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New rule on tax audits in Indonesia

Freddy KaryadiOene Marseille
The Government has recently issued several new Ministry of Finance (MoF) regulations (PMK) relating to general tax provisions, in order to improve the implementation of Government Regulation 74/2011 (PP-74), which is the main implementing regulation of the General Tax Provisions and Procedures Law (KUP Law).

The MoF seems to want to streamline the prevailing regulations by putting as much content as possible in the PMKs to minimise the issuance of lower-ranked tax regulations. The tax audit is one of the new MoF regulations which will be discussed below.

Highlights of Regulation PMK-17

MoF Regulation 17/PMK.03/2013 (PMK-17) regarding general tax audit procedures has been effective since February 1 2013. This Regulation revokes Regulations PMK-191, 198, 199 and 82.

a) PMK-17 is applicable to all ongoing tax audits, including those based on instruction letters (SP2) issued before the issuance of PMK-17.

b) This regulation provides the following additional criteria for tax audit targets:

  • taxpayers who have received the advance tax overpayment refund;
  • taxpayers who have changed their fiscal year or bookkeeping method or performed fixed assets revaluation;
  • taxpayers who have not submitted their income tax return or submitted it after the deadline stated in a warning letter, and have been selected to be audited based on a risk analysis.

c) Regarding the audit timeline, PMK-17 now splits it into the examination phase (from the issuance of SP2 up to the issuance of a preliminary tax audit findings notification, an SPHP) and the discussion phase (from the issuance of an SPHP up to the finalisation of the tax audit result report, the LHP). The main objective of this change is to give more time to the discussion phase.

d) Previously, although the General Tax Provision Law (KUP Law) stipulates that an Additional Tax Assessment (SKPKBT) can be issued after a re-audit is conducted only if there is new data, PMK-199 stated that a re-audit can also be conducted based on a director general of tax (DGT) consideration, (that is, there is a discretionary element). Now, PMK-17 reinstates that a re-audit can be conducted only based on the instruction or approval of the DGT, and such instruction or approval may be given if there is new data, including data not previously disclosed.

e) In tax audits, tax auditors must determine whether they have sufficient competent data to calculate taxable income, and if the data is insufficient a DGT ex-officio assessment maybe issued. In the past, such a DGT ex-officio assessment may only be issued to individual taxpayers, whereas for corporate taxpayers, the tax auditors must propose to continue the process with a tax audit on preliminary evidence of a tax crime.

Highlights of Regulation PMK-18

MoF Regulation 18/PMK.03/2013 (PMK-18) regarding procedures of tax audits on preliminary evidence of a tax crime has been effective since 1 February. This regulation revokes Regulation PMK-202.

In the past, the conducting of a tax audit on preliminary evidence must be informed in writing to the taxpayer prior to the commencement of the audit (open audit). PMK-18 now allows the DGT to conduct a closed audit whereby the taxpayer is not informed of it.

A tax audit on preliminary evidence must be conducted openly if the preliminary evidence is related to:

  • a refund request to article 17 B of the KUP law
  • a continuation of a tax audit to examine the taxpayer's compliance which raises an indication of a tax crime

A tax audit on preliminary evidence must be finished within six months (and can be extended) from the date of notification to the taxpayer (for open audits) or from the issuance of a tax audit instruction letter to the tax auditor (for closed audits). In PMK-202, the timeline was within four months from the notification to the taxpayer.

In conducting a closed audit, the tax auditor is entitled to:

  • perform tax audit techniques as needed to obtain related documents, including observation, surveillance, undercover, or other intelligence activities;
  • request an explanation to other related parties and to be made in minutes of request of statement;
  • discreetly request an explanation and/or evidence from relevant third parties (either verbally or in writing);
  • perform any other necessary actions to conduct a closed audit.

PMK-18 also provides guidelines in the case a taxpayer that is subject to a closed tax audit on preliminary evidence is concurrently facing a general tax audit, a verification or has submitted a revised annual income tax return.

Oene Marseille and Freddy Karyadi

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