Bonuses and compensation are part of trade transaction practices that carry different tax consequences. Directorate General of Taxes (DGT) Circular Letter Number SE-24/PJ/2018, regulates the Income Tax and Value Added Tax (VAT) treatment for various forms of rewards provided by sellers to buyers, ranging from target achievement bonuses, management service payments, and the provision of display space, to compensation for price fluctuations and delivery delays.
Under these circular, the DGT identifies three conditions that can trigger the provision of remuneration: the fulfillment of certain requirements, the provision of specific space and/or equipment, and the granting of compensation in connection with sale and purchase transactions.
Remuneration can be provided in cash, goods, or a reduction in payment obligations. However, the tax treatment depends on the purpose of the provision, the form of the reward, and the nature of the transaction between the seller and the buyer.
Under this regulation, sellers include manufacturers, distributors, and agents. Meanwhile, buyers are parties who purchase products for resale, including distributors, agents, and retailers.
The regulation primarily concerns transactions between business actors within the distribution chain, rather than discounts offered to end consumers who purchase goods for personal use.
Target Achievement Bonuses
The first category is remuneration for fulfilling specific conditions agreed upon by the seller and the buyer. In trading activities, manufacturers can set targets for purchases, resale, or punctual payments for distributors or retailers.
For example, a manufacturer sets a purchase target of 10,000 product units for a distributor within a single month. If this target is met, the manufacturer provides a bonus in the form of cash, goods, or a reduction in payment obligations.
A similar scheme can be applied based on the volume of resale to retailers or the settlement of invoices within the agreed-upon timeframe. Under such conditions, the remuneration is categorized as an award or bonus for achieving business requirements.
The income received by the buyer is subject to Income Tax. If the recipient is a resident individual taxpayer, the seller is obligated to withhold Article 21 Income Tax. Meanwhile, if the recipient is a resident corporate taxpayer, the tax withholding falls under Article 23 Income Tax.
For recipients who are non-resident taxpayers, the provisions of Article 26 Income Tax apply, taking into account the Double Taxation Avoidance Agreement (DTAA) or Tax Treaty, provided the requirements are met. Particular attention must be paid to determining the taxable base when the remuneration is provided in the form of goods.
If the value of the remuneration has been agreed upon in a binding agreement or cooperation contract, that value serves as the tax base. If the agreed value is unknown, the tax base for the incentive will be determined using the prevailing market price.
Remuneration for Management Services
The provision of bonuses may have a different classification if the buyer also performs work or provides services to the seller. For example, a manufacturer may not only ask a distributor to sell its products but also to carry out marketing activities, manage promotions, or perform certain management activities under a cooperation contract.
If the contract clearly specifies the service activities performed by the buyer and there is income recognition or billing for the delivery of these services, the remuneration is categorized as a payment for management services.
The Income Tax treatment for management services depends on the status of the income recipient. If the recipient is a resident individual taxpayer, Article 21 Income Tax withholding applies. If the recipient is a resident corporate taxpayer, Article 23 Income Tax withholding applies. Meanwhile, for non-resident taxpayers, the provisions of Article 26 Income Tax apply, subject to the applicable regulations and the DTAA.
In addition to Income Tax, payments for management services may also incur VAT obligations. If the management services are delivered by the distributor to the manufacturer within the Customs Area, the transaction constitutes a delivery of Taxable Services which is subject to VAT, provided it meets the prevailing provisions.
A distributor with the status of a Taxable Entrepreneur is obligated to collect VAT on the services delivered. This obligation remains applicable even if the service payment is not made in cash.
For cross-border transactions, the tax treatment depends on the location of service utilization and the delivery of goods. The utilization of management services outside the Customs Area is not subject to VAT. Meanwhile, if a manufacturer in Indonesia provides goods to a distributor abroad as compensation for services, the delivery constitutes an export of tangible axable goods and is subject to VAT under the export provisions.
Provision of Space and Equipment
The second category relates to the provision of specific space and/or equipment by the buyer for the benefit of the seller. In the retail industry, manufacturers may ask stores to provide dedicated space to display products, such as shelves, showcases, or specific areas within the outlet. For these facilities, the manufacturer can provide remuneration in the form of cash, goods, or a reduction in payment obligations.
If the remuneration is given for the provision of space, the income received by the buyer is categorized as income from the rental of land and/or buildings. Such income is subject to Article 4 paragraph (2) Income Tax withholding.
Meanwhile, if the remuneration is given for the provision of specific equipment, the income is categorized as rent in connection with the use of assets. This transaction is subject to Article 23 Income Tax withholding in accordance with the applicable provisions.
From a VAT perspective, providing both space and equipment constitutes the delivery of Taxable Services, which is subject to VAT if it meets the prevailing provisions. Buyers with Taxable Entrepreneur status are obligated to collect and report VAT on the services delivered. Companies must distinguish between remuneration for providing space and remuneration for providing equipment because each has different Income Tax treatment.
Compensation for Trade Transactions
The third category is compensation provided by the seller to the buyer in connection with sale and purchase transactions. This compensation can be used to cover business risks that arise during the course of the trading relationship.
One form is price protection, which is compensation provided when product prices change in a way that could potentially disadvantage the buyer. For example, a manufacturer sells electronic products to a distributor.
After the transaction, the product price drops because market conditions change. The distributor, having purchased the goods at a higher price, faces potential losses when reselling the products.
To mitigate this risk, the manufacturer can provide compensation in the form of price protection to the distributor, based on their agreement. Other forms of compensation include penalty payments for delayed delivery of goods and the reimbursement of costs for specific sales programs implemented at the seller's direction.
For instance, a manufacturer requests a distributor to offer a zero-interest installment facility to end consumers. The distributor initially pays the interest to the lending institution, and then the manufacturer reimburses those interest costs under the agreement.
Unlike bonuses for target achievement and management service compensation, compensation in this category is not subject to Article 21 or Article 23 Income Tax withholding for recipients who are resident taxpayers or permanent establishments, as stipulated in SE-24/PJ/2018.
For recipients who are non-resident taxpayers, the regulation also stipulates that Article 26 Income Tax withholding should not be applied to such compensation. Although no tax is withheld, this compensation remains taxable income that the recipient must report in their Annual Income Tax Return (SPT).
From a VAT perspective, compensation in the form of cash and/or a reduction in payment obligations is not subject to VAT. However, if the compensation is provided in the form of goods, the delivery constitutes a delivery of Taxable Goods, which is subject to VAT in accordance with the applicable provisions.
VAT on Bonus Goods
In addition to classifying rewards, companies must also determine VATobligations based on the form of the provision. For target achievement awards, rewards given in the form of cash or a reduction in payment obligations are not subject to VAT.
Conversely, if the award is given in the form of goods by the seller to the buyer and both parties are located within the Customs Area, the delivery constitutes a delivery of Taxable Goods which is subject to VAT. In this case, sellers with Taxable Entrepreneur status are obligated to collect the VAT, issue tax invoices, remit the funds, and report the tax payable in accordance with prevailing regulations.
This provision indicates that providing additional products to distributors as bonuses is not automatically exempt from VAT. Companies must factor in the tax obligations arising from the delivery of such goods.
The same VAT treatment also applies to compensation provided in the form of goods. Meanwhile, compensation in the form of cash and/or a reduction in payment obligations is not subject to VAT because there is no delivery of Taxable Goods involved in such compensation.
Tax Base
DGT also emphasizes that remuneration for achieving specific conditions, the provision of space and/or equipment, and compensation in connection with sale and purchase transactions do not constitute price discounts. Therefore, these rewards cannot be listed as discounts on sales invoices or tax invoices to reduce the selling price or deducted from the tax base.
Companies must record rewards based on the substance of the transaction and document the agreement for their provision in a cooperation contract. These classifications determine each party's respective tax obligations.
Awards for target achievement, payments for management services, the provision of space and equipment, and compensation for price changes all carry different Income Tax and VAT treatments. Companies must ensure that every reward provided has a clear transactional basis, a justifiable and accountable value, and tax documentation that complies with the applicable regulations.
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Writer: Fiorentina Renata Trixie | Editor: Thomas Rizal