Fiscal Strategy for Achieving Budget Revenue Targets

In order to achieve economic growth of 6-7 percent per year, create more jobs and improve the quality of public services, the Indonesian government’s 2010 revenue has been targeted at US$103.4 billion based on the 2010 budget, as set out in Law No. 2 of 2010 on the amendment of Law No. 47 of 2009. In 2011, revenue is targeted to increase to US$125 billion.

The principal sources of revenue under the 2010 budget are as follows: 75.3 percent from tax receipts and 24.9 percent from non-tax receipts. The level of tax receipts will be influenced by government policies related to import and export duties, tax subjects and objects, and collection policies. The policy measures that will affect the taxation sector during 2010 and 2011 are as follows:

a.  Extensification of personal income tax collection
In line with the improvement in the Indonesian economy, the tax authority will increase the number of potential individual taxpayers by:

• improving the tax information system from third parties. Tax information will be obtained from third parties such as employers, financial institutions, websites, property ownership databases and the tax authorities in other countries.
• mapping of high-rise buildings will be conducted in order to identify the building owners, developers, lessees and so forth.

b. Intensification of tax collection
 
Based on the self-assessment system, the taxation authority wants to ensure that every taxpayer submits accurate tax returns and pays all of their tax obligations. Intensification of tax collection will be brought about by:

Profiling of Taxpayers

The taxpayer’s profile includes information on the capital structure, stakeholders (including suppliers and customers), production capacity, inputs and outputs, transactions with business counterparts, financial information based on the business’s financial statements.

This profile will reflect the taxation potential of the taxpayer’s business, which will then be compared with the actual tax payments. Should a “tax gap” be found, the taxpayer will be provided with counseling so as to explain what it is doing wrong.

Intensive Monitoring of Potential Individual Taxpayers

Monitoring is carried out by centralizing the administration of major taxpayers throughout Indonesia in one tax office (tax district office) called the High Net Worth Taxpayers Office.

Benchmarking

Benchmarking is a supporting tool to evaluate the level of reasonableness in the financial performance of taxpayers, which is conducted by comparing the business capacities, and the inputs and outputs with the financial statements of the companies in a particular group based on 14 ratios, namely:
a. Gross Profit Margin
b. Operating Profit Margin
c.  Pre-tax Profit Margin
d. Corporate Tax to Turnover Ratio
e. Net Profit Margin
f.  Dividend Payout Ratio
g. Ratio of input VAT to total sales
h. Ratio of salary to total sales
i.  Ratio of interest to total sales
j.  Ratio of rental cost to total sales
k. Ratio of depreciation to total sales
l.  Ratio of other input to total sales
m.Ratio of other income to total sales
n. Ratio of non-operating cost to total sales

To date, the tax authority has prepared benchmarking ratios for 30 types of business groups, including: (a) group operating in industries; (b) group providing services, trading; and (c) group operating in financial services. Similar ratios are in the process of being developed for other industries.

Tax Audits

The purpose of tax audits in Indonesia is primarily to increase tax revenue rather than to provide a deterrent effect. New taxpayers brought into the tax net through extensification, potential taxpayers and other taxpayers, which based on the benchmarking ratios have not fulfilled their tax obligations will be advised to correct their annual income tax returns.  Failure to comply with this advice will result in a tax audit being performed, together with the subsequent possibility of a tax investigation.
 
Transfer Pricing Audits

In line with the global strategies of multinational corporations, it is very likely that transfer pricing is being done by taxpayers who are foreign investment companies, branches of overseas companies which generally would have affiliates in other countries (categorized as large taxpayers).

As in other countries, the Indonesian tax authority has been paying a lot of attention to such transfer pricing practices. In order to prevent transfer pricing, the Indonesian tax authority has issued regulations requiring taxpayers to provide additional information on their income tax returns clarifying transactions with affiliates (must be based on reasonable market value, or “arm’s length price”); the method by which reasonable market value is calculated; certification that the counterpart is not domiciled in a tax haven; and other relevant information.

In order for the monitoring to be effective, a special Transfer Pricing unit has been established whose duties are to carry out inspections and audits in respect of multinational corporation taxpayers which fail to supply the required additional information. Corporations who fail to comply or those suspected of engaging in transfer pricing may be made the subject of a tax inspection that could last up to two years.

Conclusions
 
As tax receipts constitute an essential source of state revenues, policy measures have been adopted to improve the tax collection system and ensure greater monitoring of taxpayers, which will be followed up with in counseling, audit or tax investigation.

The transfer pricing practice of multinational corporations has the potential to undermine state revenues. In order to prevent this, a special Transfer Pricing Unit has been established, and taxpayers are required to provide additional information to prove that transactions with affiliates are conducted using arm’s length price. These policies will be continued by the Indonesian tax authority in subsequent years.

Taxand’s Take

Multinational corporations must fully understand the fiscal policies being applied in Indonesia as tax receipts make up the greater part of the national revenue. As a consequence of these policies, taxpayers who are multinational corporations, and potential individual taxpayers will continue to be focused on by the tax authority.
 
One of the tax collection strategies that need to be considered in this regard is the use of benchmarking ratios for business groups operating in a number of sectors which is used by the taxation authority to compare the reasonableness of the company’s financial performance. In order to avoid an inspection or investigation by the tax authority, multinational corporations in their tax planning need to first adjust and compare their financial performance with the benchmarking ratios based on their particular business group.

With the operation of the Transfer Pricing unit, multinational corporations need to prepare various documents to prove that transactions have been conducted on an arm’s length price. The documents in question must be attached to the corporation’s annual income tax return. It is also preferable for the public accountant’s audit report to disclose cross border transactions in line with the Financial Accounting Standards.

 
Jakarta, June 2010

Knowledge Manager PbTaxand