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Fiscal Year Targets Encourage Tougher Tax Measures in 2013
Indonesia's tax revenue in fiscal year 2013 is targeted at IDR 1.193 trillion (USD 119.3 trillion), which is 24% higher than the previous year's, even though some of the sectors that have significantly contributed to the tax revenue in 2012 (such as the industrial and export sectors) have been weakened due to Europe's recession. In order to achieve the targeted tax revenue, the government will increase taxpayer coverage and law enforcement, which has resulted in the Indonesian government's need to consider revising certain tax regulations. Taxand Indonesia investigates the actions being taken as a result of these targets and its impact on businesses operating within Indonesia.
Intensification and law enforcement
According to the data of the Indonesian Tax Authority (ITA), there are registered taxpayers that only deposit 80% of the employee income tax that had been withheld. Starting mid-2013 the ITA will conduct an audit on the suspected companies in an attempt to investigate this gap.
Tax audits will also be conducted on companies suspected of carrying out aggressive tax avoidance through tax planning and transfer pricing. For this to be effective, the ITA is planning to amend the existing provisions on transfer pricing, with possible retroactive effects.
Changes in tax policies
The amount of expenses that can be deducted from the gross profit (such as the promotional and interest expenses) have a significant effect on taxes owed. These two expenses tend to be used by taxpayers to decrease their taxes. Thus, a regulation that limits the amount of these deductable expenses (a certain percentage of total turnovers) will be applied. It is not yet clear when this regulation will be effective from, but most likely will be issued in 2013 impacting transactions that take place in fiscal year 2013.
The amount of deductible interest expenses that can be claimed as deduction shall be determined through the debt-to-equity ratio (DER) so that not all of the borrowing costs can be deducted against the gross profits (but applicable only if the DER is exceeded). The issuance of such regulation is also intended to prevent tax avoidance through tax planning. The provision regarding DER had been previously set out in Minister of Finance Decree No. 1001/KMK.04/1984, but its implementation had been delayed.
Segmentation of taxable enterprises
In December 2012, the ITA issued a tax regulation concerning the procedures for the assignment of the tax invoice (Indonesian VAT tax credit method) serial number, which requires taxable enterprises to come to the tax office every 3 months. To facilitate the taxable enterprises to meet this obligation, taxable enterprises will be divided into three segments based on the following criteria: turnover, number of transactions, and information technology infrastructure.
1) The first segment will be composed of those taxable enterprises with high revenues, with a big number of transactions, and also possessing advanced information technology infrastructures. Their transactions will automatically be linked with the ITA's system so that they will automatically receive the tax invoice serial number, so that they do not have to report to the tax district office every 3 months.
2) The second segment, since their transactions are not yet linked to the ITA's system, must come to the tax district office every 3 months to obtain their tax invoice serial number.
3) For the last group, the taxable enterprises do not have to issue tax invoices for their transactions and the amount of input taxes that have to be credited will be based on the deemed input tax.
Originally, only businesses operating in the banking sector and financial institutions - whether conventional or shariah - factoring companies, insurance companies, Indonesia Deposit Insurance Corporation (IDIC), companies in the mining industry, reinvestments in forestry, are allowed to deduct the bad debt allowance from gross profit.
Recently, the Minister of Finance issued Regulation No. 291/PMK.011/2012 concerning the formation of allowance that can be deducted as expenses, expanding the types of businesses that can now deduct the allowance for bad debts as deductible expenses, to include all institutions providing loans, and the infrastructure development financing institutions.
Income tax rates on income of pension funds (mutual funds) from bond interest
Government Regulation No. 16 of 2009 stipulates that the income from bond interest received by a mutual fund taxpayer that is registered with the Capital Market Supervisory Agency (Bapepam), and from financial institutions, is subject to final tax. The effective income tax rate as set out in Minister of Finance Regulation No. 85/PMK.03/2011 (in force from May 2011 until the end of 2013) is 5%. From 2014, the rate will increase to 15%.
To attract investors to invest in mutual funds, the government is considering to keep the tax rate on bond interest at 5%.
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The government's plan to conduct audits on withholders of payroll tax, transfer pricing and tax policy changes, is intended to ensure that the targeted tax revenue will be achieved, as well as to attract more investors.Taxpayers should prepare for the planned audit on payroll tax and transfer pricing transactions by making sure that all withheld taxes have been deposited to avoid payment of the 100% administrative penalty that could be imposed by the ITA. For the audit on transfer pricing transactions, taxpayers should make sure that they prepare the proper transfer pricing documentation.
Taxpayers should take note of these updates and prepare for other changes in tax policy to maintain compliance.