Other BriefingsHow Should Foreign-Owned Companies Prepare for a Corporate Tax Audit in Indonesia?
Foreign-owned companies in Indonesia should prepare for a corporate tax audit by reconciling their tax returns with financial records and reviewing the documentation supporting deductible expenses, transfer pricing, and cross-border payments.
What can trigger a corporate tax audit in Indonesia?
Indonesia’s Directorate General of Taxes (DGT) conducts corporate tax audits in circumstances including tax overpayment claims, reported losses, corporate restructuring activities, and compliance risks identified through tax reporting.
For foreign-owned companies, potential risk indicators include:
- Repeated tax losses: Losses reported over several financial years, including by companies conducting substantial transactions with overseas affiliates.
- Significant changes in profitability: Unexplained fluctuations in revenue, operating expenses, or taxable income.
- Reporting discrepancies: Differences between corporate tax returns, financial statements, withholding tax declarations, and information available to the DGT.
- Related-party transactions: Payments to overseas affiliates involving management fees, royalties, interest, and other goods or services.
What should foreign-owned companies review before a tax audit?
Corporate tax returns and financial records
Companies should reconcile their annual corporate income tax returns with their financial statements and accounting records, focusing on taxable income calculations, deductible expenses, depreciation, and tax losses carried forward from previous financial years.
The review should also identify discrepancies between corporate income tax returns, VAT filings, and withholding tax declarations, particularly where reported revenue or expenses differ across these records.
Review significant deductions against invoices, contracts, and payment records. Identified discrepancies may require corrections to previously submitted tax returns, subject to applicable procedures.
Transfer pricing and intercompany transactions
Indonesian transfer pricing rules generally require related-party transactions to comply with the arm’s-length principle. Qualifying taxpayers must prepare transfer pricing documentation according to applicable thresholds, potentially including a master file, local file, and country-by-country report.
Intercompany service arrangements require evidence that the services were provided, benefited the Indonesian business, and were charged on an appropriate basis.
An Indonesian subsidiary paying management fees to its Singapore parent company, for instance, may be asked to produce its service agreement, invoices, evidence of services performed, and documentation supporting the calculation of the fees. Agreements and invoices alone may be insufficient.
Cross-border payments and withholding tax
Indonesia generally imposes a 20 percent withholding tax under Article 26 on specified Indonesian-source payments to non-residents, including certain royalties, interest, and service fees. An applicable tax treaty may provide a reduced rate or different treatment.
Companies claiming treaty benefits must satisfy the applicable eligibility and documentation requirements, including the relevant Form DGT procedures through the DGT’s Coretax system.
Cross-border service arrangements may also raise permanent establishment questions that affect the allocation of taxing rights under applicable treaties.
What happens during an Indonesian corporate tax audit?
Indonesia distinguishes between three types of tax audits conducted to assess taxpayers’ compliance, each with a different maximum examination period:
- Comprehensive audits: Up to five months to examine the relevant tax obligations and periods within the audit’s scope.
- Focused audits: Up to three months to examine selected tax obligations or issues.
- Specific audits: Generally up to one month to examine narrowly defined matters.
These periods cover the examination stage, from delivery of the audit notification to the formal notification of findings. Qualifying audits involving transfer pricing or complex financial transactions may be extended by up to four months. Certain specific audits are subject to shorter deadlines.
Following the audit notification, the DGT may request accounting records, contracts, tax calculations, and explanations concerning particular transactions.
The DGT communicates its findings through a formal notification known as the Surat Pemberitahuan Hasil Pemeriksaan (SPHP).
Taxpayers generally have five working days to respond to the SPHP and submit supporting explanations concerning disputed findings.
The examination then proceeds to a final discussion, during which companies can challenge proposed adjustments and present additional explanations before the DGT finalizes its findings.
The final discussion and reporting stage generally has a maximum period of 30 working days, separate from the examination period. The audit may subsequently result in a tax assessment.
What should companies do if auditors propose tax adjustments?
If disagreements remain following the examination and the DGT issues a tax assessment, the company may submit a formal objection. The general deadline is three months from the date the assessment is sent, subject to applicable exceptions.
Before submitting an objection against an assessment, the taxpayer must generally pay at least the amount of tax payable agreed upon during the final audit discussion.
An unfavorable objection decision may subsequently be challenged through the Tax Court under the applicable appeal procedures.
Contact Dezan Shira & Associates for corporate tax audit support in Indonesia
Contact Dezan Shira & Associates for assistance preparing for a corporate tax audit or responding to an ongoing examination.
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