A Directorate General of Taxes (DGT) audit examines whether a company has correctly reported and paid its Indonesian taxes. It is separate from the financial-statement audit that some Indonesian companies undergo.
Why Is the DGT Auditing the Company?
A request for a tax refund or a tax return showing overpayment can lead to an audit.
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The DGT can also identify differences between a company’s tax returns and other tax information available to it.
An SP2DK is different from a DGT audit. It is a formal request for clarification of tax information and does not constitute an audit.
What Can the DGT Examine During the Audit?
The DGT may examine whether revenue has been fully reported and whether expenses claimed as deductions qualify under Indonesian tax rules. For VAT, it can examine output VAT collected on sales and input VAT claimed on purchases.
Cross-border payments for services, interest, royalties, and other transactions can raise questions over withholding tax, tax treaties, and the tax treatment applied by the Indonesian company.
Transactions with a foreign parent or other related companies may also bring transfer pricing into the audit. The DGT can examine whether prices and other terms between related parties follow Indonesia’s arm’s-length requirements.
How Should the Company Respond to DGT Document Requests?
Under Indonesia’s current audit rules, a company generally has one month from the DGT’s formal request to provide requested books, records, documents, data, or information. The DGT can issue written reminders where the request has not been fully met.
Documents or information that should have been provided during the audit may generally not be considered during a later tax objection, although exceptions apply.
What Should the Company Do if It Disagrees with the Audit Findings?
The DGT sets out its proposed adjustments in a Notification of Audit Findings (SPHP). The company generally has five working days after receiving the SPHP to submit a written response. The audit then moves to the Final Discussion of Audit Findings (PAHP), where unresolved adjustments can be discussed before the audit is completed.
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A company can agree with some findings while disputing others. The amount it accepts during the final audit discussion matters because a taxpayer filing an objection must generally first pay at least the amount it agreed was payable.
Where disagreement remains over the legal basis for an adjustment following the final discussion, the taxpayer may request a review by the DGT’s Audit Quality Assurance Team. The request generally must be submitted within three working days after the relevant discussion record is signed. The team then reviews the unresolved issue between the taxpayer and the DGT auditors.
What Can a DGT Tax Audit Cost the Company?
Consider a company that reports IDR 20 billion (USD 1.13 million) of taxable income. If the DGT rejects IDR 2 billion (USD 112,800) of expenses that the company deducted, taxable income would increase to IDR 22 billion (USD 1.24 million).
At Indonesia’s standard 22% corporate income tax rate, the adjustment would create IDR 440 million (USD 24,800) of additional corporate income tax before any applicable administrative sanctions.
When Does the Audit Become a Formal Tax Dispute?
Disagreeing with an audit finding does not start the formal objection process. Once the DGT issues a tax assessment, the company can generally file an objection within three months from the date the assessment is sent, unless circumstances outside its control prevent it from meeting the deadline.
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If the DGT rejects the objection, the company can appeal to the Tax Court. The appeal generally must be filed within three months after the company receives DGT’s objection decision.
Respond to a DGT Tax Audit with MAP Resources Indonesia
MAP Resources Indonesia works with foreign investors facing DGT tax audits to address disputed findings before they develop into larger tax assessments. Contact us today at info@mapresourcesindonesia.com for support.
