Using tax control frameworks to ensure certainty in Indonesia
B. Bawono Kristiaji and Denny Vissaro of DDTC explain how tax control frameworks (TCF) are growing in importance among taxpayers as the Indonesian tax landscape changes.
In the midst of substantial and rapid changes in the Indonesian tax landscape, taxpayers are at risk of lacking certainty. The Tax Harmonisation Law (UU HPP) heralds the beginning of regulation changes on both strategic and technical levels. Inevitably, these changes need to be followed by many adjustments related to administration and compliance.
Unfortunately, changes in the law may give rise to asymmetric understandings and complexity: in other words, an additional compliance cost. There are risks associated with the time necessary for adaptation, with technical ambiguities, and with the possibility that the fiscal authority and taxpayers could interpret things differently.
We firmly believe that the government’s intention is to improve the tax system. In addition to UU HPP, certainty under the law and trust-based relationships with taxpayers are being developed as part of Indonesia’s current tax reform. Nevertheless, it is important for taxpayers to avoid mismanaging the tax risks associated with the regulation changes.
A tax control framework (TCF) can help to interpret the information and manifest it into the right set of actions. But before running through what TCF is and how it can help, we will provide a glimpse of the changes to the Indonesian tax system, particularly the ones that comes up from UU HPP.
New laws from the new regime
Principally, UU HPP allows the government to set up the foundation for upcoming new regulations in terms of policies and administrations. At the time of writing, less than six months since the law’s issuance, 15 important regulations have been issued. These either revise or replace existing regulations, or create a different set of rules. Many more are expected to come in the following days or months.
In parallel with the new laws, digitisation in the administration also continues to develop as the tax authority targets modernisation, simplification, and a new approach to enforcing tax law. The tax authority uses compliance risk management (CRM) to decide on the appropriate action, according to the risk profile portrayed by the taxpayers. This approach continues to develop as technology is adopted.
In addition, the Law of Fiscal Relationship between Central and Regional Governments (UU HKPD) adjusts the structure of local tax arrangement and extends the ability for subnational governments to broaden their tax base.
Many of these changes have a direct impact on taxpayers’ business and investment activities. While it is impossible to mention all of them, a few key updates from UU HPP are worth mentioning.
One notable change is in the VAT regime. UU HPP stipulates an increase of the VAT rate to 11%, while a further increase will be applied in January 2025 at the latest. In addition, many former non-taxable goods and services have been excluded from this category.
For instance, basic necessities, mining products, financial services, and social services are now included in taxable goods. However, some of these are shifted to a taxable goods and services category that may be exempt from VAT or have non-collectible VAT.
This rearrangement has had an impact on different VAT crediting mechanisms. When certain products are non-taxable goods or services, there is no credit mechanism applicable for the businesses. But when they become taxable goods or services from which VAT is non-collectible, the relevant VAT inputs are creditable.
Furthermore, taxpayers must adjust to the technicalities of the VAT administration in terms of withholding, VAT invoice preparation, and the timing of reporting. These adjustments also create new compliant risks.
Through UU HPP, the government is trying to ensure that the VAT base is broadened to match emerging business models. In doing so, the government appoints certain taxable business as VAT withholders.
For example, Ministry of Finance Regulation Number 68 of 2022 introduces VAT into transactions involving intangible goods such as crypto assets, along with financial services. Accordingly, the exchanger and e-wallet organiser are appointed VAT withholders.
Various financial services, including financial technology organisers, are also obliged to perform VAT withholding relating to many of their activities. This is as stipulated in Ministry of Finance Number 69 of 2022.
Other changes include VAT calculation with a different tax base valuation, VAT calculation with a specific amount, and other VAT withholder appointments.
Income tax changes
In term of income tax, there are also a number of important changes. For individual income tax, there have been adjustments to the tax bracket along with the applicable rates, and an adjustment in the income tax base.
In relation to the latter, fringe benefits may be taxable if certain criteria are not met. By the time this article is written, the regulations relating to the objects that are taxable are yet to be issued. Nevertheless, food and drinks that are provided for all of a company’s employees are kept excluded from income tax.
This stipulation will affect corporate taxpayers in two ways. First, under the governance for employee income tax (Article 21 Income Tax), certain withholding mechanisms and other compliance aspects need to be covered by the companies.
“There may be an increasing number of tax disputes… it becomes more difficult to predict what will happen in the near future.”
Second, more importantly, this will affect business decision-making in providing this benefit for the employee. This will depend on how the base of fringe benefit tax and the thresholds are stipulated.
To prevent tax avoidance through thin capitalisation, there is also added flexibility whether the government can use debt-to-equity-ratio (DER) rules or interest expense limitation through earning stripping rule in the future.
Meanwhile, there are also new policies that may help the effort in collecting tax revenue through the expansion of the withholding income tax mechanism to many third parties (similar to what happens in VAT withholding).
Incomes arising from the exchange of cryptoassets, peer-to-peer lending, and other financial applications backed with technology are now subject to applicable withholding income tax. It is very likely that the number of third-party appointments as a tax withholder will continue to increase.
Other important changes
It is important to note that the changes also include the General Provisions and Tax Procedures Law (UU KUP). Under the revised law, there are at least four area of important updates.
First, to add more fairness and certainty, certain administration sanction rates are reduced. Second, the government is given the authority to appoint a third party to collect tax domestically and globally.
Third, the government may create an arrangement with other countries or a global consensus in solving taxation issues. Fourth, to add more certainty and fairness in cross-border taxation, the request and execution of the mutual agreement procedure (MAP) is allowed to exist in parallel with dispute process.
Aside from revisions in UU KUP, other changes also arise in terms of excises and new taxes stipulated in UU HPP. Indonesia is committed to reduce greenhouse gas (GHG) emissions to 29% below ‘business as usual’ by 2030.
There is also an opportunity for taxpayers to state their undisclosed wealth through a Voluntary Disclosure Program (VDP) with a reduced rates during the first semester of 2022. This is intended by the government to invite more taxpayers to be compliant under the tax system before sanctions and more severe punishments may apply.
In fact, there are several advancements in the Indonesian tax system in general. While tax policies are becoming more aligned with international best practice, intergovernmental fiscal relation is also being strengthened through the stipulation of UU HKPD, as mentioned before.
Furthermore, digitisation muscles up the tax authority to collect taxes in sustainable ways. For instance, with the compliance risk management (CRM) approach, the tax authority is now able to apply different treatments to every taxpayer according to their evidence-based compliance risk profile.
As proven in many countries with a more advanced tax system, this approach does not only improve efficiency, but also creates a more sustainable relationship between the tax authority and taxpayers.
Implications of the changes for taxpayers
From the new tax landscape emerging as explained above, what are the implications for taxpayers?
First, the government is trying to perform fiscal consolidation while accelerating the economic recovery. It seems that more relaxed taxation measures, along with incentives, are being balanced by the broadening of the tax basis. As such, the government aims to redistribute the tax burden in a way that is fair but also optimal to the economy.
Second, there are potential changes to the scope of applicable taxes for the taxpayer’s business. The changes can vary between the type of taxes, with each of them requiring a different approach or mechanism to comply. This means that new tax administration obligations can arise when a company’s products become taxed under VAT and other taxes, or they are obliged to collect certain taxes.
Third, there may be an increasing number of tax disputes. With such changes, it becomes more difficult to predict what will happen in the near future. There may be discrepancy of understanding between tax authority and taxpayers.
Fourth, there are also opportunities for taxpayers to reduce compliance costs or to utilise the new tax facilitations. As mentioned above, some of the new regulations potentially reduce the tax burden and are ‘friendlier’ to businesses.
Fifth, it becomes more necessary than ever to comprehend new tax regulations as soon as they are stipulated. It is not impossible that could be situations where the stipulation of a regulation only provides days for taxpayers to adjust accordingly.
Sixth, it is even more important to have a good understanding, and cooperative relationship, with the tax authority. The government intends to create a more conducive situation where transparency can be ‘exchanged’ with certainty for taxpayers. Hence, it will be very useful if taxpayers are able to disclose information to the authority whenever required so that cooperative-based compliance can be developed.
How a robust tax control framework can help
To answer the challenges above, TCF is an instrumental tool to be considered. In this context, a TCF enables taxpayers to identify, manage, and mitigate risks in tax. In simple terms, the OECD defines TCF in 2013 as an internal control that ensures the returns submitted to the revenue body are accurate and that transactions or positions giving rise to material tax uncertainty are disclosed.
In more technical terms, the purpose of TCF is to develop robust tax governance in fulfilling compliant obligation, managing risks, and evaluating the tax position of the organisation. Subsequently, when there are substantial changes in regulations, TCF enables the taxpayer to adapt accordingly in efficient manner. In addition to that, TCF can help the taxpayer to collaborate with the tax authority whenever required.
For example, a TCF allows the taxpayer to identify relevant changes to the law. From here, we can objectively disclose all business arrangements that may affect a taxpayer’s tax position. After that, appropriate actions can be taken in terms of what to do and how resources can be allocated in an efficient manner.
Moreover, when required, the tax authority can later be assured that all tax requirements are met, along with possible tax risks. The TCF enables a wide range of transactions that help corporations engage with a cooperative compliance program.
Thus, at the very least, a well-established TCF enables an organisation to ensure that every tax obligation and aspect of administration is fulfilled according to the applicable laws. However, when the TCF is aligned with the business plan and the company’s identity, every option and opportunity can be accompanied by calculated risks and a plan of mitigation to reinforce certainty.
B. Bawono Kristiaji
T: +62 21 2938 2700
B. Bawono Kristiaji is a partner at DDTC Fiscal Research & Advisory. He is a practitioner and researcher with experience in tax policy, transfer pricing, and tax advisory in various industries.
Certified with an Advanced Diploma in International Taxation (ADIT) from the Chartered Institute of Taxation, UK, B. Bawono is a regular speaker in high-level tax discussions and seminars held globally and domestically by private institutions, campuses, and government agencies. He is also a prominent source person for major print and electronic media. B. Bawono is the editor of several taxation books, including Transfer Pricing: Idea, Strategy, and Practical Guidence in International Tax Perspective and Indonesia Taxation System Design: Conceptual Review and International Practice. He is the chief editor for DDTC Working Papers and also has a number of international publications.
B. Bawono earned his master’s degrees from Tilburg University and the University of Indonesia. He attended courses at Harvard University, Georgia State University, and Leiden University.
T: +62 21 2938 2700
Denny Vissaro is a manager of fiscal research at DDTC. His research expertise encompasses the fields of fiscal policy, international taxation, and tax administration. Most of his projects relate to the works of the DGT and the Fiscal Policy Agency.
Denny is a regular contributor to DDTC News. He is a regular speaker at global events, including the Rust Conference held by WU University in 2017 and Tax Policy Dialogue held by ADBI in 2021.
Denny holds the principle of international taxation and TP certificate from the Chartered Institute of Taxation, UK.