A tax audit does not always result in an unrecoverable additional tax burden. In some cases, auditors identify input VAT that was not previously accounted for in the monthly VAT return. One situation that requires particular attention is when such input VAT is subsequently assessed through a tax underpayment assessment letter (surat ketetapan pajak kurang bayar/SKPKB).
Such situations raise a question. Can input VAT assessed through an SKPKB still be claimed as a credit? In principle, a taxable entrepreneur (pengusaha kena pajak/PKP) may claim input VAT as a credit provided that the applicable VAT requirements are met. However, input VAT assessed through a tax assessment letter is subject to a specific crediting procedure.
This situation may occur in transactions involving the utilization of taxable services from outside the customs territory. When an Indonesian company receives services from an overseas provider, it is responsible for collecting, paying, and reporting the VAT due on the transaction. If these obligations are overlooked and subsequently identified during a tax audit, the Directorate General of Taxes (DGT) may issue an SKPKB.
VAT on Services From Outside the Customs Territory
Article 3A, Paragraph 3, of Law of the Republic of Indonesia Number 42 of 2009 concerning the Third Amendment to Law of the Republic of Indonesia Number 8 of 1983 concerning Value-Added Tax and Luxury-Goods Sales Tax provides that parties utilizing taxable services from outside the customs territory must collect, pay, and report the VAT. Moreover, Minister of Finance Regulation (Peraturan Menteri Keuangan/PMK) Number 81 of 2024 concerning Tax Provisions within the Coretax Administration System further regulates the requirements for crediting taxes.
PKPs must identify each service transaction with an overseas party under the applicable rules. If the service qualifies as the utilization of taxable services from outside the customs territory, they must collect, pay, and report VAT.
Under the relevant provisions, input VAT on the acquisition of taxable goods or taxable services assessed through tax assessment letters may be credited up to the amount of the principal tax stated in the assessment.
However, the credit cannot be claimed automatically. Several requirements must first be met.
First, issued SKPKBs must strictly contain input VAT assessments that had not previously been accounted for. In other words, the assessment does not include adjustments relating to other types of transactions, such as supplies for which VAT must be self-collected.
Second, PKPs must agree to all audit findings listed in the SKPKB. Third, the entire amount assessed in the SKPKB, including the VAT principal and administrative sanctions, must be fully paid.
Fourth, PKPs must not pursue any legal remedies against the SKPKB, which include objection, appeal, reduction or cancellation of the tax assessment, reduction or cancellation of administrative sanctions, lawsuit, and judicial review.
The last requirement deserves attention because this crediting procedure is available only if no legal remedy is pursued against the assessment. Consequently, PKPs should carefully consider the implications before deciding whether to accept the audit findings.
Claiming Input VAT From an SKPKB
Consider the following example. An Indonesian company engages an overseas sub-consultant to provide professional services in support of a project in Indonesia. During a tax audit, the auditor reviews the company’s general ledger and identifies a transaction recorded as a material purchase. Upon further assessment, they determined the transaction was not a purchase of materials. Instead, it is the utilization of services from an overseas provider.
As the services are utilized in Indonesia, the transaction constitutes the utilization of taxable services from outside the customs territory and is therefore subject to VAT. The party utilizing the services in Indonesia supposedly collected, paid, and reported VAT.
In this case, the company had not accounted for the VAT arising from the utilization of the overseas services. The auditor subsequently assessed the underpaid VAT through an SKPKB, including administrative sanctions.
Under the applicable provisions, the input VAT in this case may still be credited if the PKP agrees to all audit findings stated in the tax assessment and pays the outstanding VAT in full, including the principal tax and sanctions specified in the assessment.
The PKP must not pursue any legal remedy against the relevant tax assessment if it intends to use this crediting procedure. Simply put, the decision to accept or dispute an audit adjustment carries consequences worthy of careful consideration. Before responding to the audit findings, the company should assess whether the adjustment is appropriate and evaluate the impact of each available option.
Importantly, the creditable amount is limited to the principal input VAT stated in the tax assessment. As a result, if an SKPKB assesses both VAT and administrative sanctions, only the VAT principal may be claimed as input VAT. Administrative sanctions are not creditable. This distinction is crucial when assessing the impact of a tax audit on the company’s VAT position.
Claiming Input VAT
Once the SKPKB are fully paid and all input VAT credit claiming requirements are satisfied, the payment document can serve as a tax invoice for VAT crediting purposes. The input VAT is credited in the tax period in which the payment is made, subject to the deadline for claiming input VAT under the VAT provisions.
Accordingly, companies should ensure that the SKPKB payment, accounting records, and input VAT credit are all recognized in the appropriate period. If the credit results in an overpayment position in the monthly VAT return, the excess may generally be carried forward to the following tax period or claimed through a VAT refund procedure, subject to the prevailing rules.
Responding to Tax Audit Findings
When an SKPKB is issued, filing an objection is not necessarily the only course of action. In a real-life case, accepting the adjustment may produce a more effective outcome for the company.
In this case, a company reviews and recalculates the auditor’s adjustment. The review confirms that the input VAT amount assessed through the SKPKB is indeed correct.
The company then agrees to the audit findings, pays the assessed amount together with the administrative sanctions, and does not file an objection or pursue any other legal remedy. The company can subsequently credit input VAT assessed through the SKPKB since it has fulfilled the requirements under PMK Number 81 of 2024.
The company may also claim a VAT refund because the transaction relates to the December tax period. Thus, pursuing a legal remedy is not always the only consideration. A thorough analysis should be conducted before determining how to respond to the audit findings. If the auditor’s adjustment is proven to be correct, the company may claim the input VAT as long as all requirements are satisfied and may seek a refund under specific circumstances.
Considerations for PKPs
Such cases demonstrate the significance of identifying input VAT that has yet to be accounted for from the early stages of a tax audit. Once an audit is underway, companies should promptly review transactions that could trigger additional input VAT. Supporting data and documents may be submitted to the auditor before they issue the notice of audit findings.
This step is essential because, where previously uncredited input VAT can be taken into account in the audit findings and meets the applicable requirements, its impact on the company’s VAT position can be assessed more accurately.
When input VAT is identified during a tax audit, PKPs should consider the following:
- Identify the nature of the transaction. Determine whether the transaction involves the acquisition of taxable goods, taxable services, or the utilization of taxable services from outside the customs territory.
- Review the supporting documents. Examine contracts, invoices, payment records, and other supporting documents to establish the transaction and the related VAT obligations.
- Assess the impact of the audit. Compare the potential output VAT and input VAT arising from the auditor’s adjustment.
- Review the SKPKB. To credit input VAT, the SKPKB must satisfy the applicable requirements, including those concerning the type of adjustments.
- Consider the implications of pursuing legal remedies. This crediting procedure requires the PKP not to pursue any legal remedy against the SKPKB.
- Ensure payment and crediting comply with the applicable rules. Both the VAT principal and administrative sanctions must be paid, while only the principal input VAT may be claimed as a credit.
Therefore, the appearance of input VAT in an SKPKB does not mean that the input VAT is creditable. Credits may only be claimed if all prescribed requirements are satisfied.
For PKPs undergoing a tax audit, the issue should be assessed not only based on the adjustment amount, but also by considering the administrative implications, the right to claim input VAT, and the available options after the SKPKB is issued.
Also Read:
Tax Refunds Are a Right, Not a Fiscal Favor
What Is Tax in Indonesia?
Breaking Down the Article 21 Withholding Tax Provisions