Dualism in Benefit in Kind Charges: A Dispute-Prone Issue

Referring to the Great Indonesian Dictionary (KBBI), dualism is defined as a condition that shows two conflicting sides. In various contexts, dualism occurs when two parties are in conflict, including disputes between the tax authorities and taxpayers.

One of the frequent objects of tax disputes is related to the tax treatment, on the provision of BiK or fringe benefits, by companies or Corporate Taxpayers to their employees, especially with the issuance of Government Regulation (PP) Number 55 Year 2022, which was further detailed in the Minister of Finance Regulation (PMK) Number 66 Year 2023. 

According to the regulation, BiK is defined as compensation in the form of goods other than money whose ownership is transferred from the provider (company) to the recipient (employee). Meanwhile, a fringe benefit is defined as compensation in the form of rights to the utilization of a facility/service sourced from the provider's assets or a third party. 

Under the regulation, the provision of BiK or fringe benefit is determined as an Income Tax object for the recipient. Except for BiK that are determined not to be Income Tax objects, such as the provision of food and beverages for all employees, as well as compensation in the form of BiK and fringe benefits in certain areas and related to the performance of work regulated by or based on the Minister of Finance Regulation. 

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

For employers, BiK and fringe benefits can be considered deductible expenses, as long as they meet the criteria of activities related to earning, collecting, and maintaining income (3M).

This is outlined in Article 23, paragraph (2) of Government Regulation No. 55 of 2022, as well as Article 2, paragraph (1) of Minister of Finance Regulation No. 66 of 2023, which states:

'The cost of compensation or remuneration provided in the form of BiK and/or benefits related to work or services can be deducted from gross income to determine taxable income by the employer or the provider of compensation or remuneration in the form of BiK and/or fringe benefits, as long as it is an expense for earning, collecting, and maintaining income.'

The wording regarding the deduction of BiK or fringe benefits in these two regulations differs from Article 6, paragraph (1), letter n of the Income Tax Law, which states:

'The amount of taxable income for domestic taxpayers and permanent establishments is determined based on gross income minus expenses for earning, collecting, and maintaining income, including the cost of compensation or remuneration provided in the form of Benefit in Kind and/or fringe benefits.'

The difference in wording between the latest regulations and the Income Tax Law has led to a dualism in the classification of BiK or fringe benefits. First, the cost of BiK or fringe benefits related to 3M activities, and second, BiK that is not related to 3M activities. 

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

Closing Tax Avoidance Loopholes

With the changes to BiK provisions in Government Regulation No. 55 of 2022 and Minister of Finance Regulation No. 66 of 2023, it is expected that tax avoidance loopholes can be narrowed. Under the previous regulations, there was room for shifting the tax burden from employees receiving BiK or fringe benefits to the employer.

This was done because the tax rate on BiK when borne by the company was lower compared to the tax rate on BiK when treated as taxable income for the recipient. Now, with the issuance of PP No. 55/2022 and PMK No. 66/2023, every BiK item is considered taxable income that must be deducted by Income Tax, other than those that are exempted.    

According to OECD data, tax avoidance or tax planning practices like these are commonly carried out by high-level management, such as directors or commissioners, or individuals from high-income groups who receive BiK or fringe benefits. However, in practice, it does not rule out the possibility that this scheme is also carried out by mid-level staff employees.

By closing this tax avoidance loophole, the government hopes to secure an additional source of state revenue.  

With the changes to BiK provisions in Government Regulation No. 55 of 2022 and Minister of Finance Regulation No. 66 of 2023, it is expected that tax avoidance loopholes can be narrowed. Under the previous regulations, there was room for shifting the tax burden from employees receiving BiK or fringe benefits to the employer.

This was done because the tax rate on BiK when borne by the company was lower compared to the tax rate on BiK when treated as taxable income for the recipient. Now, with the issuance of PP No. 55/2022 and PMK No. 66/2023, every BiK tem is considered taxable income that must be subject to income tax withholding, except for the exemptions specified.

According to OECD data, tax avoidance or tax planning practices like these are commonly carried out by high-level management, such as directors or commissioners, or individuals from high-income groups who receive BiK or fringe benefits. However, in practice, this scheme is also not impossible to be used by mid-level staff employees.

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

Contradicting the Matching Principle

Although these changes can have positive macroeconomic effects, the new BiK provisions raise some issues. In particular, with the dualism between BiK related to 3M and BiK not related to 3M, the matching principle that has long been applied in tax practice becomes irrelevant.

According to the matching principle in tax, as explained by Drinkwater & Edwards (2014), the rule is: 'An expense can be categorized as a deductible expense for the provider if, for the recipient, it is considered revenue or taxable income.'

However, under the new regulation, BiK or fringe benefits that are considered revenue and taxable for the recipient may not necessarily be deductible as an expense for the provider, depending on whether the 3M criteria are met.

Thus, when BiK is taxable on one side but cannot be claimed as a deductible expense by the provider (non-deductible), there is a risk of double taxation.

Legal Uncertainty

The difference in principles regarding the treatment of BiK or fringe benefits between the Income Tax Law and its two derivative regulations, PP No. 55/2022 and PMK No. 66/2023, creates legal uncertainty for taxpayers.

Although, based on the hierarchy of laws, it is clear that in cases of interpretive differences, reference should be made to the higher-level regulation, which is the law. If there are discrepancies between the norms or provisions of the PP or PMK and the law governing the same matter, then the law should be the guiding reference.

However, taxpayers still require certainty. Therefore, policymakers need to provide clarity to prevent concerns and confusion about which regulation should be followed. (ASP/KEN)

 

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