Stay relaxed, the title is not referring to a new strain of coronavirus that the public should be worried about. In this article, a completely different ‘type’ of COVID - which stands for Compliance in a VIrtual and Digital environment - is elaborated upon. However, despite the obvious differences, the two strains of ‘COVID’ have something in common, and both are as dangerous if underestimated.
The Directorate General of Tax (DGT) has amended regulations that initially were created to respond to the coronavirus outbreak. Most, if not all, were perhaps issued with a degree of uncertainty, since the circumstances and consequences were not easily quantified at that moment. The process of re-evaluation is logical and understandable given that the outbreak is an extraordinary event that requires extraordinary measures. The updated regulations are necessary to keep the economy moving and to support business operations.
The reality of the virtual environment
Shortly after President Joko Widodo declared the coronavirus outbreak as a national disaster, many regions in Indonesia followed it up by imposing a strict territorial quarantine policy. All government ministries and public authorities, including the DGT, implemented a ‘work from home’ policy for their officials.
The shift to remote working, however, seemed to be challenging for everyone. Tax officials were not as available as they would normally to be, or they should be. Each tax office developed their own procedures regarding the arrangement of face-to-face meetings between officials and taxpayers, which often caused confusion and misunderstandings. Likewise, communications and interactions were disrupted, and tax officials’ working hours and response times to queries became blurred.
To improve the situation, starting from September 1 2020, the DGT require taxpayers who want to conduct a face-to-face consultation with tax officials to set an appointment in advance, online, centrally, through kunjung.pajak.go.id for all tax offices across the country, prior to being permitted to meet with the officials. Observing health protocols, the daily allotted space is therefore limited, hence a longer waiting time is expected. Certain administrative services that can also be carried out in the tax office, are, among others, tax ID registration (NPWP), tax return submission, VAT refund request, and electronic filing identification number (EFIN) activation.
Virtual meetings between tax officials and taxpayers are still allowed, anyway. Effective as of June 15 2020, the DGT has introduced guidelines to implement the ‘new normal’ for certain activities, including tax audit, that are encouraged to be conducted virtually. However, many taxpayers, and perhaps tax officials, as well, find it particularly challenging to maintain a conducive discussion environment during tax audit without being able in the same location processing paper evidence.
Tax litigation was suspended for 83 days and re-opened on June 8 2020. Hearings are increasingly allowed to be held remotely, where possible. A panel of judges and a registrar will be presenting in the courtroom, while other parties, including the appellant, attend virtually. The remote hearings also involve a process of examining evidence, listening to arguments, and reading the final verdict, among others. However, this remote hearing scheme is optional. The parties may opt for physical hearings.
Ideally, virtual audits and remote hearings are to be conducted as closely as possible to on-site audits and physical hearings. However, conducting these activities can be an awkward experience for some, not only for the tax officials and judges, but also taxpayers.
Aside from requiring reliable and secure video conference programmes, they also require certain techniques and strategies. From the tax auditors’ point of view, for example, it is tough to carry out structured interviews of relevant personnel that should be conducted independently as they can possibly be accompanied by other personnel, off screen.
Moreover, visual cues and non-verbal gestures that can often help detect gaps or inconsistencies of information given are not seen and captured during the video conferences. A stable internet connectivity on both ends is a must, as a technical glitch can be disastrous. Furthermore, security is also a major concern. Using unsecured or vulnerable networks can potentially put data privacy at risk. High security measures must be put in place to avoid phishing, cyber-attacks, and credential stuffing, among others.
The biggest challenge in a virtual setting is, actually, miscommunication, as it can be difficult to convey messages across ‘distances’ without the ability to understand and communicate effectively. Furthermore, poor communication can eventually lead to other worse complications, such as conflicts and damaging relationships. A perfect mixture of clarity, creativity, and connections seem to be necessary for effective communication, both in a virtual and physical environment.
When digital and physical collide
While physical meetings and interactions are discouraged and may not happen all the time, quite on the contrary, many tax auditors and judges at tax courts are sceptical about digitised documents or electronic data retrieved from taxpayers’ IT systems and, hence, do not accept them and prefer paper documents as evidence, instead.
Many taxpayers pursue a fully automated tax system, even integrating it with other information systems, such as enterprise resource planning (ERP), to reduce the chance of errors. However, without clear and standardised guidance from the DGT and tax courts about the use of digitised documents and electronic data, especially during tax audits and litigation, taxpayers might have to think about getting around it without the need to improvise.
Digitised documents are certainly different from electronic data. While electronic data is directly retrieved from IT system/database, digitised documents involve conversion of paper documents into digital format through scanning or using optical character recognition (OCR) conversion software.
The key element in digitised documents is document authenticity. Comparably, the key element in electronic data is data integrity. Both authenticity and integrity boil down to trust. From this point, ideally, the term ‘document’ refers to all materials, regardless of whether they are in paper, electronic data, or even other formats, as long as they are from trusted sources. If one material is preferable than the other, then, perhaps trust is the issue?
Similar to digitised documents, despite the regulation, in many cases, the DGT requires the taxpayer to submit physical letters with a wet signature, by mail or direct submission. Electronic letters are not recognised even though they are sent from taxpayers’ official email addresses that have been registered in the tax office, while conversely, official letters and notices sent by DGT are allowed to be sent electronically with digital signatures to taxpayers registered email addresses.
The Fiscal Policy Agency of the Ministry of Finance recently informed that short-term tax policy directions focus on incentives to support the recovery of the private sector, driving economic transformation and improving competitiveness through the Omnibus Law on Tax. This broadens the tax base and compliance, and develops a tax system that is compatible with technology-based economic activities or strengthens the taxation of trade through electronic systems (PMSE).
In terms of tax revenue, the target for fiscal year 2021 is IDR 1,481.9 trillion ($99.3 billion) (8.39% of GDP). This figure is an increase of 5.51% from the target for fiscal year 2020 of IDR 1,404.5 trillion (8.57% of GDP). Total realisation of state revenue in August 2020 reached IDR 1,028.02 trillion or 60.52% of the total revised state budget target of IDR 1,699.9 trillion. This revenue comprised tax revenue of IDR 795.95 trillion and non-tax revenue and grant of IDR 232.07 trillion.
As announced in August 2020, for Q2-2020, Indonesia registered a contraction in GDP growth of 5.32 % year-on-year, the first contraction in the economy since Q1-1999. In 2021, economic uncertainty would likely remain on the horizon. This situation requires the government, especially the DGT, to innovate, both in terms of policy formulation and implementation, in order to meet fiscal and economic objectives. This is particularly challenging given the responsibilities that the DGT has of not only meeting the targets, but also providing assistance to businesses during and after the crisis caused by the coronavirus outbreak. The innovative policies implemented would be strategic and significant, and might last over the long-term.
Since September 2019, equipped with cutting-edge technology, the DGT have introduced a risk-based approach called compliance risk management (CRM) allowing the DGT to apply different treatments to each taxpayer according to their risk profile. Using the CRM approach, tax offices are expected to put more attention on taxpayers whose potential tax liabilities have not been optimally explored. In the near future, this approach might also be used to decide and determine the eligibility for remote audits of taxpayers.
Likewise, in response to the rapid and unprecedented changes in the tax environment, taxpayers would also need to implement CRM. CRM for taxpayers is not solely about potential underpayments, overpayments, or assessments, but also the ability or inability to meet the requirements, providing tax reporting and analytics, as well as capitalising on tax savings opportunities, among others.
It needs to be underlined that incentives and flexibility granted during the coronavirus outbreak do not equal to relaxing compliance requirements. It is important for taxpayers to be audit-ready at all times. Taxpayers need to assess and revisit all actions and policies taken during the pandemic. These include tax return filing and payment as well as monitoring deadlines, the ongoing tax audit or litigation processes, and taking strategic approach, if and when necessary.
Certain deadlines that fall within the force majeure period are extended for six months, which includes the following procedures: tax refund process (from 12 to 18 months), tax objection process (from 12 to 18 months), tax objection request submission (from 3 to 9 months), tax penalty relief/waiver process (from 6 to 12 months), cancellation of tax assessment and cancellation of tax audit results (from 6 to 12 months).
The above are just a few examples that hopefully prompt further consideration about what has been achieved, the situation post-changes, and the plans for the future regarding the implications and the ways of navigating them.
As previously mentioned, it is highly likely that going forward, the DGT will be working towards engaging taxpayers in a virtual and digital environment. For some taxpayers, this might have put them in limbo as it requires more resources. However, it is worth noting that one of the most essential factors to deal with uncertainty and to be resilient to disruption is embracing innovation.
All taxpayers, especially those who have not yet started, need to expedite their digitalisation plans to be able to stay one step ahead. Why? Because the DGT will also be adjusting their collections and compliance strategies, using the CRM and through digital transformation. The DGT will likely be strengthening its cooperation with customs, as well, through data exchange and information sharing, such as the recently introduced pre-populated VAT returns initiative. Better use of technology will support taxpayers in improving their tax compliance practice. Additionally, it will also give the benefits of data visualisation that enables taxpayers to explore business insights and speed up their decision-making process, for instance.
Some government ministries and public authorities have started to think about implementing the ‘work from home’ policy permanently. Flexible working space and the hub and spoke model are two other options that are also being considered. The coronavirus outbreak sets public sectors on a fast forward mode. The way that the DGT works and interacts will likely be permanently changed in many ways. For taxpayers, though it is not a competition, the choices are between staying ahead or letting themselves being disrupted.
Regardless of communication disruptions that might occur as tax officials and taxpayers move forward, being proactive is still of paramount importance and taxpayers should never cut corners on the effort. This moment is actually a good time for taxpayers to develop more robust and genuine communication and engagement with tax officials, not only because it will enhance the quality of the relationship, but also to avoid future surprises and keep abreast of changes in regulations.
This also applies internally, in which employees and employers need to understand and embrace the upgraded ways of communication and working relationships, in a virtual and digital environment. The digitalisation plan encompasses more than just technology. It also requires possessing a digital mindset and culture. The plan requires leadership, buy-in, collaboration, and commitments.
The pandemic was created situations in which an atmosphere of uncertainty is fast approaching, prevalent, and salient, making compliance become unavoidable and more challenging to manage. Compliance is no longer a function, but a behaviour.
In this challenging and unprecedented time, businesses need to be diligently aware of the underlying risks and urgently take the necessary steps to manage them. Things are not going to be less complicated in the future, and hence it is important to stay on top of compliance matters. Compliance is about balancing resources which need to be spent where the risk is the highest. Do not underestimate the threat of COVID.
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Susy Suryani Suyanto is the managing partner of Suryani Suyanto & Associates. She has become a tax specialist in matters relating to dispute resolutions, with a proven track record in assisting multinational corporations listed in Indonesia and overseas stock exchanges.
Susy has more than 11 years of experience as a tax consultant with Arthur Andersen and EY and has attended various trainings, including tax manager training in Chicago. She serves as the chairperson and in various leadership roles across tax chambers and forums in Indonesia.
In addition to holding bachelor’s degrees in accounting and law, Susy holds a master’s degree in law from Padjadjaran University, where she graduated with a summa cum laude.
T: +62 21 290 35 889
Faozan Efendi is a director at Suryani Suyanto & Associates. His career experience includes being a tax consultant at Suryani Suyanto & Associates since 2004, before moving to work at GE Indonesia as the indirect tax leader. He rejoined Suryani Suyanto & Associates in 2017.
Faozan specialises in transfer pricing issues, and managing and handling tax disputes such as objections and appeals. He is also well experienced in tax planning, tax litigation, income tax compliance, business tax advisory and annual income tax provision functions.
Faozan obtained a bachelor’s degree in accounting from Gadjah Mada University.
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