Changes in Allowances for Bad Debts Initial Balance Calculation Method

Question:

Allow me to introduce myself, my name is Ari. I am a tax staff at one of the conventional consumer financing companies that have been registered as well as supervised by the Financial Services Authority (Otoritas Jasa Keuangan/OJK in Indonesian) and is domiciled in Jakarta. Please note that our company records and calculates the establishment of the allowances for bad debts for each group of receivables quality based on staging.

We have recently heard of a new tax regulation that results in the change in the mechanisms for the calculation of the initial balance of allowances for bad debts for the 2024 tax year. My question is, what is the mechanisms for the calculation of the initial balance of the allowances for bad debts based on the latest tax regulation? Please explain. Thanks.

Ari, Jakarta.

Answer:

Thank you for your question, Mr. Ari. To answer your question, we need to first refer to Law No. 7 of 1983 concerning Income Tax as last amended by Law No. 7 of 2021 concerning the Harmonisation of Tax Regulations (Income Tax Law/ITL as last amended by the HPP Law).

Pursuant to the regulation, the establishment of allowances for bad debts for consumer financing companies is allowed to constitute deductible expenses. See ‘Fiscal Corrections to the Establishment or Collection of Allowances’.

This is as stipulated under Article 9 paragraph (1) subparagraph c number 1 of the ITL as last amended by the HPP Law in conjunction with Article 20 of Government Regulation No. 55 of 2022 concerning Adjustments to the Regulation in the Field of Income Tax (Gov. Reg. No. 55/2022).

The government has recently issued technical provisions related to the establishment of allowances for bad debts that are allowed to constitute deductible expenses. The technical provisions concerned refer to the Minister of Finance Regulation No. 74 of 2024 concerning the Establishment of Allowances for Bad Debts Constituting Deductible Expenses (MoF Reg. 74/2024). See ‘New Regulation on the Establishment of Allowances for Bad Debts Issued’.

Pursuant to the regulation, several matters are to be taken into account in calculating the establishment of allowances for bad debts. First, one of the taxpayers allowed to charge the write-off of bad debts through the establishment of reserves are consumer financing companies, either conventional or those based on sharia principles as stipulated under Article 3 paragraph (3) of MoF Reg. 74/2024.

Second, pursuant to Article 4 paragraph (1) of MoF Reg. 74/2024, the establishment of allowances for bad debts is calculated based on financial accounting standards applicable in Indonesia insofar as not exceeding certain thresholds. See ‘These Are Certain Thresholds for Calculating Allowances for Bad Debts’.

Third, the establishment of allowances for bad debts are expenses accrued from the carrying amount of allowances for bad debts at the end of the tax year minus the initial allowances for bad debts. This is as stipulated under Article 4 paragraph (2) of MoF Reg. 74/2024.

Fourth, pursuant to Article 4 paragraph (3) of MoF Reg. 74/2024, allowances for bad debts are the carrying amount of the allowances for bad debts at the start of the tax year after taking into account bad debts during the current tax year as a deduction.

Fifth, certain thresholds are applied to the calculation of the carrying amount of the allowances for bad debts at the end of the tax year. This is as stipulated under Article 4 paragraph (4) of the MoF Reg. 74/2024. Sixth, pursuant to Article 4 paragraph (5) of MoF Reg. 74/2024, the carrying amount of the allowances for bad debts at the end of the tax year must use the lower value between (i) the value calculated based on financial accounting standards applicable in Indonesia or (ii) the value of certain thresholds.

Seventh, in the event that the result of the calculation of the expenses is less than zero, this value is recognised as income in the current tax year. This is as stipulated under Article 4 paragraph (9) of MoF Reg. 74/2024. Please also see 'Download Establishment of Allowances for Bad Debts New Regulation Here’.

Eighth, in the event of a discrepancy between the carrying amount of the allowances for bad debts at the beginning of the 2024 tax year and the allowances for bad debts at the end of the 2023 tax year, the following provisions shall apply: (i) the excess difference is recognised as expenses charged for a maximum period of two tax years, namely in the 2024 tax year and/or the 2025 tax year and (ii) the shortfall is recognised as income in the 2024 tax year.

For convenience, the following is an illustration of the discrepancy in the calculation of the initial value of allowances for bad debts in the 2024 tax year as listed in Appendix letter B number 3 of MoF Reg. 74/2024.

Illustration:

PT X is a consumer financing company taxpayer that holds a permit and is supervised by the Financial Services Authority. Before MoF Reg. 74/2024 comes into force, the initial value of allowances for bad debts for the 2024 tax year is based on the ending value of allowances for bad debts for the 2023 tax year of IDR8.5 billion.

However, after MoF Reg. 74/2024 comes into force, the carrying amount of allowances for bad debts at the beginning of the 2024 tax year based on the ending value of allowances for bad debts for the 2023 tax year of PT X amounts to IDR 16 billion with details of the calculation (in millions of rupiah) as follows.

Based on the above calculation, there is a discrepancy in the calculation of the carrying amount of allowances for bad debts in the 2024 tax year of IDR 7.5 million with the following calculation details.

Thus, the excess difference resulting from the change in the carrying amount of allowances for bad debts of IDR 7.5 million may be charged to expenses for a maximum of two years, i.e., in the 2024 tax year and/or the 2025 tax year.

This concludes our answer. We hope we may be of assistance.

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