PBB a.

High administrative costs to employ qualified

 UU no 12 th. 1985 amended to UU no 12 th. 1994 employees
 State tax: PBB P3 (Perkebunan, Perhutanan, b. Rate disparity
Pertambangan) c. Negative image of the local government
 Based on Law no 28 th. 2009  Local tax: PBB P2 d. Discourage improvement to avoid higher tax
(Pedesaan, Perkotaan) e. Appeal and fairness
Reasons:
BPHTB
a. To improve the accountability of regional
 UU no 28. Th 2009 art. 85-93
autonomy
 Uses self-assessment system
b. Provide new opportunities for regions to
 Tax object: transfer of rights or grant of new rights
impose new levies (increasing the types of
 Tax base: NPOP which could be:
local taxes and user charges)
a. Sale/purchase price
c. To shift greater authority in taxation and user
b. Market price
charges by expanding the regional tax base
c. Auction price
d. To give authority to the region in determining
d. NJOP PBB (if point a and b does not qualify and
tax rate
NPOP < NJOP)
e. To function tax as an instrument of budgeting
and regulation on the region’s APBD  NPOPTKP regional = minimum Rp60mn. In case of
inheritance NPOPTKP is set at minimum Rp300mn.
 Subject: A person/entity who has the right or
receive benefits from the land/building  BPHTB = 5% x (NPOP – NPOKP)
 Object: Land & buildings
Local Taxes and Retributions
They are classified according to its selling value
Factors to be considered in classifying:  State tax: PPh, PPN, PBB P3, stamp duty, BPHTB
Land Building  Local tax  UU No. 28 th 2009. Examples: PBB P2
Location Materials and hotel/restaurant tax
Land Construction  Similarities:
Environment Location a. Main source of local government’s revenue
Environment b. Imposed on society
 Exempted: land/buildings for non-profit public c. Can be forced in return for the advantage of
services, protected forests, grave, etc. regional facilities received
 Tax base: NJOP  average price from arm’s length d. Executed for the sake of prosperity
transaction. If there is no transaction: compare  Differences:
with similar objects; new acquisition value; NJOP Factors Local tax Local charges
replacement Regulations National level; Perda
 PBB-P2 tariff in Yogyakarta: formal
Tax rate NJOP (in million) Reciprocal Indirect, Direct,
general individual
0.1% ≤500
Payee Taxpayers Users of
0.125% 500<NJOP<1,000
government
0.160% 1,000<NJOP<2,000
services
0.220% 2,000<NJOP<5,000
Coercive Administrative Economical
0.3% >5,000
nature and criminal
 NJOPTKP = 10mn ≤ NJOPTKP ≤ 12 mn
Tax body Central, Regional
 If one taxpayer owns >1 tax objects, NJOPTKP will regional through Dinas
only be assigned to the object whose value is the Pendapatan
highest. Daerah
 PBB = Rate% x NJKP x (NJOP – NJOPTKP)  Local tax principles: democracy, equity and justice,
P2 tax rate P3 tax rate community participation, accountability with
0.3% 0.5% respect to regional potential
 NJKP  Local tax characteristics:
PBB P2 PBB P3 a. May be purely local tax or transfer from state
NJOP ≥ Rp1bn = 40% Plantation, forestry, tax
NJOP < Rp1bn = 20% mining = 40%
 Problems with PBB:
 b. Levied only in the administrative territories
controlled by the region
c. Used to finance local household affairs or
regional expenditures
d. Collected based on Perda to force people to pay
 Local tax: provincial tax (motor vehicle tax, fuel
tax, surface water, cigarette) and district/city tax
(hotel, restaurant, entertainment, billboards,
parking, PBB P2, BPHTB)
 Hotel and restaurant tax is imposed to the service
provided to the user. The rate is at maximum of
10%.
 Local charges or levies are managed by Dinas
Pendapatan Daerah. Payment for them are made
for the benefit provided by local government.
 Local charges characteristics:
a. Levied by local government
b. There is an economical coercion in the
collection
c. The existence of a contract
d. Imposed to everybody who uses the services
provided by local government
 Object:
a. General services: services provided for public
benefits. Examples: health, education, parking
b. Business services: services provided is
commercial that should be provided by private
sectors but are not optimal or the assets are
owned by local government. Adopt the
commercial principles: (1) utilize the local
assets that have not been managed optimally;
(2) has not been provided private sectors.
Examples: wholesale markets, auction, bus
stations
c. Special permissions: local governments
activities to give permissions to
individuals/entities for the guidance and
supervision. Examples: permission to build,
alcoholic drinks license, route permit
Fiscal Accounting
 Commercial accounting
Principle Accrual/matching, assets-
liabilities approach
Pre-tax Determined according to GAAP
income
Tax expense Taxes reported on IS
Effective tax Tax expense/pre-tax income
rate
 Tax accounting
Principle Cash basis, revenue-expense
approach
Taxable Determined according to tax
income code
Current tax Taxes payable on the current
expense year’s taxable income
Statutory tax Set by tax law
rate
 Book-tax differences resulted from different
accounting treatments under PSAK and tax laws.
The differences can be permanent or temporary
 The accounting treatment for tax is managed
under PSAK 46 which adopts IAS 12. Scope:
a. Income tax applies on both domestic and
foreign taxable income
b. Includes: withholding tax of a subsidiary,
associate, or joint venture on the distribution to
the reporting entity
c. Not applicable for government grants (PSAK 61)
or investment tax credits, but applies to
temporary differences that may arise from such
grants/credits
 Rationale for fiscal correction:
a. Accounting profit is different from fiscal profit
b. Allows taxpayer to file only one SPT
c. Correction will include income and expenses
 Permanent difference occurs when
income/expenses are recognized in the calculation
of financial accounting but not in the fiscal/tax. It
could be non-taxable income or non-deductible
expense. It only affects the period which they
occur.
 Non-taxable income under tax laws include:
interest on municipal bonds, lottery prize, profits
from property transfer, construction/service
business, property leases
 Non-deductible expenses include donation and
sanction/fine
 Permanent difference can result in:
a. Positive correction: pre-tax income < taxable
income
b. Negative correction: pre-tax income > taxable
income
 Temporary difference occurs because
income/expenses are recognized in one period for
tax purposes but are recognized in different
periods in the book. It resulted in Deferred Tax
Assets or Deferred Tax Liabilities
 Temporary difference in income usually resulted
from long-term revenue recognition
 Temporary differences in expense could result
from:
a. Differences in depreciation method, in which
tax laws only allow straight-line or decreasing
balance
 b. Differences in inventory valuation methods, in International Taxation
which tax laws only allow FIFO or the average  BEPS consists of strategies to avoid tax by
method exploiting gaps and mismatches in tax rules to
c. Allowance for doubtful accounts artificially shift profits to low or no-tax locations.
 Fiscal correction for temporary differences:  Triggers:
Positive Negative a. MNCs want to minimize their tax bills
Before: Pre-tax < Before: Pre-tax > b. Conventional global tax regulations fail to
Taxable  DTA Taxable  DTL regulate the increasingly complex business
After: Pre-tax > After: Pre-tax < world
Taxable  Income tax Taxable  Income tax c. Tax avoidance has given MNCs competitive
payable becomes payable becomes advantage in the expense of justice and tax
lower higher compliance issues
Examples: prepaid Examples: accrual
 Outcomes of BEPS:
revenue, product revenue recognition,
a. Tax revenue in some countries are decreasing
warranty, bad debt prepaid assets
b. Sovereignty and tax justice are impacted
 DTA: the amount of income tax that can be
c. Encourage more companies to develop similar
recovered in the future as a result of:
practices
a. Deductible temporary differences
d. Raises opportunity for tax arbitrage among
b. Accumulated tax losses that have not been
MNCs
compensated
e. Increased tax dispute as it will also affect the
c. Accumulated tax credits that have not been
domestic taxpayers
utilized
 BEPS in Indonesia:
 DTL: the increasing amount of income tax payable
a. Transfer pricing policy lacks clear guidance and
for future period as a result of taxable temporary
punishments, the absence of Special
differences
Investigation Unit under DGT during routine tax
 Tax expense (as stated in FS) = Current Tax
audits
Expense (paid to tax authority) + Deferred Tax
b. The government has strongly banned tax haven
Expense
c. Practice of thin capitalization to maximize the
 Current Tax Expense = (Pre-tax Income – Book tax
benefits of tax-deductible interest expense
differences) x Statutory tax rate
d. Practice of tax treaty shopping which is
 DTE = Timing differences x Statutory tax rate
intended to enjoy the provision of low tax rate
 Disclosure:
facilities as guaranteed under the agreement
a. Separate income tax expense in the income
 EU suggests that to overcome BEPS, they shall
statement. In the footnotes: component of ITE,
strengthen the regulation and supervision over
DTE (timing differences, net operating loss
MNCs. They have recently asked registered MNCs
credits, effects of changes in tax rate, changes
to have only one bank account that will be subject
in valuation allowance), DTA/L, reconciliation of
under EU tax laws.
statutory federal tax rate with effective tax rate
 UK prefers a unilateral approach by strengthening
b. Net DTA/L in either current or non-current
its national tax law
category in balance sheet
 OECD opted for a multilateral approach to
c. DTE under the operating section of statement
overcome BEPS by involving many countries
of cash flow
 Transfer pricing is a strategy of a company to
 DTA is not recognized if it is resulted from non-
determine the price of a transaction between
business combination transaction and if it affects
special parties.
neither accounting profits/taxable profits.
 It is regulated under Income tax law art. 18 par. 3
However, deductible temporary differences shall
and VAT law art. 2 par. 1
be recognized in the case of investment of
subsidiaries, branches, or joint ventures.  If the transaction is affected by related
relationships, TP shall refer to fair prices which
 DTL should not be recognized in the case of initial
regulated under the principle of fairness and
recognition of goodwill and initial recognition of
business rule between the related parties
assets/liabilities that is not a business combination
transaction or does not affect accounting/tax  TP method for taxpayers is aimed to indicate the
profits. transaction price that conforms with the principle
 of fairness and business practice. While for tax
authorities, it is to assess,
 TP – Traditional Method
a. Comparable uncontrolled price method: TP at
the price indicator level
b. Resale price method: TP at the gross profit
indicator level
c. Cost plus method: TP at the COGS indicator
level
 TP – Transaction Profit Method
a. Profit-split method (profit sharing): TP at the
operating income indicator level
b. Transactional net margin method: TP at the
operating income indicator level
 Tax treaty (Double Tax Avoidance Agreement) is
necessary to avoid the imposition of double
taxation caused by the conflict in the
implementation of two state taxation
 Triggers:
a. Interdependence between countries
b. Improved cooperation
c. Expanding product marketing
d. Needs for capital, technologies, supplies
e. Tax is considered as barrier
f. Investment attractiveness
g. To defend the right of taxation on the income
of its inhabitants
 Purposes of tax treaties:
a. Facilitate international trade and investment
flows, avoid double taxation and reduce tax
bills
b. Minimize tax avoidance and evasion efforts
 Tax treaty models
OECD UN
Transaction Given more to Given more to
rights the country of the source
domicile country on
revenue
sourced on its
territory
Existence Using a “fixed Add a criterion
of BUT place of of “time test”
business”
 Countries that enter into tax agreements:
a. Source country: country where the income,
which is the object of the tax, arises
b. Resident country: country where the tax
subject resides or domiciles
 Initiatives to avoid double taxation:
a. Exemption to completely eliminate it. One
country would release its taxation rights on an
income because it has been taxed by another
country. Subject to be exempted includes
diplomatic representatives. Object to be
exempted would be foreign income of a
resident taxpayer which has been taxed abroad.
b. Tax credit consists of full credit method and
ordinary credit method. The first reduces the
tax paid out of the country solely to the
domestic tax imposed on such income. The
latter provides foreign tax deductions on
domestic taxes.
 Indonesia’s tax treaty model is the combination of
OECD and UN. Article 21 on other income under
the treaty:
a. OECD: other income than those specified in P3B
will be taxed only in the country of domicile
b. UN: source country is still allowed to tax if
income arises in the source country
c. Indonesia: other income, other than lottery and
prizes, will be taxed in the country of domicile
 Indonesian P3B is regulated under UU No. 36 Th.
2008. While the process of establishing P3B is
subject to UU No. 24 Th. 2000 on International
Agreement.
 P3B becomes part of the Indonesian taxation
provisions through ratification process and its
position is treated as lex specialist against
domestic law.
Taxation in the Digital Economy
 Digital economy is a transformative process
brought by advances in ICT which has made
technology cheaper and more powerful, changing
business process and bolstering innovations
 Tax problems in the digital economy:
a. Tax avoidance and BEPS: ICT has allowed
intangibles to be more mobile, companies rely
more on data, network effects, multi-sided
business models
b. Systemic challenges: direct taxation (nexus,
data, and characterization) and indirect
taxation (VAT/GST)
 MNCs can earn income in a controlled foreign
corporation in a tax haven country by transferring
IP to sell digital goods/services without being
subject to tax
 Big Data for tax collection purposes:
a. Help tax authorities and finance department to
efficiently store and process enormous
amounts of taxation data
b. Perform accurate Customer Due Diligence by
creating a single view of compliance  CDD will
be highly automated to watch over tax
avoidance practices and list suspicious accounts
 c. Predicting tax yields/liabilities more accurately  The impacts would be loss of revenue to the tax
d. Vastly decrease tax fraud and evasion by authorities
improving risk scoring and detection  Trigger: agency problem where shareholders want
e. Improve the auditability and accuracy of the management to run the company as ethical as
regulatory reporting  improve the quality, possible to leverage its reputation. The
timeliness, and overall confidence in the management would then translate this demand by
reporting thus lowering the number of audits lowering costs, maximizing profits, and end up in
 Technology allowed e-filing to be more personal maximizing value.
and loyal due to:  The steps for tax planning are:
a. Simplicity: fewer transactions, simpler forms, a. Analyze taxable transactions, type and amount
faster responses of taxes
b. Transparency: administration system would be b. Select the regulation that is potential for tax
transparent saving
c. Data management: taxpayers’ information c. Utilize tax rate differences, difference in tax
would be handled in a more secure manners object treatment, and tax breaks
 Tax planning is legal as it utilizes the available
Tax Planning and Ethics discount/tax breaks provided by the government
 Approaches to asses the ethical aspect of taxation:  Tax avoidance is legally reducing tax obligations
a. Utilitarianism ensures that common according to the rule. But it is aggressive as it uses
goods/services are available. Further, it aims to other means such as tax haven. It is often seen as
promote total happiness. Under this approach, immoral as it undermines the integrity of the tax
tax avoidance would be seen as unethical as tax system
is supposed to help in redistributing earnings Basis TP TA
and establish necessary programs to cater Meaning Financial Purposefully
common goods. planning in a adjusting
b. Deontology (The Rights Approach) is a bit blurry way that one’s financial
as it believes that people has their rights to maximizes the affairs to
choose what they will do with their lives and full benefits prevent
they have the fundamental moral right to of all payment of
choose it. Tax avoidance under this approach permissible tax
deductions
would be seen as unfavorable, but at the same
Nature Legal and Legal and
time deontologists would not condemn it
moral immoral
either.
What? Tax saving Tax dodging
 Deontologists believe that as long as tax avoidance Motive Bonafide Malafide
is not harming others, then it would not be Objective To lessen tax To lessen tax
deemed as unethical. liability liability
 Ethics on tax planning brings pressure for Permissible by Yes No
companies as most companies use tax planning to law
maximize income after tax. This is due to the facts Legal Uses the Uses the
that companies are usually assessed for its implications advantages of shortcomings
performance based on earnings after tax. Yet at tax law of tax law
the same time, they have to act ethically. Benefits Emerge in the Occurs in the
 Tax can also be seen as a social responsibility to long run short run
pay a fair amount for the prosperity of the public.  Tax evasion: illegally underestimate revenue or
Tax avoidance then would be seen as avoiding overestimate expenses to reduce tax bills. It
social responsibility which may damage sometimes uses fictious transactions. It also
companies’ reputation. involves wrong interpretation and fraud.
 Tax planning: strategy to align financial goals from
the efficient tax perspective
 The purpose is to achieve corporate goals in the
most tax-efficient manner