Questioning the Obligations of Corporate Income Tax in the Name of Joint Operations

My article with the title Uncertainty over the Tax Treatment of Joint Operations (JO) in the Construction Business Sector which was published in the ORTax media thirteen years ago, on 27 July 2007 to be exact, concluded that JO’s tax treatment was carried out through several affirmation letters issued by the Director-General (Dirjen) Taxes are not consistent with each other. Uncertainty occurs in determining whether or not a form of Joint Operation must have a Taxpayer Identification Number (NPWP) and become a Taxable Entrepreneur (PKP), whether it is based on the nature or actual condition of the transaction ( substance ) or the content ( form ).) from the contract agreement between the JO and the employer (the project owner) or vice versa.

Five years later, since the writing of the article, Government Regulation Number 1 of 2012 was issued as an implementing regulation of the VAT Law to provide more certainty in which case the JO is required as a PKP or not, the main thing is to look at the nature or substance of the party who commits the crime. delivery of Taxable Goods/Taxable Services to the Employer or Project Owner, whether on behalf of the JO or behalf of each member of the JO, not on the content or formal form of the contract/work agreement. In other words, about the Inauguration of PKP, PP 1 of 2012 applies the material principle ( substance over form).

The definition of Joint Operation so far still refers to the confirmation letter from the Director-General of Taxes No. S-323/PJ.42/1989 where the form of JO is a form of joint operation, namely an association of two or more entities that join to complete a project and the merger is temporary until the project is completed. This letter also confirms that the form of merger or joint operation is not subject to the imposition of Corporate Income Tax, but the imposition of Corporate Income Tax is still imposed on the income earned by each of the merged entities by the portion/part of the work or income they receive. Therefore, the issuance of a TIN for a joint operation solely to collect VAT and withhold Income Tax, including Income Tax Article 21, Article 23/26, and Article 4 paragraph (2).

That JO is not the subject of the imposition of Corporate Income Tax is indicated by the issuance of the Circular Letter of the Director-General of Taxes Number SE-44/PJ./1994 which regulates the mechanism for splitting proof of income tax withholding article 23. Furthermore, based on S-251/PJ.313/1999 it was confirmed that SE-44 /PJ./1994 can also be applied to the breakdown of proof of final income tax withholding for JO members.

In addition, SE-30/PJ/2013 which revokes SE-80/PJ./2009 states that if a Joint Operation (KSO)/Joint Operation (JO) transfers land and/or building rights, the Final Income Tax on the transfer of land and/or building rights is paid by each KSO member by the share of income received by each KSO member. This SE proves that the stipulation applied is that the JO does not have any corporate income tax obligations.

Furthermore, the Regulation of the Minister of Finance Number PMK 261/PMK.03/2016 provides an example that if there is a cooperation agreement between the developer company and the landowner, the deposit of Final Income Tax is the obligation of each, not the obligation of the JO.

The imposition of PPh on JO members, not on the JO itself, is also applied in other countries such as the Philippines for JOs who carry out construction service work. In this case, the JO is treated like a partnership in the United States, namely as a “ pass-through entity ”.

PER-04/PJ/2020 related to JO

There is a new provision issued on March 13, 2020, namely Director General of Taxes Regulation Number PER-04/PJ/2020 concerning Technical Instructions for the Implementation of Administration of Taxpayer Identification Numbers, Electronic Certificates, and Inauguration of Taxable Entrepreneurs, which revokes PER-20/PJ/2013 as lastly amended by PER-02/PJ/2018, as well as revoking several other related Perdirjen.

Although the purpose of the issuance of PER-04/PJ/2020 as stated in the preamble is to provide legal certainty and improve services to Taxpayers regarding technical instructions for implementing the TIN administration, electronic certificates, and inauguration of PKP, it turns out that this Regulation of the Director-General of Taxes also regulates ( regeling ) Corporate income tax obligations on behalf of JO.

In summary, related to the JO’s corporate income tax obligations, PER-04/PJ/2020 regulates the following:

1. JO is included in the definition of Agency

PER-04/PJ/2020 expands the definition of Entity contained in Article 1 point 3 of the KUP Law, Elucidation of Article 2 Paragraph (1) letter b of the Income Tax Law and Article 1 number 13 of the VAT Law where the Regulation of the Director-General of Taxes explicitly adds Cooperation Operations (joint operations ) are included in the meaning of the Agency. The definition of Agency according to PER-04/PJ/2020 in full is as follows:

The entity is a group of people and/or capital which is a unit whether doing business or not doing business which includes a limited liability company, limited liability company, other company, state-owned company or regionally-owned business entity in whatever name and forms, firm, joint venture. , cooperatives, pension funds, partnerships, associations, foundations, mass organizations, socio-political organizations, or other organizations, institutions, and other forms of bodies, including collective investment contracts, permanent establishments, joint operations, and company representative offices foreign and joint investment contracts.

The definition is also different from the definition of Agency according to the Regulation of the Minister of Finance Number 147/PMK.03/2017 concerning Procedures for Registration of Taxpayers and Elimination of Taxpayer Identification Numbers as well as the Inauguration and Revocation of Inauguration of Taxable Entrepreneurs which is one of the legal bases for the issuance of PER-04/ PJ/2020, wherein the PMK, joint operations are not mentioned as being included in other forms of bodies. JO is included as another form of an entity from the definition of Agency only related to the obligation to confirm as a Taxable Entrepreneur following Article 3 of Government Regulation Number 1 of 2012 as an implementing regulation of the VAT Law, not in the context of Corporate Income Tax.

The question arises from the perspective of the provisions of laws and regulations, do regulations at the level of the Director-General of Taxes have the authority to expand or interpret the definition of Agency contained in the Act by themselves?

Based on Chapter II A Attachment II Number 198 of Law Number 12 of 2011 concerning Formation of Legislations as amended by Law Number 15 of 2019 it is regulated that higher laws and regulations can delegate further regulatory authority to Regulations Lower legislation. However, Number 213 of Appendix II of the Law confirms that the delegation of authority that regulates a statutory regulation may not be delegated to the director-general, secretary-general, or officials of the same level. Furthermore, Number 214 Appendix II of Law 12 of 2011 stipulates that direct delegation to the director general or an official of the same level can only be granted by a statutory regulation whose level is lower than the law. The fact is that there is no such delegation to the Perdirjen either from regulations at the level of a Government Regulation or a Regulation of the Minister of Finance.

JO itself is formed from an agreement between its members to carry out joint activities for profit and is not a separate legal entity ( rechtspersoon ) as is the case with a joint venture in the form of a Limited Liability Company (PT). How the form of a JO is not regulated in the Civil Code and the Commercial Code in Indonesia, so it often creates problems in legal relations with third parties. If JO is defined as an association that is not a legal entity, then it should be included in one of the associations that are not legal entities, namely: civil partnership, firm partnership, or limited partnership ( Chidir Ali, 2005 ).

The Supreme Court in the cassation of a bankruptcy case Number 01 K/N/1999 in its legal consideration said that by using the joint name of two legal entities in a Joint Operation, the operation cooperation can be categorized as a firm company as referred to in article 16 of the Commercial Code. Meanwhile in the matter of bankruptcy No. 42/Palit/PN. Niaga Jakarta Pusat, former Chief Justice M. Yahya Harahap as an Expert in the trial argued that the Joint Operation can be categorized as a Civil Federation as regulated in Articles 1618 – 1652 of the Civil Code ( Christian Frank Sinatra, 2012 ).

The categorization of JOs as either a Firm or a Civil Federation is limited to the legal judgment of the Chief Justice and the opinion of the Expert in the matter, and cannot by itself be binding on the public unless it is expressly regulated in the legislation.

2. Definition of JO adopts PSAK 66

PER-04/PJ/2020 provides a new definition of Joint Operation, namely a joint arrangement between the parties which stipulates that the parties called joint operators have joint control or have rights to assets, and obligations to liabilities, which perform the transfer. and/or services on behalf of Joint Operations ( Joint Operations ).

The definition seems to refer to the definition of Joint Operations in the Statement of Financial Accounting Standards (PSAK) 66 Joint Arrangements which adopted IFRS 11 Joint Arrangement on Joint Operations and Joint Ventures replacing PSAK 39 (Accounting for Joint Operations) and PSAK 12 (Part of Participation in Joint Ventures). PSAK 66 regulates the recording of Assets, Liabilities, Revenues, and Expenses carried out by JO members based on their respective portions. JO itself does not maintain separate bookkeeping separate from the bookkeeping of its members.

Meanwhile, the Director-General of Taxes Decree No.KEP-214/PJ./2001 (not revoked until now) stipulates that when submitting the Article 21 Annual Income Tax Return (now there is no more Article 21 Annual Income Tax SPT, but only Periodic SPT), JO must attach Financial Report on JO activities. With the understanding that the Financial Statements are the final result of a bookkeeping process, it can be concluded that the JO is obliged to keep the books, although not to calculate and report Corporate Income Tax on behalf of the JO. The JO who is required to bookkeeping, in this case, is the JO who submits the BKP/JKP on behalf of the JO, often referred to as the Administrative JO, so that the JO is obliged to withhold and collect PPh (output) and must be confirmed as a Taxable Entrepreneur to collect VAT.

3. Fulfillment of Corporate Income Tax obligations on JO

Article 6 paragraph (1) PER-04/PJ/2020 stipulates that NPWP is an identification number used by Taxpayers in the administration of the implementation of rights and/or fulfillment of tax obligations.

Furthermore, Article 6 paragraph (3) stipulates that tax obligations for Joint Operations include:

a. fulfillment of Corporate Income Tax obligations on behalf of Joint Operations following the provisions of laws and regulations in the field of Income Tax;

b. withholding or collecting Income Tax following the provisions of laws and regulations in the field of withholding or collecting Income Tax; and/or

c. collection of Value Added Tax, if the Joint Operation delivers the Taxable Goods or Taxable Services on behalf of the Joint Operation per the provisions of the legislation in the field of Value Added Tax.

The provision of Article 6 paragraph (3) letter a of PER-04/PJ/2020 is quite surprising because it refers to the confirmation letters from the previous DGT, Circulars, and Regulations of the Minister of Finance related to cooperative efforts, JO is not the subject of imposition of Corporate Income Tax but only must withhold or collect PPh and collect VAT if the JO delivers the Taxable Goods and/or Taxable Services on behalf of the JO (administrative JO). Does expanding the definition of an Agency to include Joint Operations as other entities and giving a new definition of JO by adopting the definition of Joint Operation in PSAK 66 and then automatically cause the JO to become mandatory for corporate income tax?

Since point, an of Article 6 paragraph (3) PER-04/PJ/2020 above states that the fulfillment of Corporate Income Tax obligations on behalf of Joint Operations is following the provisions of laws and regulations in the field of Income Tax, the reference is, of course, the Law Law Number 7 of 1983 as last amended by Law Number 36 of 2008 concerning Income Tax and its implementing regulations. However, so far the only provision related to Income Tax that has ever been issued in connection with the JO is SE-44/PJ./1994 concerning the mechanism for breaking the proof of income tax withholding article 23. The rest is only in the form of affirmation letters in response to the questions raised. by the Taxpayer, including S-323/PJ.42/1989 which confirms that the JO is not the subject of the imposition of Corporate Income Tax.

As applies in practice, both by taxpayers, the Directorate General of Taxes, and by the Panel of Judges of the Tax Court, joint operations are not subject to corporate income tax. If JO is considered a subject of corporate income tax, the next question is how to treat the withholding income tax which by SE-44/PJ./1994 must be in the name of the JO member or split into the name of the JO member if the withholding evidence is still in the name of the JO? Another question also arises related to the Regulation of the Minister of Finance Number PMK 261/PMK.03/2016 which stipulates that if there is a cooperation between the developer company and the landowner, the deposit of Final Income Tax is the obligation of each party involved in the cooperation, not the obligation JO. Will these provisions be void? Of course, it is not following the hierarchy of laws if there is a Regulation of the Director-General of Taxes that regulates other than what is already regulated in the Regulation of the Minister of Finance. lex superior derogat legi inferiori, rules that are higher in the hierarchy should override lower ones.

Conclusion

PER-04/PJ/2020 not only regulates technical instructions for the administration of NPWP, electronic certificates, and inauguration of PKP but also regulates the fulfillment of Corporate Income Tax obligations in the name of Joint Operations. The Regulation of the Director-General of Taxes needs to be reviewed because it is not in sync with other provisions related to the taxation of income derived from the JO form, causing uncertainty.

Provisions of income taxation obtained through the form of Operational Cooperation should be stated explicitly and definitely in the form of regulations per the provisions of the establishment of legislation about hierarchy as regulated in Law Number 12 of 2011 as amended by Law Number 15 the Year 2019. In addition to the object and tariff, the tax burden on the Taxpayer community is also closely related to the determination of the subject so that it should be regulated by regulations at the level of the Law. This is following the mandate of Article 23A of the 1945 State Constitution of the Republic of Indonesia that taxes and other levies that are coercive for state purposes are regulated by Law.

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