One Year in Effect, Issues Persist with the Implementation of Benefit-in-Kind Provision

Since its release a year ago, the implementation of technical provisions on tax on benefit in kind and fringe benefit, as stipulated in the Minister of Finance Regulation (PMK) Number 66 Year 2023, still raises issues for taxpayers.

In general, PMK No. 66/2023 affirms that compensation in the form of in-kind or fringe benefits related to work or services can be deducted from the employer's gross income. 

Then, on the side of the recipient or employee, the benefit in kind or fringe benefit can be determined as the object of income tax. Additionally, this regulation clarifies the definition of benefit in kind. PMK Number 66/2023 defines it as compensation in the form of goods other than money whose ownership is transferred from the provider (company) to the recipient (employee).

Read: Effective on 1 July 2023, Tax Provision on Benefit in Kind Finally Released 

Meanwhile, the definition of fringe benefit in this regulation remains the same as the previous provisions in Government Regulation (PP) Number 55 of 2022, namely, as a reward in the form of rights to utilize a facility/service sourced from the provider's or third party's assets.

Practices and Issues

Several issues have been raised regarding the implementation of PMK 66/2023. 

Firstly, the timing of its release is considered suboptimal due to a significant gap with the parent regulation, causing uncertainty among taxpayers. 

Secondly, certain PMK 66/2023 provisions lack clarity, creating potential disputes between taxpayers and the Directorate General of Taxes (DGT). 

Thirdly, the regulation has been criticized for omitting value-added tax (VAT) considerations. Fourth, taxpayers have questioned the DGT's delay in releasing the nominative list of in-kind benefits provided to employees. 

Release Pause and Administrative Burden

PMK 66/2023 is a derivative regulation of Government Regulation (PP) Number 55 of 2022 and Law (UU) Number 7 of 2021 on the Harmonization of Tax Regulations (HPP Law).

However, there is a significant time gap between the release and implementation of PMK 66/2023 and the earlier regulations. The HPP Law has been in effect since 29 October 2021, and PP 55 of 2022, which was promulgated on 20 December 2022, has been in effect since 1 January 2023. Following that, PMK 66/2023 was issued and took effect on 1 July 2023.

Read:11 Benefit-in-Kinds with Certain Types and Limits of Benefit-in-Kinds are Tax-Free, Here are the Details!

Thus, if companies have already withheld Income Tax Article 21 or Income Tax Article 29 in 2022, they must return it to the recipient of the benefit in kind or fringe benefit. Although it does not affect financially, this return process creates an administrative burden. 

Input Tax Credit Constraints

The implications of tax provisions on benefits in kind or fringe benefits extend beyond Income Tax Articles 21 and 29 to include Value Added Tax (VAT). As benefits in kind or fringe benefits provided by employers can be in the form of either goods or services, both income tax and VAT considerations apply.

If the goods or services provided are Taxable Goods (BKP) or Taxable Services (JKP), they will be included as VAT objects, as regulated in the Law on VAT. The problem is, that even though what is transfered is taxable goods or taxable services, the company cannot credit the input tax on these benefits.

The reason is that under VAT provisions, input tax cannot be credited if the transfer is not related to the business run by the taxpayer. For example, providing vehicle or housing facilities to employees.

Submission of Nominative List

Companies that provide in-kind benefits to their employees are required to attach a nominative list to the DGT along with the submission of the Annual Tax Return (SPT). The obligation is stipulated in PMK 66/2023 which is effective from 1 July 2023. 

Related to this, two issues often arise. First, in practice, the DGT has asked for a nominative list of benefits in kind or fringe benefits when conducting an audit of Corporate Income Tax for tax year 2022.

In fact, the provision of benefit in kind or fringe benefit for the 2022 tax year is exempted as an income tax object. This shows that there is a difference in understanding of the regulation by some tax authorities.

Second, until now the DGT has not specifically regulated the form or format of the nominative list that must be used. Indeed, in several socialization opportunities, the tax authority mentioned that taxpayers can use the promotional cost format stipulated in PMK Number 02 of 2020, as a reference.

However, taxpayers need to get certainty regarding the specific format for the nominative list since it is important to avoid mistakes.

Third, in addition to the format issue, taxpayers also have no clear guidance on how to fill it in. Whether it can refer to the records in the Company's books or based on the reporting of Income Tax Return Article 21.  

For Legal Certainty

In every policy, it is important for all parties to understand it properly. To avoid misinterpretation, comprehensive and detailed regulations are required.

Therefore, the issues mentioned above should be a priority for the government, especially the tax authority, to promptly address and complete the regulations on benefits in kind or fringe benefits.

Moreover, this regulation has been in place for quite some time. It is time for all parties to evaluate its effectiveness, not only for the benefit of taxpayers but also for the government. (ASP/KEN)

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