Taxation Aspects of Joint Operation/ Joint Venture
Jakarta, Ideatax -- Nowadays, the term 'Joint Operation' is something we are all familiar with. Investopedia (2023), defines Joint Operation as a business arrangement in which two or more parties agree to combine their resources for the purpose of accomplishing a specific task. On the other hand, Cornell Law School (2023) defines Joint Venture as a combination of two or more parties seeking the development of a single enterprise or project for profit, sharing the risks associated with its development.
There are several purposes of establishing a Joint Operation or Joint Venture, including to increase resources, reduce costs, combine the expertise of experts, and to enter foreign markets (Investopedia, 2023). Meanwhile, in terms of management, there are four types of Joint Venture management models, namely the transplant model, dominant parent, independent role, and joint management (Hukumonline, 2022).
In Indonesian taxation, the Joint Operation arrangement has been recognized since 1989. Through Letter of the Director General of Taxes Number S-323/PJ.42/1989, the Government defines Joint Operation as an association of two or more entities that combine themselves to complete a project, this merger is temporary until the project is completed.
Through the Regulation of the Director General of Taxes Number PER-04/PJ/2020 concerning Technical Guidelines for Procedures for Granting Taxpayer Identification Numbers, Confirmation of Taxable Entrepreneurs, and Confirmation of Taxable Entrepreneurs, the Government provides further rules regarding registration procedures and taxpayer obligations, including but not limited to Joint Operations or Joint Ventures.
Obligation to Register for Joint Operation
Director General of Taxes Regulation Number PER-04/PJ/2020 categorizes a Joint Operation as part of a Corporate Taxpayer. Therefore, the Joint Operation is obliged to register itself to obtain a tax ID number in order to carry out its taxation rights and obligations.
The Joint Operation must register with the Tax Office where the Joint Operation is established by bringing the following requirements: photocopy of the cooperation agreement or deed of establishment of the Joint Operation or Joint Venture, photocopy of the NPWP of each Joint Operation member, documents showing the identity of the Joint Operation management and one of the managements of each Joint Operation member company.
Moreover, PER-04/PJ/2020 also regulates that the Joint Operation has three tax obligations, namely fulfilling corporate income tax obligations on behalf of the Joint Operation, withholding or collecting income tax, and collecting value added tax.
Income Tax Liability of Joint Operation
Although the Joint Operation is categorized as a Corporate Taxpayer, there are differences between the Joint Operation and other Corporate Taxpayers. In general, Corporate Taxpayers have the obligation to submit Annual Corporate Income Tax Return and deposit Corporate Income Tax every year. However, this regulation does not apply to Joint Operation.
Since the Joint Operation is established by two or more Corporate Taxpayers to carry out a certain mission, the tax obligation of the Joint Operation is shared proportionally according to the amount of ownership in the Joint Operation. This regulation can be found in DGT letter number S-323/PJ.42/1989 which regulates that the form of incorporation of Joint Operation is not subject to corporate income tax. The imposition of corporate income tax is imposed on the income earned by each incorporated entity in accordance with its proportion.
This regulation is reinforced by Director General of Taxes Letter number S-251/PJ.313/1998 which regulates that the income received by the Joint Operation is actually the income of the members, the amount of which is determined in accordance with the Joint Operation establishment agreement. Therefore, the imposition of income tax on the income of the Joint Operation is actually the imposition of income tax on the income of the Joint Operation members.
For example, ABC Ltd and DEF Ltd agreed to form a Joint Operation under the name XYZ Ltd with ownership proportions of 40% and 60% respectively. At the end of the year, Jo XYZ earned a profit of Rp 100 million. Then, the profit is attributed 40 million to ABC Ltd and 60 million to DEF. Furthermore, ABC Ltd and DEF Ltd must report the profit of the JO in their annual reports.
Joint Operation Withholding Obligations
As a form of Corporate Taxpayer, joint operation has the obligation to withhold or collect Income Tax and Value Added Tax from other parties. The withholding and collection obligations include: the obligation to register, the obligation to calculate the withheld tax, the obligation to deposit/collect the withheld tax, and the obligation to report the withheld and collected tax.
In addition, the types of taxes that must be withheld/collected by joint venture companies include: Income Tax Article 21, Income Tax Article 23, Income Tax Article 26, Income Tax Article 4(2) and VAT.
VAT Joint Operation Obligations
As mentioned above, the Joint Operation has the obligation to collect VAT. To collect VAT, the Joint Operation must be registered as a Taxable Entrepreneur (PKP) with the tax office. The Joint Operation has the obligation to register as a Taxable Entrepreneur if its gross turnover exceeds 4.8 billion rupiah.
After registering as a Taxable Entrepreneur (PKP), the Joint Operation also has the obligation to make tax invoices, calculate accrued VAT, deposit the VAT payable no later than the end of the following month and report the VAT Period Tax Return every tax period.
Bookkeeping Obligations of Joint Operation
As a separate entity from its parent company, the Joint Operation has an obligation to conduct bookkeeping as regulated in Article 28 of Law Number 6 of 1983 concerning General Regulations and Tax Procedures as amended by Law Number 7 of 2021 concerning Harmonization of Tax Regulations.
This regulation is emphasized by Director General of Taxes Letter number S-323/PJ.42/1989 which states that in determining and calculating the amount of income tax payable, the Joint Operation has an obligation to maintain books separately from each entity joining the Joint Operation.
Law Number 6 of 1983 concerning General Regulations and Tax Procedures as amended by Law Number 7 of 2021 concerning Harmonization of Tax Regulations.
Director General of Taxes Number PER-04/PJ/2020 categorizes Joint Operation as part of Corporate Taxpayer
Letter of Director General of Taxes Number S-323/PJ.42/1989
Letter of Director General of Taxes Number S-323/PJ.42/1989
Cornell Law School. (2023, May 31). joint venture. Retrieved from Cornall Law School: https://www.law.cornell.edu/wex/joint_venture
Hukumonline. (2022, February 1). Joint Venture: Definition, Characteristics, and Legal Basis. Retrieved from Legal Online: https://www.hukumonline.com/berita/a/joint-venture-lt61f7e67ef2763/?page=1
Investopedia. (2023, March 28). Joint Venture (JV): What Is It and Why Do Companies Form One? Retrieved from Investopedia: https://www.investopedia.com/terms/j/jointventure.asp
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