Tax authority monitoring and enforcement in Indonesia

December 2018 | EXPERT BRIEFING | CORPORATE TAX

financierworldwide.com

This article provides an update on tax authority monitoring and enforcement in Indonesia, covering field audits to test the compliance of a taxpayer with tax obligations, as well as planning, strategising and measuring audit performance and audit policy. The article also mentions the treatment of taxation for mineral mining businesses and implementation of the Know-Your-Beneficial-Owner principle in Indonesia.

Field audits to test compliance of a taxpayer with tax obligations

On 21 April 2017, the Directorate General of Tax of Republic of Indonesia (DGT) issued a regulation on ‘Guidelines for Field Audits to Test Compliance with Tax Obligations’ and a circular letter on ‘Technical Guidance for Field Audits to Test Compliance with Tax Obligations’. These regulations stipulate that, as an initial procedure for a field audit, the DGT should deliver to taxpayers a written notification of a field audit, along with a written summons for a meeting between the tax auditor and the taxpayer.

At the meeting with a tax auditor, the following individuals should be in attendance: (i) a representative of the corporate taxpayer; (ii) the individual taxpayer; (iii) one of the heirs, executor of testament or administrator of estate for an undivided inheritance; or (iv) a guardian for underage children or those who are under wardship/guardianship. They may be accompanied by an employee or a tax consultant who understands the taxpayer’s business or freelance activities.

During the meeting, the tax auditor should brief the taxpayer on the reason and purpose of the audit. The tax auditor will then request an explanation of certain taxation matters of the taxpayer, including bookkeeping. The meeting should be recorded in the minutes, which will serve as a basis for the tax auditor to carry out a field audit. If the taxpayer fails to attend the meeting, the tax auditor will issue a statement of absence and will proceed directly with the tax audit at the taxpayer’s premises. Any display of non-cooperation by the taxpayer during the audit may lead to a preliminary audit for a tax crime.

Plan, strategy and measurement of audit performance

On 28 April 2017, the DGT issued a circular letter on ‘The Plan, Strategy, and Measurement of Audit Performance of 2017’. The DGT emphasised that the 2017 tax audit would focus primarily on implementation of the tax amnesty programme. Upon enactment of the Tax Amnesty Law, tax audits were conducted to encourage taxpayers to join the tax amnesty programme. After the tax amnesty period ended, the focus of compliance audits shifted to taxpayers who had not joined the tax amnesty programme. The DGT differentiated tax audit treatment between taxpayers who had joined the tax amnesty programme and those who had not.

For those who had joined the tax amnesty programme, the head of the regional tax office may trace assets for any that were undisclosed or not fully disclosed prior to and during 2015, according to the written statement submitted for tax amnesty. Findings related to these assets may lead to the commencement of a special audit in accordance with prevailing laws and regulations.

For those who had not joined the tax amnesty programme, the DGT may conduct a tax audit for a tax period, part of a tax year or a tax year in which the tax stipulation has not expired. If a taxpayer undergoes a tax audit, the tax auditor may also trace any assets that are undisclosed in annual tax returns (Surat Pemberitahuan or SPT).

Audit policy

On 13 August 2018, the DGT issued a circular letter on ‘Audit Policy (Circular Letter 15)’, which revoked the circular letters on ‘Audit Policy’ and ‘Audit and Research Policy on Property Tax’. Circular Letter 15 aims to provide uniformity for the steps of a tax audit, which is expected to increase audit quality and quantity, contribute optimal tax revenue, minimise legal remedies against tax assessments following audits and improve ongoing compliance by taxpayers. In brief, Circular Letter 15 stipulates detailed provisions on the subject, object and procedures for a tax audit.

Pursuant to Circular Letter 15, a tax audit consists of three main components: (i) the process of selecting taxpayers to be examined, which shall be carried out objectively, transparently and in a reliable manner; (ii) optimising the performance of the tax auditor carrying out the audit activities; and (iii) continually improving tax regulations in the field of inspection.

Circular Letter 15 focuses on revitalising the audit process, which is implemented by, among other things, preparing a compliance map and list of priority targets for potential investigation (Daftar Sasaran Prioritas Penggalian Potensi or DSP3) and a list of priority targets for audit (Daftar Sasaran Prioritas Pemeriksaan or DSPP). DSP3 is a list of taxpayers regarded as priority targets for potential investigation throughout the relevant year, whether in the form of supervision or audit. The DSP3 serves as the basis for the relevant tax office to determine which taxpayer will be included in the DSPP.

Under Circular Letter 15, a number of variables are used to determine whether or not a taxpayer is shortlisted in the DSP3, including any indication of a high level of non-compliance by a taxpayer. Indicators of non-compliance are classified by type of taxpayer (i.e., corporate or individual) and the type of tax office at which the taxpayer is registered (pratama or non-pratama tax office).

The indicators for corporate taxpayers include: (i) discrepancies between SPT profile and actual economic profile (business and assets); (ii) the existence of an intra-group transaction whose value is more than 50 percent of the total transaction value; (iii) the issuance of more than 25 percent of tax invoices to taxpayers whose taxation registration numbers begin with 000 in a tax period; (iv) absence of an audit on all taxes for the last three years; and (v) the results of analysis of information, data, report and complaint (Informasi, Data, Laporan, dan Pengaduan or IDLP) or Center for Tax Analysis (CTA).

For individual taxpayers, the indicators include non-compliance of tax payment and submission of SPT non-audit on all taxes for the last three years, discrepancies between SPT profile and the taxpayers’ business scale, assets, lifestyle and loan profile and the results of analysis of IDLP or CTA.

Treatment of taxation and non-tax state revenue for minerals mining businesses

On 2 August 2018, the regulation on the ‘Treatment of Taxation and/or Non-Tax State Revenue for Mineral Mining Businesses’ (GR 37/2018) was enacted. GR 37/2018 was issued to provide legal certainty on taxation and the imposition of non-tax state revenue for holders of mineral mining licences in Indonesia. The taxation provisions under GR 37/2018 will come into effect at the start of the 2019 tax year.

GR 37/2018 stipulates that the income tax provisions it regulates will only apply to mineral mining companies holding: (i) a mining business licence, granted for mining activities; (ii) a special mining business licence, granted for mining activities in a state reserve area; (iii) a community mining licence, granted for mining business in a certain area with limited investment and size; (iv) an operation-production special mining business licence from the conversion of an unexpired contract of work, granted for certain mining activities (e.g., construction, processing, refining, transport and sales) in a state reserve area; and (v) a contract of work that stipulates income tax obligations in accordance with the prevailing income tax laws (i.e., Indonesian income tax law). For holders of a contract of work that stipulates income tax obligations in accordance with the prevailing Indonesian income tax law, the taxation provisions under that contract will apply until it expires.

The tax objects in the mining business sector are income received or obtained by a taxpayer in mining business sector in connection with business income or non-business income in any name and form. Business income is income received or obtained from the sale/transfer of products. This is calculated by metal market price, non-metal market price, rock market price or the actual price received or obtained by the seller. Non-business income, on the other hand, is treated in accordance with the provisions of Indonesian income tax law.

Know-Your-Beneficial-Owner principle

On a separate occasion, on 5 March 2018, the Indonesian president issued the ‘Implementation of Know-Your-Beneficial-Owner Principle by Corporation for Prevention and Eradication of Money Laundering and Terrorism Funding’ regulation. The enactment of the regulation is part of Indonesia’s continuing efforts to prevent and eradicate money laundering and the funding of terrorism.

Pursuant to this regulation, it is mandatory for a corporation to determine its beneficial owner. The beneficial owner may also be determined by an authorised agency based on the results of an audit conducted in accordance with the Know-Your-Beneficial-Owner regulation, information from a government agency or private institution which manages the data and/or the information of the beneficial owner, and other valid and accountable information.

The information on the beneficial owner must be updated annually. The authorised agency will collect and manage the information from various corporations and form a database which indicates the source or use of funds or property associated with corporations. The Know-Your-Beneficial-Owner regulation grants a one-year transitional period for corporations already established or in the process of being established.

Freddy Karyadi is a partner, and Nina Cornelia Santoso and Jovico Nicolaus Honanda are associates, at ABNR. Mr Karyadi can be contacted on +62 819 1010 3949 or by email: fkaryadi@abnrlaw.com. Ms Santoso can be contacted on +62 (21) 250 5125 ext. 416 or by email: nsantoso@abnrlaw.com. Mr Honanda can be contacted on +62 (21) 250 5125 ext.489 or by email: jhonanda@abnrlaw.com.

Freddy Karyadi, Nina Cornelia Santoso and Jovico Nicolaus Honanda

ABNR