through facsimile, while in the current digitalised business era, some may have abandoned fax machines and use email or other online channels instead to perform data exchange.
It is no surprise that there were cases arising from this gap as the formal letters sent by the tax auditor through facsimile, such as the SPHP, have been considered valid. On the other hand, since the taxpayer was not aware of it and took no action, they would be deemed irresponsive. Consequently, the tax audit was concluded without proper attendance. In a worst-case scenario, the ITA may continue the audit on an ex-officio basis if they viewed that the data/documents are not sufficient to determine the taxable income.
Managing the timeline of the tax audit is one major driver of the success of the audit. Although the ITA holds the authority to start the audit and control the timeline, the taxpayer can always predict the audit plan and synchronise it with the tax auditor, as the guideline is also there. Maintaining the timestamp of each process enables the taxpayer to understand the urgency of each request, the next course of action, or even to make use of any available opportunity.
As strong tax technical analysis may be one key determining factor, the taxpayer's ability in providing the ITA with proper data/documents is not an exact science. In general, data and document collection should be completed within one month and the ITA will issue an affidavit of incomplete data if complete data/documents are not obtained.
At the litigation stage, such affidavit may be an added burden to the taxpayer if it corresponds to the disputed subject (depending on the complexity of the case). Therefore, the taxpayer should not only submit the data/documents to the ITA in a timely manner, but also arrange a proper data receipt to cover every critical data/document request.
Furthermore, data/documents submitted after the deadline may also be deemed as not eligible to be considered by the ITA. This status will remain until the objection stage, as the ITA has the right to ignore any additional data/documents not provided within the given timeframe during the tax audit.
In the appeal stage, the tax court judges would usually recognise additional data/documents; however, additional effort to explain the reasons for the delay during the tax audit would be necessary to convince the tax court judges, with an explanation of the case from the very beginning.
In many cases, proper data receipts during the tax audit process may save a lot of time and effort during the litigation stage. In contrast, poor data receipts or records may jeopardise the case. However, of course, this process requires effective and continuous communication with the tax auditor. It may take extra effort and time yet nothing is wasted since building a good relationship with the tax auditor will enhance the success rate of the tax audit process. In fact, an impression of an open and cooperative taxpayer may be formed, creating a positive environment for any future engagements with the tax office.
As a reflection, it is truly necessary to familiarise ourselves with the above intricacies of a tax audit, at least to minimise any misconduct in undergoing the whole process. It would be even better if one could identify and realise any opportunities coming out of these intricacies to obtain an optimum result from the tax audit.
Strong and consistent technical arguments
The tax audit realm is full of procedural matters which should be anticipated by the taxpayer as the auditee. However, every material aspect in a tax audit is important and should be addressed properly.
Building strong and consistent arguments at this stage not only can solve the tax audit findings (cancel the fiscal adjustments) incorporated by the ITA, but it also may strengthen the taxpayer's standpoint during the subsequent dispute processes, if relevant. The technical arguments covers the details, explanation of the nature of the transaction, the tax regulatory basis and the supporting transaction documents.
In the SPHP, the ITA typically outlines the basis of their adjustments and arguments from every perspective. It could be presented in a very simple or a detailed manner, depending on the appetite of the tax auditor.
In general, the tax adjustments made by the ITA can be categorised as juridical matter or evidence-proving matter. In either case, the rebuttal submitted by the taxpayer should cover every aspect of the SPHP.
When it comes to findings related to juridical matters or interpretation of tax regulations, the taxpayer should pay attention to the root of the law quoted by the ITA and its relevance to the commercial substance of the transaction.
“Managing the timeline of the tax audit is one major driver of the success of the audit.”
In practice, the elaboration of the regulatory basis in an SPHP can sometimes be very general. Some may even seem to cherry-pick certain references that are not within the hierarchy of Indonesian legislation. Thus, considering the basic principles set by the 1945 Constitution of the Republic of Indonesia (i.e. any taxes being collected by the government should be in accordance with the law), an adjustment without a strong root in law can be considered as containing a legal defect, or at least insufficient consideration. This is why intensive elaboration on the regulatory basis would play an important role, especially in the eyes of the tax court judges. Experience also suggests that, sometimes, a case with complex variables may be solved effectively by a correct juridical approach.
As part of the data/document collection process, the taxpayer is also often requested to submit several analyses or working papers to prove the accuracy of its tax interpretations; this includes, but is not limited to, the corporate income tax (CIT) calculation details, withholding tax (WHT) object, and value added tax (VAT) object reconciliations.
Please note that the tax audit findings may also arise from such analysis. In rebutting a finding related to the substance of a transaction or business interpretation, the taxpayer should put considerable focus on the evidence, instead of the arguments. This is important as the Indonesian Civil Code requires the party that claims a right to prove the existence of it. Therefore, before claiming an argument, the taxpayer should ensure that the related evidence/proof is supportive. This is why careful language should be used in outlining the reconciliations and/or explaining any tax interpretations to the ITA.
Since every transaction may have its own commercial and legal interpretations, it would also be advisable to gain support from these areas when providing justification on the tax interpretation. Before delivering arguments or rebuttal to a finding, one should firstly ensure that the nature and its tax interpretation can be maintained consistently, especially when there is a possibility that the case will last until the litigation stages.
In the eyes of the tax objection reviewer and/or tax court judges, changes of technical elaboration of a case may trigger pros and cons. In such cases, reasonable justification should be prepared to support the changes.
Notwithstanding the above, arguing on technical matters can be very exhausting, especially when the counterpart does not have any intention to absorb any input. Although the taxpayer may have a strong argument on a subject, the ITA has the authority to conclude the tax assessment.
Nevertheless, as the auditee, the taxpayer should continue to show maximum effort and cooperation during a tax audit, either by outlining detailed arguments and/or by providing as many supporting documents as possible. In the event of a tax appeal, the tax court judges will appreciate such a gesture and it could be a determining factor.
Mindfulness during the tax audit closing process
Once the tax finding has been formalised through the SPHP, the taxpayer needs to address it through a formal channel. For any disagreements, the rebuttal should be submitted within the timeline provided, i.e. seven days and can be extended by three days. While the timeline has been explicitly stipulated by a MoF Regulation, the taxpayer should also be mindful about the content of the rebuttal itself. As discussed above, data receipts and technical arguments should be clearly outlined in every exchange.
After the taxpayer submits a written response, the ITA will invite the taxpayer to attend the tax audit closing conference. Discussions will take place and the taxpayer may also provide additional data/documents back-and-forth. This can be quite difficult as usually one would not prepare specific data receipts to document such data submission at this stage, since it occurs during a face-to-face discussion.
Future challenges often happen in this situation, if the taxpayer does not provide a proper response to the tax auditor during the closing conference. Therefore, to prevent this risk, it would be worthwhile for the taxpayer to prepare a separate data receipt to record such exchange.
Furthermore, considering that the prevailing regulation only allows the management and/or the legitimate proxy to represent a corporate taxpayer during the closing conference, please ensure that the tax auditor accepts the attendees. Otherwise, although other people are there (such as the tax or accounting personnel) and discussions could take place, the taxpayer would still be considered absent. In this situation. and without a proper formal rebuttal, the fiscal adjustments/findings made by the ITA may be deemed to have been agreed.
Finally, the closing conference documentation also plays an important role. Upon completing the closing conference, formally, the tax auditor will prepare minutes to document the discussion. In this case, any additional data and arguments should be outlined properly.
However, please bear in mind that any tax position taken by the taxpayer is expected to be upheld consistently until the end of the dispute process (if disputes should take place), or even until the following tax years (if a similar transaction takes place). Therefore, for any unclarified matters, it is sometimes necessary to add a general or ambiguous sentence to allow room for manoeuvre, as long as it is accurate.
Before closing the tax audit process, the taxpayer would need to explicitly state findings that are agreed and findings that are disagreed. Extra careful consideration and review must take place, since this statement will be considered as the final decision and binding to the taxpayer. Please note that the numbers outlined not only reflect the agreeable amount, but also may be interpreted as the taxpayer's juridical position on the finding.
Every aspect of a tax audit has its own intricacies. The formal procedures are not just a mere protocol that one should go through but should be managed properly so that the risk of being deemed underperforming or uncooperative may be minimised. With a proper checklist, each issue can be tracked and addressed efficiently. Opportunities from the tax audit's formal aspects may also emerge along the tax audit process and should be captured to pursue an optimum result.
Similarly, more intricacies may come from the interpretation of regulations and/or transactions. In this regard, the taxpayer should be able to address every issue from every angle since the ITA would expect that the taxpayer (as the auditee) knows better about the customary practice.
Consistent and strong technical arguments should be delivered properly along with the legal quotation and relevant commercial references. Generally, every crucial rebuttal ought to be addressed in writing to minimise miscommunication or false allegation in the future, since the burden of proof lies with the taxpayer.
Simply put, handling a tax audit requires not only fair technical skills but also strong interpersonal skills, since the course of the process depends highly on human relations. One should be creative enough to address the concerns/questions from the ITA in the best manner. Of course, in many cases, different interpretations may still persist, and that is why every standpoint should always consider the possibility of taking it forward into a tax dispute/litigation process.
Although these intricacies may arise in the event of a tax audit, the taxpayer should be prepared long before the tax audit starts, not just by submitting proper tax administration, but also by performing pre-audit review or regular tax diagnostic review to identify any potential areas that may be scrutinised or could be improved. Using this approach, the taxpayer may still be able to amend tax returns and bookkeeping or prepare the necessary supporting data/documents, as long as the ITA has not conducted a tax audit on the period/year concerned.
Considering the vast tax regime and the risks carried by the above intricacies, it would also be advisable to appoint a credible tax consultant to assist and accompany the taxpayer during the tax audit process (as an attorney), or simply as an advisor who provides support from outside the pitch, to minimise any improper tax treatment or mismanagement during the tax audit.
Click here to read all the chapters from ITR's Indonesia Special Focus
T: +62 81 2100 4451
Ahdianto is a partner at GNV Consulting with more than 22 years' experience in tax, customs and business consulting. He is known for his litigation expertise in the tax court.
Ahdianto has engaged in several tax projects such as performing tax diagnostic reviews, tax dispute settlements and corporate tax restructuring. He is also a specialist at obtaining tax and customs facilities, and securing tax and customs refunds. He has broad experience in strategic planning and representation in the Indonesian tax court for multinational companies.
Ahdianto was named as an indirect tax leader and as a tax controversy leader by ITR World Tax for 2020 and 2021. He led the GNV Consulting team to win national awards for Tax Disputes & Litigation Firm of the Year in the 2018 and 2020 ITR Asia Tax Awards. He is a licensed tax court attorney and holds the highest professional certification of a tax and customs consultant.
Fabian Abi Cakra
T: +62 813 1031 4103
Fabian Abi Cakra is a partner at GNV Consulting with more than 15 years' experience in the tax consulting world, mostly with one of the Big Four firms.
Fabian is experienced in handling tax compliance, advisories, diagnostic reviews and tax dispute resolution, which involves the settlement of cases at the tax office and tax court levels, for several clients across various industries. He is also experienced in other corporate services such as merger and acquisition (M&A) projects, liquidation and litigation.
Fabian holds a bachelor's degree in social studies and politics, majoring in fiscal administration, from the University of Indonesia. He is a licensed tax court attorney and holds the highest professional certification of a tax consultant.