In business or buy-and-sell transaction, sellers often give various rewards to the customers as stimulus. The ‘rewards’ term granted also varies, from discount, fixed rebate, bonus, commission, et cetera. Buyers—who act as distributors—also frequently issue invoices to the sellers in various names, such as instore advertisement, promotional contribution, or other terms substantially similar to one another.
The provision of different rewards also has different tax implication so that it often becomes a disputed matter between Taxpayers and tax authorities. The differences are commonly related to the distinct treatment on rewards, whether as commission or prize, in which the respective tax approaches are different.
Therefore, the Directorate General of Taxes (DGT) policy affirming the tax provision on the rewards related to buy-and-sell transaction should be appreciated. At least, the issuance of DGT Circular Number SE-24/PJ/2018 gives more certainty for the Taxpayers and the tax authorities who were frequently in dispute due to the uncertainty over the status of rewards and the tax implication, specifically on the granting of rewards by the buyers who, in this case, act as distributors (not end consumer) or those related to granting of rewards under certain conditions. SE-24/PJ/2018 was issued on and effective since 29 November 2018.
The certain conditions as referred to in SE-24/PJ/2018 are achievement of specific requirements, provision of space and/or specific equipment, as well as receipt of compensation regarding buy-and-sell transaction.
Specific Requirements
The examples of specific requirements in SE-24/PJ/2018 are in the form of purchase and/or sales by the buyers meeting a certain amount as well as settlement by buyers within a certain period. The rewards granted may be in the form of cash, goods, or liability reduction, which in general retail business are referred to as fixed rebate, conditional rebate, trade discount, etc.
SE-24/PJ/2018 confirms that the aforementioned rewards are included in the category of “prize”. If the recipient of the rewards is a corporate Taxpayer, the prize becomes the object of Income Tax Article (ITA) 23 with 15% rate. Meanwhile, if the recipient is an individual Taxpayer, the prize becomes an object of ITA 21 with progressive rate.
Other good news is that the reward or “prize” is not an object of Value Added Tax (VAT) if it is given in the form of cash. Previously, the tax auditor tended to consider rewards in the form of cash as VAT object, so it oftentimes resulted in dispute with the Taxpayers. Thus, the affirmation is a proper act to take by DGT because there is no service activity conducted and no goods given.
In addition, SE-24/PJ/2018 categorizes other rewards types into the term of management service rewards. The rewards can be called as management service rewards only if there is any cooperation contract engagement that states the: (i) service activity; (ii) income recognition on the service; and (iii) billing on service transfer.
If the three requirements of service transfer are fully met, the buyers with VAT-Registered Person status are obliged to issue Tax Invoice to collect VAT of 10% on the service rendered to the sellers. The frequently used terms for such service rewards are: advertisement support, promotional contribution, festival contribution, instore promotion, etc.
However, the mention of management service in SE-24/PJ/2018 rather causes confusion among the Taxpayers because the term is not referring to any definition of management service explained in DGT Circular No. SE-35/PJ/2010. The elucidation in SE-35/PJ/2010 defines management service as the provision of service with direct involvement in the execution or supervision of the management. In fact, the rewards as referred to in SE-24/PJ/2018 are solely for promoting products sold by a company. In this case, the provider of the rewards only acts as the intermediary in marketing the products to the consumers. Luckily, both for management services and intermediary services, the Income Tax (ITA 23) rates applied are the same, i.e. 2%, so that there will be no dispute potential rising between the authorities and the Taxpayers.
The rewards related to the achievement of specific requirements are also affirmed not in the form of discount. Therefore, the sellers shall not list the rewards given as discount in both the commercial invoice and the Tax Invoice that reduces the selling price or reimbursement in calculating the VAT base.
Unfortunately, this understanding is potentially overlapping with the concept of discount commonly applied by sellers to buyers. Sellers often give discount to buyers for their next purchase if the buyers make it in bulk. If the discount is deemed a liability reduction categorized as rewards, the obligation of tax withholding arises with the rate of 15% as prepaid Income Tax for the buyers. This can also be an expense for the buyers’ cash flow or expense for the sellers if the tax withholding is borne by the sellers. Moreover, the discount included in the Tax Invoice is potentially corrected by the tax officials if it is considered a reward or an appreciation for the fulfilment of certain condition.
Provision of Space or Specific Equipment
Based on the engagement with the buyers, sellers may request the buyers to provide space and/or specific equipment facility for the interest of the sellers. The facility may be in the form of floor to place goods and display shelf for merchandise, including rack, hanging shelf, and/or display windows to put the goods displayed in order to support the marketing activity for the sellers’ products. It is confirmed in SE-24/PJ/2018 that the rewards for the facility provision can be categorized as income from rental of land and/or building or income from rental of asset.
Generally, rental of land and/or building is subject to final Income Tax of 10% (ITA 4 paragraph (2)). Meanwhile, the rental of asset is subject to ITA 23 of 2%, especially if the recipient of the service reward is a Resident Taxpayer.
On the other hand, buyers with VAT-Registered Person status shall issue a Tax Invoice to collect the VAT of 10% on services provided to the sellers. The sellers shall also be obliged to collect the VAT of 10% if the rewards are in the form of goods transferred domestically (inside Customs Territory). The commonly used terms for this transaction are, among others, space rent and display rental.
Compensation Related to Buy-and-Sell Transaction
In a different condition, sellers may give compensation in the form of cash, goods, or liability reduction to the buyers whose status are distributors. The purpose is to assume the risks of price fluctuation, late goods delivery, or certain sales program under the instruction of the sellers that may result in loss for the buyers with distributor status.
For example, by the order of the sellers, the distributors give the facility of 0% interest instalments to end consumers. In this case, there is no loss for the buyers with distributor status. The buyers are only forced to pay the interest expense in advance to the lender institution to then obtain the reimbursement from the sellers. The reimbursement is what is referred to as compensation provision.
Related to this, SE-24/PJ/2018 affirms that there is no Income Tax withholding to perform by the sellers, no matter what triggers the compensation provision. This is because the transaction conducted is not included in the objects of ITA 21 or 23 withholding.
It is also underlined that this type of rewards is not VAT object. Unless if the compensation is in the form of goods, the sellers are obliged to collect the VAT of 10%, particularly if the sellers are VAT-Registered Persons and both the sellers and the buyers are located domestically. The terms used for this transaction are rafaksi (discount given due to lower quality compared to the sample, or damaged goods) and gross margin support.
Dissemination
Before SE-24/PJ/2018 was issued, tax provisions on the granting of various rewards for buyers were not specifically regulated in tax laws. In previous practices, tax officials frequently considered that all rewards obtained by the buyers were VAT objects. With the existence of SE-24/PJ/2018, certain types of rewards not the objects of VAT are explicitly and clearly explained.
However, DGT shall disseminate SE-24/PJ/2018 intensively using an easily understood language to ensure consistent understanding between the Taxpayers and the tax officials. This is important, mainly for the Taxpayers, for planning the marketing strategy or making new agreements with counterparties so that the provisions in SE-24/PJ/2018 are not adding more burden to the business players.
Thus, the implementation of SE-24/PJ/2018 shall not be applied retroactively. Moreover, tax planning is also needed, especially related to corporate Income Tax for the Taxpayer acting as the buyer receiving the rewards. This is because the tax withholding rate is 15%, so the potential of prepaid tax is relatively big and may result in corporate Income Tax overpayment by the end of the year.
As other regulations in general, SE-24/PJ/2018 shall also be effective since its stipulation so that the Taxpayers have enough time to make further adjustment to their marketing strategies.
