The challenging tax environment and its risks
It has been six months since the World Health Organization (WHO) announced the COVID-19 outbreak as a pandemic on March 11 2020. Since then, multinational enterprises (MNEs) have been tightening their belts through various approaches as business slows down globally. Under these conditions, each and every MNE should struggle towards optimising its performance and hope for the best so that the business can survive. However, as long as business is alive, tax implications are inevitable.
Taxation has become the backbone of many developing countries. To maximise tax revenues, the government must formulate an optimum policy, while at the same time developing a good and sustainable business environment. The interpretation of such policy from both the executor (the tax authority) and the taxpayer (MNEs) has always been an interesting story, yet also very determining, especially in a self-assessment tax system. As long as there are different interpretations, the possibility of tax disputes will always exist, regardless of the pandemic situation. As Benjamin Franklin famously remarked: “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.”.
Referring to the article written by Anjana Haines regarding a comprehensive survey conducted by Euromoney’s Legal Media Group (LMG), more than 400 senior legal and company officials from a range of countries and industries actually anticipated an increase in dispute resolution during this pandemic and they tended to outsource the dispute settlement process due to all the existing limitations. Meanwhile, except for the health and safety measures, it is widely understood that every business component should strive for a more efficient budget in order to maintain business stability, especially to manage the cash flow. This includes managing the settlement of tax controversies.
In Indonesia, a tax dispute object often originates from the issuance of a tax assessment notice (SKP) and/or tax collection notice (STP). These legal products are often issued with the applicable sanctions on tax underpayment(s), e.g. interest penalties for late payment (2% per month, capped at the maximum of 24 months), and increment penalty with various rates ranging from 2% to 200% for tax cases, or even up to 1,000% for customs cases.
The tax dispute process starts from the objection level at the regional tax office, followed with tax appeal or lawsuit level at the tax court, until the judicial review level at the supreme court. In general, for objections and appeals, the taxpayer may choose not to settle the non-agreed tax underpayment as stated in the tax assessment letter until the dispute process is completed, except in the case of a customs dispute (where the taxpayer must pay at least 50% in advance) and the case of a tax collection notice (where any outstanding balances can be followed up with distress warrants). However, if the taxpayer then loses the case at the objection or appeal level, there will be an additional increment penalty of 50% and 100%, respectively. Hence, every action taken over these assessments is critical, as it may carry higher cash-flow risks in the future.
In addition to the risk of increasing sanctions in each level of dispute, the risk from the dispute settlement process itself has also increased, since although each government entity (from the tax office, regional tax office, until the tax court) has implemented new policies to support health and safety protocols, in this traditional litigation process, in-person meetings are still being carried out. It is understood that such measures may have been taken since most taxation issues in Indonesia are closely related to accounting information and administrative documents, which are easier to exchange in hard copy form.
Having said this, it is widely understood that although dispute channels are available, the risks are vivid, especially if the case is not solid. While on the other hand, if the case was strong and the final dispute result is favourable, only certain types of case which can be entitled to an interest compensation/reward. Accordingly, as the tax controversy load is continuing to escalate, this creates a profound challenge for professional tax advisors and litigation practitioners.
Identify the critical points and prepare the strategy
The government is spending abundantly during the COVID-19 pandemic. Thus, it would be very understandable that they would look for ways to plug the gap between the revenue and cost budgets through tax and customs instruments. Consequently, it is also logical to anticipate the possibility of increasing tax litigation cases. Even without the arrival of new COVID-19-created dispute cases, the on-going cases which were pending or ineffectively processed during the three-month lockdown (from March to May 2020) are catching up, as they should be concluded immediately. As Martin Luther King, Jr. once said, "Justice too long delayed is justice denied".
Accordingly, professional tax advisors must not only have the human resources, but also have an efficient and effective strategy to deal with these cases. These instruments should be supported by a good, safe infrastructure (such as IT, transportation, safety equipment, premises, etc.), as well as leadership and competence. All of these components must work together in order to achieve maximum results while still providing room for human capital development, research, and, needless to say, the work-life balance of the whole team.
The tax controversy arenas in every country may have many types and levels. However, in understanding the constellation of a tax controversy, a tax advisor must not only recognise the features, requirements and processes of each dispute stage, but also must be able to further define the costs and benefits, pros and cons, and the likelihood of the outcome in order to estimate the risk and the amount at stake.
In this case, it can be considered that a ‘tax controversy management’ should begin long before the starting line of a dispute. In fact, it should start before a transaction takes place, throughout the whole transaction process, until the settlement of the transaction and its tax compliance. Thus, as a mitigation effort, an MNE is advised to regularly carry out a simulation in the form of a tax diagnostic review and/or analysis of the areas that may trigger different interpretations in order to identify/quantify any exposures to tax penalties or sanctions. If feasible, it would also be advisable to amend the relevant tax returns prior to a tax audit.
In line with the government’s health and safety protocols for the settlement of tax matters whereby both taxpayers and tax officers are encouraged to avoid physical meetings as much as possible, the tax advisors (as the attorney of the taxpayer) should be creative in exploring any loopholes within this new procedure. Tax disputes often start from lack of documentation, details or explanation, while in the COVID-19 pandemic, provision of documents through the online platform should be rather manageable if the filing was proper. Nonetheless, taxpayers should be aware that the filing of their bookkeeping’s supporting documents should follow the minimum requirements as stipulated by the general tax laws, as well as the law on electronic information and transactions. Otherwise, unnecessary risks may arise regarding the formality of the bookkeeping.
Similarly, performing meetings through online platforms may also sound simpler, as there should be no travel time, no physical document exchange, and/or less ineffective discussion. However, each e-meeting should be properly documented through proper minutes of meeting, e-document receipt (even for emails) and if possible, by obtaining a legal footage/recording of the discussion. Without proper documentation, challenges on the cooperativeness of the taxpayer may also arise. In Indonesia, this is critical, since the tax court judges also need proof that the taxpayers have delivered maximum efforts in upholding their arguments and asserting their position.
Transfer pricing (TP) has also been under the spotlight these past few years following the finalisation of the OECD’s BEPS Report Action 13. At a glance, Indonesia is an investee country. Most companies performing foreign direct investments which perform transactions with their related party(ies) would then be exposed to the obligation of preparing TP documentation. Typically, different interpretations and points of view often arise from TP analysis in any kind of form.
Yet again, it is very important to ensure that the TP documentation fulfils the administrative requirements set by the government. Kindly note that in the worst case scenario, if the TP documentation is viewed as not fulfilling the formal requirements, even though the substance of the arm’s-length principle itself has been supported, the tax authority may have the right to deem the transaction(s) to be not in accordance with the arm’s-length principle and to perform adjustment to the corresponding income/expenses.
In addition to the above anticipations on tax technicalities, every execution should be delivered with proper teamwork and leadership. Experience has proven that many tax controversies were born out of ‘bad chemistry’ during the tax audit process. It is undeniable that although both the tax authorities and the taxpayer have their rights and obligations, in an event of a tax audit, one would be the auditor while the other one would be the auditee. As such, questions should be managed properly and of course, more importantly the auditee should understand where the discussion is heading, what would be the repercussions, and/or whether there is a hidden exposure beyond it. Therefore, handling the tax audit would involve the art of reading psychology and creating a good, and if possible, a long-lasting connection with the tax authorities.
Last but not least, MNEs are urged to utilise any tax incentives available during the COVID-19 pandemic even if these may only cover corporate income tax (CIT), withholding tax (WHT) or value added tax (VAT) aspects. Indonesia has introduced several tax incentives, which include reduction of CIT rates and instalments, employee WHT borne by the government, accelerated VAT refund procedures, and so on. Minimising tax burdens by obtaining incentives bestowed by the government would be one way to slow down tax controversies. Further, exploring the possibility to obtain interest compensation on any tax refunds would also be worthwhile to support the cash flow - depending on whether the regulation can support it or not.
In conclusion, tax advisors who handle litigation cases should evolve along with the customised standards of the COVID-19 pandemic and its anomalies, including by anticipating the possibility of an increasing volume of tax controversy settlements in the near future. The same challenge will also emerge on the government’s side. This challenge would be reciprocal, as both sides will require a lot of preparation not only in the aspects of infrastructure and capacity, but also in developing the skill set to achieve an effective and efficient litigation process. In addition, good leadership would also strengthen the bonds and collaboration between the tax advisors and the clients as well.
Tax litigation practitioners should also be aware that clients are taking extra-efficient measures in managing every area during the COVID-19 pandemic. Therefore, minimising the probability of tax disputes by performing regular tax health-checks may be one best solution, considering the escalating risks of undergoing tax disputes (at least for fulfilment of the formal and material aspects of any sensitive cases), as well as optimising the available incentives to minimise tax burdens. Nonetheless, of course, when a tax controversy takes place, the tax advisors should be creative to figure out the best strategy to go with in the litigation process. In developing the most efficient strategy, one may need to invest in delivering extra attention or pro bono services.
Despite all the limitations that exist during the COVID-19 pandemic, it is trusted that many professional tax advisors are looking at the upcoming wave of litigation positively and have prepared strategies to absorb it smoothly.
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Ahdianto is a partner at GNV Consulting. With more than 21 years of experience in tax, customs and business consulting, he is known in the market 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.
|Fabian Abi Cakra|
T: +62 813 103 14 103
Fabian Abi Cakra is a tax director at GNV Consulting. With more than 14 years of experience in the tax consulting world, mostly with one of the Big Four firms, he has been providing valuable support and advice through his participation in the tax team.
Fabian is experienced in handling tax compliance, advisories, diagnostic reviews and tax dispute resolutions, 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 mergers and acquisitions (M&A) projects, liquidation and litigation.
Fabian holds a bachelor’s degree in social studies and politics, and majored in fiscal administration, from the University of Indonesia.
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