Accounting and tax are like two sides of a coin which are closely related and truly complementary. But, the approach and the application are often contradictory or less in line. Instead of improving the compliance, the implementation of both is often confusing Taxpayers.
"Accounting" that is the focus of this paper is general financial accounting that refers to the Indonesian Financial Accounting Standards (Pernyataan Standar Akuntansi Keuangan/PSAK), that are compiled and published by the Indonesian Financial Accounting Standards Board (Dewan Standar Akuntansi Keuangan/DSAK)–under the auspices of Indonesian Institute of Accountants (Ikatan Akuntan Indonesia/IAI). Meanwhile, what is meant by "tax" in this paper is tax accounting based on the prevailing taxation laws. The main actors are of course accountants and tax authorities.
In its implementation, IAI uses global accounting standards as benchmarking. History begins in the 1970s when Financial Accounting Standards (Standar Akuntansi Keuangan/SAK) followed the United States (US) accounting practice standards, namely Generally Accepted Accounting Principles (GAAP). In the 1990s, SAK began to follow International Accounting Standards (IAS). Then, as of 1 January 2015, SAK officially adopted the International Financial Reporting Standards (IFRS), which is a continuation of the IAS.
Initially, IFRS only harmonized the accounting system in the European Union, but now more than 120 countries allow and require the IFSR as a guideline for companies in preparing financial statements. Indonesia through IAI is one of its followers.
IAI has proclaimed the convergence of PSAK to IFRS in full starting from 2012, to be updated continuously following the development of global accounting. This convergence has spawned a number of new SAKs, revising old standards deemed to have been no longer relevant.
IFRS convergence not only affects the business world, but also in the world of taxation. Even tax officers often fail to understand the accounting practices that change rapidly each year.
It is the application of the principle of substance over form accounting in SAK that becomes the core problem. This accounting principle recognizes the fact of the occurrence of a financial transaction rather than legal evidence. Meanwhile, the tax authority will use the opposite approach (legal form).
One of differences between SAK and taxation regulations is related to ISAK 16 regarding the recognition of fixed assets in the service concession agreements. ISAK 16 is an interpretation of financial accounting standards for public to private service concession agreements for the financial year beginning on or after 1 January 2012. This interpretation applies to infrastructure built or obtained by operators from third parties for the purpose of service agreements; and existing infrastructure for which access is granted by the concession provider to the operator for the purpose of the service agreement.
As an example of a power plant company that get concessions from Perusahaan Listrik Negara (PLN). The content of the concession is a power purchase agreement with PLN—not a debt agreement. However, based on ISAK 16, what is recognized as a company asset in financial statements is not a generator but the costs incurred to build the power plant. This cost is recognized as a financial asset that is equal to receivables that have not been billed to the counterparty, namely PLN. At the same time, the power plant has been recorded as a fixed asset owned by PLN even though in reality in the agreement, the transfer of new assets can be made after the concession period ends. Thus, it makes as if the company provides a loan to PLN to build a power plant. This condition has an impact on revenue and cost recognition in which the company recognizes the existence of financial revenue and financial expenses (not depreciation costs).
The recognition of financial revenue is determined using the current value (with a certain interest rate). Meanwhile, the delivery of the assets will ideally only take place at the end of the concession period. That means even though the transaction has not yet taken place and the concession has not ended yet, the revenue that has not been billed to PLN (receivables) shall be recognized from now on. In this case, the power plant contractor is likened to a financial company (a financial institution), which seems to provide loans to the government (PLN).
Unlike the tax, the tax authorities still refer to the old accounting standards. In the case above, the company's main income comes from electricity sales and the cost of building the power plant can be treated as an expense by an asset depreciation mechanism.
The principle of substance over form also applies in the application of PSAK 73, which defines a lease as a contract or part of a contract that gives us the right to use an asset for a certain period to be exchanged for compensation. In this context, the leased item is accounted for as a usufruct asset—even if it is ideally not the tenant's property. Accordingly, the value of the assets recorded in the financial statements can differ from the actual lease value that is paid. Although there are exceptions to the application of PSAK 73 for short-term leases and low-value leases.
For example, Company A rents an office for 6 (six) months with a tendency to be extended for another five years. Based on PSAK 73, the accountant will record it as a right of use for a period of five years even though the option to extend the lease is only a commitment (a custom factor).
Meanwhile, if using the tax approach, the lease is interpreted as an agreement to give the right to use the property for a certain period with a written or unwritten agreement. The property can only be used by the beneficiary for the agreed period. There is no exemption of lease in taxation provisions.
Thus, in taxation, a lease cost that can be treated as an expense is the actual cost incurred or allocated in accordance with the lease term. This condition can make a time difference of the expense recognition between commercial accounting and tax, thereby potentially causing a fiscal correction in the calculation of income tax payables in the Annual Tax Return.
Another example of IFRS convergence that has implications for taxation is the application of PSAK 10 related to the effect of changes in foreign exchange rates. In this context, the accounting approach emphasizes the presentation of financial statements using a currency unit that is commonly used in corporate transactions (a functional currency) so that the value can differ annually according to the company’s condition.
Meanwhile, taxation provisions require that the bookkeeping is denominated in the rupiah currency. Interestingly, the taxation provisions open the same space for companies to use foreign currencies (in this case the US dollar currency). Previously, the use of foreign currencies such as the US dollar was only possible to be limited to certain Taxpayers—such as Permanent Establishment (PE) and branch offices—which had been approved by the Minister of Finance.
However, the nature of this policy is to adhere to the principle so that when the permit is granted for a period of five years, in the taxation provisions it cannot change annually. Apart from that, tax regulations are sufficient to adapt the provisions in PSAK 10 in which Directorate General of Taxes (DGT) accommodates the needs of Taxpayers who use the US dollar functional currency to be able to file bookkeeping in the US dollar currency.
The problem then, there has been no similar approach of PSAK 10 from the tax authorities to harmonize ISAK 10 and PSAK 73 with taxation provisions. Aligning accounting and taxes in terms of concession and lease agreements may not be as easy as addressing currency differences in financial statements and annual tax return. But at least it can be started by increasing the understanding of the tax authorities of SAK that is generally accepted throughout the world, especially on matters not yet regulated in taxation provisions.
The point is as long as there is no attempt to harmonize taxation provisions with financial accounting standards, fiscal corrections will always occur and be increasingly counterproductive to the government's efforts to create a friendly investment climate. If it can be made easier, why should it be complicated?
* This article was also published in March 2020 edition of Majalah Pajak.