OECD Examines the Practice of Presumptive Tax Regimes in the World

JAKARTA. The Organisation for Economic Co-operation and Development (OECD) released a working paper on the design of presumptive tax regimes applicable in various countries.

As the name implies, a presumptive tax regime is a tax collection conducted based on presumptions to approach net taxable income.

This is done because jurisdictions find it difficult to accurately determine the amount of taxable income due to a number of factors, such as when taxpayers do not do bookkeeping or when some transactions are made with cash payments that are difficult to trace.

The OECD notes several disadvantages of this presumptive tax regime despite its advantages. First, it hinders business growth because taxpayers feel favored by this tax regime and thus keep their businesses within the threshold.

Second, it encourages tax avoidance behavior because taxpayers will try to make their business revenue fall under the criteria of the presumptive tax regime. Third, it creates injustice because taxpayers with different profits will get the same tax treatment.

Using a presumptive tax regime will simplify tax imposition, and the tax administration burden that taxpayers and tax authorities must bear can also be cut. Thus, taxpayer compliance can be improved.

According to the OECD, one example of implementing a presumptive tax regime applies to the activities of Micro, Small, and Medium Enterprises (MSMEs), business actors who are not legally incorporated, or other business activities that are difficult to tax.

In practice, the design of this alleged tax regime differs from one jurisdiction to another. Those differences include; targeted taxpayers, eligibility criteria, tax base and others. According to the OECD, these differences complicate cross-country comparability and make solid conclusions difficult to draw.

Because of this, the OECD considers that it is necessary to produce a working paper so that the characteristics of each regime can be systematically compiled and the optimal presumptive tax regime can be identified.

In general, the presumptive tax regime framework developed by the OECD focuses on several areas of design and administration, such as target groups, eligibility criteria, regime types, tax obligations, shared taxes, regime administration, non-tax support instruments, and interaction with standard tax systems. (ASP/KEN)