Tax Provision of Benefit in Kind, End of Year Gift or New Year Expenses?

The issuance of Government Regulation (PP) Number 55 of 2022 is a gift at the end of 2022 as well as a new guideline for taxpayers to start the new year 2023. Instead of enlightening and helping, the long-awaited regulation leaves uncertainty and raises the risk of administrative burdens that are likely to trouble taxpayers.

One of the points in the Government Regulation that has been awaited is the implementation of the provisions of Law Number 7 of 2021 on Harmonization of Tax Regulations (HPP), which emphasizes the provision of benefit in kind from companies to employees as income tax objects.

"Replacement or compensation in respect of work or services received or obtained, including salaries, wages, allowances, honoraria, commissions, bonuses, gratuities, pensions, or other forms of compensation, including benefit in kind, unless otherwise stipulated in the law".

The HPP Law also emphasizes that replacement costs or compensation given in benefit kind that are directly or indirectly related to business can be deducted from the employer's gross revenue.

Thus, the benefit in-kind value is a component of the employee's gross income which is the basis for calculating Income Tax Article (ITA) 21 or ITA 26. The benefit in-kind value is also a component of costs that can be deducted from the employer's or company's gross income.

Since the HPP Law was passed in 2021, the government has just issued implementing guidelines for tax provisions on in-kind following the issuance of PP Number 55 of 2022 concerning Adjustment of Regulations in the Income Tax sector at the end of the year.

In essence, as of 1 January 2023, employers are required to calculate, report, and pay income tax for benefits in kind given to employees starting in 2022. However, for benefit in kind that has not been deducted income tax by the employer in 2022, it is the obligation of the employees who receive to calculate and pay the tax themselves, as well as report by self-assessment in the 2022 Annual Tax Return.

To be able to calculate its value, the taxpayer must first understand the definition of "reimbursement or compensation in the form of benefit in kind. There are two definitions of compensation regulated in PP Number 55 of 2022.

First, a compensation in the form of benefit in kind is a compensation in kind other than money. In this case, what is meant by money includes checks, savings balances, electronic money, or digital wallet balances.

Second, compensation in the form of benefit is compensation in the form of the right to use a facility and/or service. Facilities and/or services provided by the provider to the recipient may originate from the provider's assets or third party assets that are leased and/or financed by the provider.

Essentially, to calculate the amount of benefit in kind refers to the market value. As for benefit, it is calculated based on the amount of costs incurred or should have been issued by the compensation provider.

However, PP Number 55 of 2022 makes an exception for the imposition of income tax on certain benefit in-kind and/or benefits received by employees. Even though they are excluded from employee income tax objects, certain benefits in-kind can still be expensed as a deductible expense. For more details, see the following list of benefit in kind income tax-free.

Read: New Regulation Issued, Check Out the List of Benefits in Kind Exempted from Income Tax

Not clear

Even though PP Number 55 of 2022 has explained a number of matters related to the procedure for assessing benefit in kind/benefits as a tax object, however a more detailed explanation is still needed so as not to confuse taxpayers, both employers and employees.

For example, related to benefit in kind in certain areas, the categorization and definition is too broad and confusing. PP Number 55 of 2022 explains that "certain areas" are areas that are economically feasible to develop, but in general the infrastructure is inadequate and difficult to reach by public transportation, either by land, sea or air.

One of them is the nature given by the company to employees who get certain assignments, as long as the business location of the employer gets a certain area determination from the Director General of Taxes. The note at the end of the sentence can be interpreted that companies living in remote areas that do not have a "certain area" determination letter from the DGT cannot take advantage of the income tax-free facility.

Likewise, non-objects of income tax in the form of benefit in kind with certain types and restrictions, which are still unclear. Especially related to the type and value of benefit in kind, as well as what the criteria for recipients are. The explanation seems to still have to wait for the issuance of the relevant Minister of Finance Regulation (PMK).

Risks & Expenses

Further, the provision for self-assessment reporting for employees who receive benefit in-kind in 2022 but the income tax have not been deducted by the employer. This is not only troublesome for employees receiving in kind, but also for the company as the employer. This is because the company must assess and calculate in detail the value of benefit in kind given to each employee, and then inform them one by one. This administrative procedure should also be clarified.

Based on the writer's assessment, the implementation of the determination of benefit in-kind as a tax object can burden the company's cash flow, especially if the income tax on benefit in-kind is fully borne by the company. Conversely, if income tax on in kind is deducted from the employee's salary, it will erode the employee's net income.

Therefore, it is necessary to have an open discussion between companies and employees regarding the determination of benefit in kind as a tax object. It would be better to involve the Tax Authorities as source persons and mediators so that they can produce solutions that are mutually beneficial for both employees and companies. Do not forget, before this rule was issued, employees had no additional obligation to report, calculate, and pay taxes on in-kind received from the employer.

The last question, how far is the company's responsibility towards fulfilling employee tax obligations in 2022? Surely, it will be difficult for companies to prove compliance of taxes reported by their employees. Will this affect the recognition of benefit in kind as an expense in the 2022 corporate income tax return? If so, it can be more complicated.

Read: 10 Important Points of the VAT New Regulation

Tax Return Amended as An Alternative Option

Maybe the government needs to consider alternative options for calculating 2022 benefit in-kind through the amendment mechanism for 2022 income tax return article 21 without being subject to interest sanction. This is because the rules regarding the calculation and reporting of in-kind as a tax object (PP No. 55 of 2022) has only been published at the end of 2022. This alternative will be simpler and easier for both employers and employees. (AGS/KEN)

*The Article was published in CNBC Indonesia on 4 January 2023

CNBC Indonesia

Disclaimer! This article is a personal opinion and does not reflect the policies of the institution where the author works.