Tax Audit in Indonesia

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Tax Audit in Indonesia | Tax Consultant in Indonesia

Article 29, Law number 6/1983 concerning General Provisions and Tax Procedures (“Ketentuan Umum dan Tata Cara Perpajakan/KUP”) as lastly amended by Law number 16/2009, gives the Director General of Taxes (DGT) an authority to perform tax audits. This is the spirit of tax audit regulations in Indonesia on which all regulations concerning tax audit procedures lie. According to Article 29, there are two main purposes of tax audit in Indonesia performed by DGT i.e.:

1. To test taxpayers’ compliance
2. For other purposes with regard to enforcement of the tax laws.

However to establish legal certainty for taxpayers, Article 13 KUP stipulates that tax audits should be performed within the statutory limitation of 5 years after the date of a tax is payable or after the end of a tax period, a fraction of a fiscal year, or a fiscal year.

To assure that tax audits comply with Article 29, the Minister of Finance issued several Regulation number 17/PMK.03/2013 (PMK-17) dated 7 January 2013 and effective since 1 February 2013. Since effective, PMK-17 revokes several Regulations concerning tax audit procedures, i.e. Regulation number 191/PMK.03/2007 (PMK-191), number 198/PMK.03/2007 (PMK-198), number 199/PMK.03/2007 (PMK-199), and number 82/PMK.03/2011 (PMK-82). Essentially PMK-17 governs audit process started from the planning to the completion.

PMK-17 is valid to all ongoing tax audits, including audits based on instruction letter (SP-2) issued before the issuance of PMK-17. In addition to PMK-17 covers areas which PMK-82 and PMK-199 previously regulate, it also combines several procedures previously governed under separate regulations i.e. PMK-191 concerning issuance of tax assessment letter to taxpayers concurrently facing tax audit on preliminary evidence of tax crime, and PMK-198 concerning seal procedures in tax audit in Indonesia.

Highlights of PMK-17

1. Tax audit target between PMK-17 and previous regulation are as follows:

New Regulation

I. Tax audit for examining taxpayers’ compliance

A. Mandatory

Taxpayers submit refund under article 17B general provisions and tax procedures law.

B. Routine

(1) Taxpayers which submit income tax return declaring tax overpayment except those claiming for refund under article 17B general provisions and tax procedures law.
(2) Taxpayers which have received advance tax refunds prior to audit
(3) Taxpayers which have submitted income tax return showing tax loss
(4) Taxpayers which have performed mergers, consolidations, spin-offs, expansions, liquidations, and/or leave Indonesia permanently.
(5) Taxpayers which have changed fiscal year or bookkeeping method, or performed fixed assets revaluation.
(6) Taxpayers which have not submitted income tax return or submitted it after the due date as stated in the warning letter, or which have been selected for a tax audit based on a risk analysis.
(7) Taxpayers which have submitted income tax return and have been selected for a tax audit based on a risk analysis.

Old Regulation

I. Tax audit for examining taxpayers’ compliance

A. Mandatory

Taxpayers submit refund under article 17B general provisions and tax procedures law.

B. Routine

(1) Taxpayers which have submitted income tax return and have received advance tax refunds prior to audit.
(2) Taxpayers which submit income tax return showing tax loss.
(3) Taxpayers which have not submitted income tax return or submitted it after the due date as stated in the warning letter.
(4) Taxpayers which have performed mergers, consolidations, spin-offs, expansions, liquidations, and/or leave Indonesia permanently.
(5) Taxpayers which have submitted income tax return and have been selected for a tax audit based on a risk analysis.

2. Change in tax audit timeline

Under PMK-82 audit timeline is counted from the issuance of SP2 up to the finalization of tax audit result report (LHP), while under PMK-17, audit timeline is now divided into the examination period (from the issuance of SP2 up to the issuance of preliminary tax audit finding notification (SPHP)) and the discussion period (from the issuance of SPHP up to finalization of LHP). The spirit behind this change is to give more time to the discussion period.

Change in tax audit timeline are as follows :

New Regulation

Field Audit

Examination period is up to six months and may be extended for two more months.
Discussion period is up to two months

Office Audit

Examination period is up to four months and may be extended for two more months.
Discussion period is up to two months

Extension for special cases

For oil and gas production sharing contractors, taxpayers within a group of companies, taxpayers identified with transfer pricing issues or financial engineering, the examination period of six months in field audit may be extended for not more than three times for six months each as necessary.

Old Regulation

Field Audit

Starting from the issuance of SP2 up to the finalization of LHP should be done in four months and may be extended for another four months

Office Audit

Starting from the date when taxpayers present at tax office to fulfill invitation letter up to the finalization of LHP should be done in three months and may be extended for another three months

Extension for special cases

For taxpayers with transfer pricing issues, tax audit process of four months may be extended for five times.

3. Obligations of the tax auditor

There are several changes in obligations of tax auditor under PMK-17 as compared to PMK-82. PMK-17 no longer separate tax auditor obligations based on type of audit performed as regulated formerly by PMK-82. PMK-17 also adds tax auditor’ obligations in a preliminary meeting with taxpayer to explain taxpayer’ obligations to submit documents, books, records, or documents used as basis for bookkeeping or recordkeeping and other documents required by tax auditor. Unlike PMK-82, PMK-17 does not stipulate anymore time period of seven days at the latest for tax auditor to return all documents borrowed from taxpayers. The points of changes in obligations of tax auditor include :

New Regulation

1. Conduct a meeting with taxpayer to present explanation concerning :

1) The reason for and purpose of tax audit
2) The rights and obligations of taxpayer during and after the performance of audit
3) Taxpayer’s right to propose a discussion with the Quality Assurance Team if there is any dispute between the taxpayer and the tax auditor during closing conference.
4) Obligations of taxpayer to submit documents, books, records, or documents used as basis for bookkeeping or recordkeeping and other documents required by tax auditor.

2. Return documents, books, records, or documents used as basis for bookkeeping or recordkeeping and other documents borrowed from taxpayers.

3. Educate taxpayer to fulfill tax obligations in accordance with the prevailing regulations through the form of written advice

Old Regulation

1. Conduct a meeting with taxpayer to present explanation concerning :

1) The reason for and purpose of tax audit
2) The rights and obligations of taxpayer during and after the performance of audit
3) Taxpayer’s right to propose a discussion with the Quality Assurance Team if there is any dispute between the taxpayer and the tax auditor during closing conference.

2. Return documents, books, records, or documents used as basis for bookkeeping or recordkeeping and other documents borrowed from taxpayers at the latest seven days since the date of tax audit result report.
3. Guide taxpayers to fulfill tax obligations so that they will satisfy the prevailing regulations in the following fiscal years.

4. Rights and obligations of taxpayers

A. Rigths of taxpayers

Unlike Article 13 PMK-82, Article 13 PMK-17 does not segregate rights of taxpayers in tax audit based on type of audit performed. In addition, Article 13 PMK-17 also revokes the rights of taxpayers to request tax auditors showing their assignment letter where there have been changes in audit team members. Except the above change, the remaining rights of taxpayers in PMK-17 are still the same with PMK-82 such as:

1) Request tax auditors to show their official identity and instruction letter of tax audit,
2) Request tax auditor to give notification letter of tax field audit in the case field audit
3) Request tax auditor to present a letter concerning changes in composition of audit team members
4) Request tax auditor to give explanation with regard to the reason for and the purpose of tax audit
5) Receive preliminary tax audit findings notification (SPHP)
6) Attend the closing conference on date as defined in the invitation letter
7) Propose a discussion with the Quality Assurance Team if there is any dispute between tax auditor and taxpayer during the closing conference
8) Provide opinion and assessment with regard to the performance of tax audit by tax auditors through fulfillment of audit questionnaire.

B. Obligations of taxpayers

There is no major change in obligations of taxpayers under PMK-17 except the wording to give tax auditor opportunity to unseal moveable goods and immovable goods under PMK-82 is replaced with to provide tax auditor with assistance to unseal moveable goods and immovable goods.

5. Re-audit conditions

Changes in re-audit conditions are as follows :

New Regulation

Article 68 PMK-17 stated that a re-audit can be initiated only if there is new data including data that has not been disclosed previously during the former audit.

Article 68 PMK-17 stated that :

1. if a re-audit results in addition of tax underpayment to tax underpayment previously mentioned in the former tax assessment, DGT issues additional tax underpayment assessment,
2. if a re-audit results in no addition of tax underpayment, that re-audit must be stopped with preparation of LHP sumir,
3. if a re-audit results in no addition of tax underpayment but there is change in loss carried forward balance, DGT issues a decree with regard to change in loss carried forward balance.

Old Regulation

Article 29 PMK-199 stated that a re-audit can be initiated based on instruction or approval of Director General of Taxes.

That instruction or approval can be given subject to the satisfactory of the following conditions :

1) there is new data including data that has not been disclosed previously during the former audit, or
2) based on DGT’s discretion or consideration

Article 29 stated that additional tax underpayment assessment must be based on a re-audit if the same tax obligation has been covered in the issuance of the former tax underpayment assessment.

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