By: Muda Markus Dolopoto, the Registered Tax Attorney
(The following explanation is based on Law Number 7 of 1983 Concerning Income Tax as Last Amended With Law Number 11 of 2020 concerning Job Creation (Omnibus Law) and its implementing regulations (hereinafter abbreviated as Income Tax Law)
A. Treatment of Income Tax on Debt / Reserves
Debt arises from borrowing money or buying assets on credit.
Dr. Asset (cash and cash equivalents, inventory, fixed assets, etc.)
If the debt is released, then the journal is
According to the provisions of Article 4 paragraph (1) letter k of the Income Tax Law, the benefits arising from debt relief are taxable income, because he gets assets without any payment. This is no different between commercial and tax accounting.
For certain taxpayers, profits due to debt relief are exempted as a taxable income (fiscal correction). The exemption rules are in Government Regulation Number 130 of The Year 2020 Concerning Exemptions as Tax Objects for Gain Due to Exemption of Small Debt, but the exception is only up to IDR 350,000,000, – If the amount of debt relief exceeds that amount, then the excess is an gain. / taxable income.
If the debt is canceled, then the journal is
Returned assets have no effect on profit loss, unless the return on assets is less or more than the amount of assets that should have been returned, it will affect profit loss in the form of taxable profits if the assets returned are less than what they should be, or in the form of deductible costs / losses if the assets returned are more than it should be.
It must be distinguished between the terms debt relief and debt cancellation. The tax treatment is different.
2. Reserve Fund
In accounting, if a company wishes to expand its business and / or to ensure the continuity of the company (anticipating the possibility of future losses), or if certain expenses are expected in the future, a reserve fund can be formed. Funds to establish these reserves usually come from income (indirect method)
The journals are as follows:
Cr Reserve Fund
According to the Income Tax Law, the expense arising from the formation of reserves are non-deductible expense, because this is an internal transaction (conversion of assets / liabilities within the company) and the Income Tax Law adheres to the real principle / system (real situation), namely both income and expenses. recognized in a tax year must be based on what actually happened in that year, must be based on the arising of the juridical rights and obligations of each party conducting the transaction or engagement (realized externally in that year). Therefore, all kinds of assumptions, expectations, and uncertainty estimates that are recorded based on internal transactions are not taken into account in a tax year.
In line with this, if the reserves fund are not used up, then the accounting should be journalized in the following year:
Dr Reserve Fund
In terms of income tax, it is non-taxable income (fiscal corrected), because the expense are non-deductible.
It can happen that in the year the reserves fund are formed, the expense arising from the formation of these reserves fund are not fiscal corrected by the taxpayer, but in the year the reserves fund are not used up, the resulting income is fiscal corrected. If the tax auditor is observant, then he will cancel the fiscal correction on that income.
Article 9 paragraph (1) letter c of the Income Tax Law provides exemptions for taxpayers in the form of banks and non-bank financial institutions as well as certain other taxpayers to form reserve fund. In this case the costs incurred are deductible and the income arising from the reserves fund not being used up constitutes taxable income.
The Income Tax Law adheres to the principle of deductibility – taxability, non deductibility – non taxability).
The Income Tax Law acknowledges that the Taxpayer accrues several accounts (accrued expenses) based on the taxpayer’s accounting basis, because the accrued expense have already been incurred but have not been paid. With a note, some of the accrued expenses are deductible, some are non deductible. For example, accrued salary tax expenses which are calculated using the grossed up method or land and building tax expenses and other indirect taxes, are deductibles, but accrued salary tax expenses which are calculated not by grossed up method, are non deductible.
3. Dividend Reserves (Dividend Payable)
In general, companies take dividends from retained earnings (after being taxed), but it is not uncommon for companies to take dividends from income (before tax).
1 If dividends are taken from income,
The journal entry is
Dr Dividend Expense
Cr Dividend Payable / Reserve)
Article 9 Paragraph (1) letter a of the Income Tax Law clearly states that the dividend expense (dividen in whatever name and form) is non-deductible. This means that the dividend is subject to Annual Income Tax and is also subject to Income Tax on dividends (double taxation) if the dividend is paid.
If dividends Payable / Reserve) are not paid (canceld), the accounting journal:
Dr Dividend Payable / Reserve)
Income arising from canceled dividends is non-taxable, because it is already subject to Annual Income Tax at the time the dividends are incurred.
The Income Tax Law adheres to the principles of deductibility – taxability, non deductibility – non taxability.
2 If dividends are taken from retained earnings,
Then the journal is
Dr Retained Earnings
Cr Dividend Payable / Reserve)
This journal has no effect on profit loss.
If dividends payable / eserve) received from Retained Earnings are canceled, then accounting should be journalized
Dr Dividend Payable / Reserve)
Cr Retained Earnings
I wonder why the Indonesian Limited Liability Company Law requires companies to record as income, as if dividends were taken only from income.
Even if the company journals Credit: Income, then in terms of income tax it is non-taxable, because it is taken from Retained Earnings that have been taxed, or in the case of dividends taken from income: due to expenses incurred when declaration / payment of dividends according to Article 9 paragraph (1) letter a Income Tax Law, are non deductible. The author’s opinion is often different from that of Fiskus, who could be the object of a dispute in the Tax Court.
The canceled dividend payable is recorded according to the accounting principle as income, then the income is fiscal corrected, because the canceled dividends are taken from Retained Earnings. Even if it is taken from income, then the income arising from the cancellation of dividend payments is non-taxable (fiscal corrected), because Article 9 paragraph (1) letter a of the Income Tax Law, confirms that the expenses arising from the distribution of retained earnings (dividends), are non deductible.
(principle deductibility – taxability, non deductibilituy – non taxability)
B. Tax Treatment of Interest-Free Loans
If two taxpayers enter into a loan and borrowing agreement without interest, the income tax treatment is as follows:
First of all, it must be seen whether the two parties have a associated entreprise (special relationship) or not.
The definition of a associated enterprice (special relationship) must refer to Article 18 paragraph (4) of the Income Tax Law which reads ”
“(4) The special relationship as referred to in paragraph (3) to paragraph (3d), Article 9 paragraph (1) letter f, and Article 10 paragraph (1) is deemed to exist if:
- Taxpayers have direct or indirect equity participation of at least 25% (twenty five percent) in other Taxpayers; relationship between the Taxpayer and the participation of at least 25% (twenty five percent) in two or more Taxpayers; or the relationship between two or more of the latter taxpayers;
- Taxpayers control other Taxpayers or two or more Taxpayers are under the same control, either directly or indirectly; or
- there is a family relationship, both blood and blood, in a straight line and / or to the side of one degree. “
A special relationship between taxpayers can occur due to dependence or attachment to one another due to:
- ownership or equity participation; or
- there is control through management or use of technology.
Apart from these things, special relationships between individual taxpayers can also occur because of blood or marriage relations.
A special relationship is deemed to exist if there is an ownership relationship in the form of equity participation of 25% (twenty five percent) or more directly or indirectly.
For example, PT A owns 50% (fifty percent) of the shares of PT B. The ownership of shares by PT A is a direct investment.
Furthermore, if PT B owns 50% (fifty percent) of the shares of PT C, PT A as the shareholder of PT B indirectly has 25% (twenty five percent) of the shares in PT C. In this case, PT A, PT B, and PT C are considered to have a special relationship. If PT A also owns 25% (twenty five percent) of the shares of PT D, between PT B, PT C, and PT D is considered to have a special relationship.
Ownership relations as above can also occur between individuals and entity.
A special relationship between taxpayers can also occur because of control through management or use of technology even though there is no ownership relationship.
A special relationship is considered to exist when one or more companies are under the same control. Likewise, the relationship between several companies that are under the same control.
What is meant by “blood family relationship in a straight line of one degree” is father, mother, and child, while “blood family relationship in one degree side of bloodline” is siblings.
What is meant by “seminal family in a straight line of one degree” is parents-in-law and stepchildren, while “seminal family relationship in one degree side line” is brother-in-law. “
If a company in the form of a limited liability company and shareholders have a special relationship, the Director General of Taxes has the authority to correct an interest-free loan to become a deemed interest based on the provisions of Article 18 paragraph (3) of the Income Tax Law which reads as follows
“The Director General of Taxes has the authority to re-determine the amount of income and deduction as well as determine debt as capital to calculate the amount of Taxable Income for Taxpayers who have a special relationship with other Taxpayers in accordance with the reasonableness and customary business that is not affected by a special relationship by using the comparison method. price between independent parties, the resale price method, the cost-plus method, or any other method. “
“The purpose of this provision is to prevent tax evasion that could occur because of a special relationship. If there is a special relationship, there is a possibility that the income is reported less than it should be or the cost is more than what it should be. In such a case, the Director General of Taxes has the authority to re-determine the amount of income and / or expenses according to the circumstances if there is no special relationship among the Taxpayers. In determining the amount of income and / or expenses, the comparable uncontrolled price method, the resale price method, the cost-plus method, or other methods such as: method of profit sharing (profit split method) and method of transactional net income (transactional net margin method).
Likewise, there is a possibility of covert capital participation, by stating that the capital participation is a debt, the Director General of Taxes has the authority to determine the debt as company capital. This determination can be made, for example, by means of an indication of the ratio between capital and debt that is common among parties who are not affected by a special relationship or based on data or other indications.
Therefore, the interest paid in connection with the debt which is considered as equity participation is not allowed to be deducted, while for shareholders who receive or earn the interest it is considered as dividends which are subject to tax.”
The derivative of Article 18 Paragraph (3) of the Income Tax Law is the provision in Article 12 of Government Regulation No. 94 of 2010 concerning the Calculation of Taxable Income and Payment of Income Tax in the Current Year as amended by Government Regulation Number 45 of 2019 which reads:
Paragraph (1) Loans without interest from shareholders received by the Taxpayer in the form of a limited liability company are permitted if:
- the loan comes from funds owned by the shareholders themselves and not from other parties;
- the capital that should have been paid up by the shareholder of the lender has been fully paid up;
- the shareholder of the lender is not in a loss; and
- the limited liability company that receives the loan is experiencing financial difficulties to sustain its business
Paragraph (2) If the loan received by the Taxpayer in the form of a limited liability company from its shareholders does not meet the provisions as referred to in paragraph (1), interest is payable on the loan at a fair interest rate. “
Paragraph (1) Self explanatory
Referred to as “fair interest rate” is the prevailing interest rate determined in accordance with the principles of fairness and common practice (best practice) if the transaction is carried out between parties who have no special relationship as referred to in Article 18 paragraph (4) of the Law. Income tax.”
That is the provision which gives authority to the Director General of Taxes in the case of interest-free loans received by taxpayers in the form of a limited liability company from their shareholders.
There is not any article in the tax law that gives authority to the President, the Minister of Finance, or the Director General of Taxes in the case of interest-free loans received by taxpayers in the form of a limited liability company from parties other than their shareholders that must be deemed interest.
Taxpayers must firmly refuse if Fiskus expands the interpretation of the above provisions to apply to all interest-free loans from any party. If Fiskus expands the interpretation, it means that Fiskus interprets the two provisions above in a contrario manner which according to the tax principle (tax law) cannot be used in interpreting the provisions of the tax laws and regulations
The reasons are as follows:
- In laws other than tax law, a contrario and analogical interpretation are often applied. However, in tax law, interpreting as a contrario and interpreting analogically are prohibited, because the two interpretations will expand the meaning, giving rise to abuse by Fiskus, who was not the tax object to be the tax object or vice versa. (Article 23 paragraph (2) of the 1945 Constitution reads: “All taxes for the state’s needs are based on law.” The meaning is, the imposition of taxes must be based on the limitations that have been determined in the tax law, may not expand the meaning). If Fiskus still stipulates that the loan must be subject to deemed interest, then it is an act of robbery which can be punished with robbery.
- Determine whether a loan with interest-or without interest-is the policy of each company, based on individual business calculations. The tax principle teaches that even though Fiskus has the authority to test the material correctness of a transaction or calculation, this does not mean that Fiskus is allowed to assess or interfere at the company’s discretion. Fiskus may not, for example, assess the efficiency of the company, if the way a company works is less efficient, so that it will get less profit. Fiskus had to make do with the less than that big profit. Or, Fiskus may not interfere with the company’s policy of borrowing without interest, so all loans must be with interest, so that they can be taxed.
In the business world, borrowing money without interest is common. For example: a loan at a pawnshop with a term of less than 3 months has no interest; cash funds from credit cards within 3 months are usually interest-free; interest-free Islamic loans (syariah loan) are also common; Kredit Usaha Rakyat from the government for small business is also withouth interest. Interest-free loans are usually based on business calculations or belief considerations such as Islamic loans (syariah loan).
For all the interest-free loans, the Director General of Taxes does not impose deemed interest, because he does not have the authority.
It is recommended that both creditors and debtors should not record in their respective books, the loan seems to have interest. If both parties acknowledge that there is interest, then the consequence is that they must be subject to Income Tax in accordance with the provisions of the applicable laws.
During the tax audit, both parties must adhere to the principle that Fiskus who makes fiscal corrections must be based on evidence and Fiskus must provide a written explanation of the legal basis.
In responding to the Tax Audit Notification Letter (SPHP), both parties must assess the legal basis used by Fiskus, because if the case reaches the Tax Court, the Tax Court Judge in giving a definite decision is based on the provisions of Article 78 of Law No.12 of 2002 concerning the Tax Court which reads:
“The decision of the Tax Court is taken based on the results of the evidentiary assessment, and based on the relevant tax laws and regulations, as well as based on the judge’s conviction”
Elucidation of Article 78
“The judge’s conviction is based on an evidentiary assessment and is in accordance with tax laws and regulations.”
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