Providing Legal Certainty: Special Tax Provisions for Joint Operations Released

The government issued special tax regulations for Joint Operations (KSO), a legal entity formed through joint arrangements between members of the KSO to manage rights to assets and liabilities. 

Previously, tax provisions regarding KSOs were regulated in several different regulations such as the Law on Value Added Tax and Sales Tax on Luxury Goods (VAT and STLG) and the Law on Income Tax.

However, to provide legal certainty, the government released a special regulation that comprehensively regulates the tax rules of KSO, including the general provisions of tax, VAT, and STLG as well as Income Tax. The provision in question is the Minister of Finance Regulation (PMK) Number 79 of 2024 which came into force on 18 October 2024. 

Provisions for TIN Registration for KSO 

In the context of general tax regulations, the tax treatment for Joint Operations (KSO) is similar to other business entities. Therefore, the government categorizes KSOs into two groups:

• KSOs Required to Have a Taxpayer Identification Number (TIN)

A KSO must obtain a TIN if it meets any of the following criteria:

• Engages in the transfer of goods and/or services,
• Receives or earns income, and/or
• Incurs expenses or pays income to other parties on behalf of the KSO.

To obtain a TIN, the KSO can register at the tax office based on its domicile or registered address. The domicile of the KSO refers to the residence or address of one of its members designated to represent the KSO under an agreement or appointment letter. TIN Registration must be completed no later than one month after the KSO's establishment or commencement of business activities.

Additionally, KSOs with a TIN that transfer taxable goods (BKP) or taxable services (JKP) are required to be registered as VAT-Registered Person (PKP) if their gross revenue exceeds the threshold for small businesses and/or one of its members is already registered as a PKP.

• KSOs Not Required to Have a TIN

A KSO is not required to register for a TIN if it does not conduct business activities under the name of the KSO. For example, KSO was established solely as a coordination tool, where business activities are conducted under the names of its individual members according to their respective shares.

Consequently, tax obligations are fulfilled by the individual members of the KSO. Therefore, the KSO is also not required to be confirmed as a PKP.

VAT and STLG provisions of KSO

Every transfer of taxable goods and/or services from members to KSO or from KSO to customers is subject to VAT or STLG. The VAT will be payable when the transfer of taxable goods and/or services is made.

• Basis for VAT Imposition

For the transfer of BKP and/or JKP from members to the KSO, the VAT basis is determined using an alternative value, specifically the agreed contribution value among the members. While the transfer of taxable goods and/or services from the KSO to the customer, the VAT imposition base is adjusted to the provisions of the VAT Law.

• Preparation of Tax Invoices

For members transferring taxable goods and/or services to the KSO, they are obliged to issue tax invoices. Likewise, KSOs that transfer taxable goods and/or services to customers are required to issue tax invoices.

Income Tax Provisions for KSO

Income received by KSO from customers may be subject to Income Tax either on a final or non-final basis according to the tax provisions. Final income tax is determined by multiplying the final income tax rate against the income tax base, while non-final income tax is calculated using the non-final income tax rate against taxable income.

The amount of taxable income on non-final income is calculated by deducting the amount of non-final income from the costs to obtain, collect, and maintain (3M) non-final income. 

• Deductible Costs for Non-Final Income

Deductible costs include expenses incurred and charged by the KSO, including contributions made by members based on their agreed proportions, detailed by the type of goods/services transferred.

Furthermore, taxable income after deducting income tax and final income tax is the remaining operating result to be distributed to KSO members.

• Remaining Business Profit (SHU) of KSO

The SHU, if received by KSO members who are domestic taxpayers or permanent establishments, is not subject to withholding and/or collection of income tax.

Provided, however, that the permanent establishment receiving the surplus reinvests it in Indonesia. If not, the surplus becomes subject to income tax. Furthermore, the SHU, if received by KSO members who are foreign taxpayers, is subject to withholding and/or collection of income tax.

• KSO Experiencing Loss

If the KSO experiences a loss, the KSO can compensate for the loss and cannot be compensated with the income of the members, including losses when the KSO has ended or dissolved.

• Withholding and Collection of Income Tax 

If a KSO receives income, makes purchases or imports, or conducts exports that are subject to withholding/collection of income tax, the KSO is required to perform the withholding, collection, or self-payment of income tax according to applicable tax regulations.

The income tax that is withheld, collected, or paid by the KSO is a tax credit for the KSO, provided that it is not a final income tax. If the income received relates to construction services, the withholding or tax deposit must be made using the highest income tax rate of the members.

Provisions for Existing KSOs

For KSOs that have been established and have a TIN before these provisions came into effect, there are several things to consider. First, ensure that the registered location is the same; if it has changed, the KSO must apply for a transfer of registration. However, if the KSO does not meet the criteria for having a TIN, it must apply for the cancellation of the NPWP and/or PKP registration.

Second, if the KSO meets the criteria to be a PKP but has not been registered as one, it must submit a request to be recognized as a PKP. Third, the KSO must fulfill other tax obligations, such as collecting VAT or VAT and STLG once the provisions are in effect. Fourth, the KSO must carry out withholding and/or collection of income tax. Fifth, starting in 2025, the KSO must calculate, account for, pay, and report income tax. (ASP/CHY/KEN)