In business, especially those related to trade, sales are the main target that is always the benchmark. One strategy commonly used by companies to encourage sales growth is incentives, for example, providing compensation.
Compensations are usually made by manufacturers of goods to retailers or shops that sell goods to final consumers. Usually, compensation will be given if the retailer manages to sell a certain number of products. This means that certain conditions must be met.
In business applications, this mechanism is often referred to using the terms incentive, discount, rebate, or cashback.
This way, both parties will benefit equally, for the manufacturers and the retailers. For the manufacturers, this gift can spur retailers to increase their sales. Meanwhile, for retailers, in addition to benefiting from product sales, there will also be additional income from the manufacturers.
The problem is, for distributors, as a party in the middle between producers and retailers, the provision of purchase compensation actually creates problems. Especially related to the tax obligations arising from the transaction. Why so?
Income Tax Object
So, every compensation received, in connection with the achievement of certain requirements by retailers, in any form, whether money, goods, or reduction of obligations, is an object of Income Tax.
This is as stipulated in the Director General of Taxes Circular Letter Number SE-24/PJ/ 2018. This regulation emphasizes that the purchase compensation is the object of Income Tax Article (ITA) 23 with a rate of 15%. Meanwhile, if the recipient is an individual taxpayer, the gift becomes the object of ITA 21 with a progressive rate.
Therefore, the manufacturer as the party giving the gift is obliged to withhold ITA 23 or ITA 21 and make a tax withholding slip to be submitted to the buyer or recipient of the gift. The withholding tax slip can later be used by the recipient of the gift when crediting the ITA 23 or ITA 21 that has been deducted.
Read: Fiscal Correction and its Implications on Loss Compensation
For information, the regulation also covers the provision of sales compensation in the form of services which are then referred to as management service compensation if there is a cooperation contract agreement that includes service activities, income recognition for services, and billing for service transfer.
Withholding from Distributor
The definition of seller under this provision is a party that sells its products to buyers. This includes manufacturers, distributors, and agents. Meanwhile, the definition of a Buyer is a party that buys products from the Seller for resale, including distributors, agents, and retailers.
The income tax withholding mechanism on the purchase compensation is carried out following the transaction flow. Thus, if the flow of goods is carried out through a distributor, before being delivered to the retailer, then the provision of compensation must also be done through the distributor, not directly to the retailer.
Although only an intermediary or distributor of purchase compensation, distributors have an administrative obligation to receive tax withholding slip of ITA 23 or ITA 21. As well as the obligation to withhold ITA 23 or ITA 21 from retailers and issue proof of withholding to be submitted to retailers.
This is considered to be an additional burden for distributors that should not be ignored. Although, on the one hand, there is no material benefit received in return.
So, both the tax invoice and withholding slip must still be done in sequence, it cannot jump from the producer to the retailer if the gift is through a distributor. If it is not done in stages, it will cause a mismatch between the flow of goods and the provision of rewards.
Risk of Overpayment
Indeed, obligations have implications or risks for distributors. Among them, the risk that can arise is overpaying taxes. Please note, if the tax credit received by the distributor in one tax year is greater than the income tax payable.
It's just that risk is not certain to happen. Because it is still possible that the amount of income tax payable could still be greater than the tax credit. Moreover, if you have good tax management, the company can avoid this risk.
For the record, if distributors continue to ignore this provision, they risk being subject to tax sanctions in the form of administration and criminal charges.
Altnernative Solution
However, there are several solutions that distributors can take if they want to avoid administrative burdens—first, changing the function or role from being a distributor to just being an intermediary between manufacturers and retailers.
As a distributor, business actors usually have two roles. One is as a buyer when receiving goods from the manufacturer, then as a seller when handing over the goods to the retailer. Therefore, distributors usually make a profit from the price difference between purchases from manufacturers and sales to retailers.
Meanwhile, as an intermediary, business actors only get a commission given by the manufacturer which is the object of ITA 23 for intermediary services.
Another way is to turn compensation into direct discounts. Bear in mind that giving direct discounts does not include compensation as regulated in SE-24/PJ/2018.
By using a discount scheme, distributors only need to make one tax invoice which includes the discount as a reduction in the selling price.
However, whatever scheme is chosen, the business process should still refer to the applicable tax provisions. Because no matter how big, administrative constraints in carrying out tax compliance are far more risky if taxpayers avoid the regulated tax obligations.
Apart from the above-mentioned issues, we cannot deny the fact that this regulation was issued against the background of taxpayer anxiety because tax disputes often arise due to unclear status of compensation and their tax implications.
In general, the existence of SE-24/PJ/2018 has created legal certainty, considering that in the previous provisions, there was no clear and detailed regulation regarding clauses related to compensation criteria. (ASP/KEN)
