Curious About Differences Between Examination & Tax Audit? Check Here

To improve tax compliance, the Directorate General of Taxes (DGT) has re-stipulated the audit methods for taxpayers (Wajib Pajak/WP in Indonesian) with different segmentation. This is outlined in the Directorate General of Taxes Circular Letter No. SE-07/PJ/2020.

Based on this regulation, the DGT divides the taxpayer segmentation into two, namely strategic taxpayers and other taxpayers. This segmentation allows the DGT to conduct examinations (which are included in supervision) and audits using different methods. This is expected to render further precision and effectiveness.

As such, what do examination and audit refer to?

Examinations 

Referring to Article 1 number 30 of the General Provisions and Tax Procedures (Undang-Undang Ketentuan Umum dan Tata Cara Perpajakan/UU KUP in Indonesian), an examination refers to a series of actions conducted to assess the completeness of the information and attachments of a tax return (Surat Pemberitahuan/SPT in Indonesian) as well as the accuracy of its writing and calculation.

This implies that an examination is conducted by tax officers to review whether the annual tax returns and periodic tax returns filed by taxpayers are correct, complete and clear, as required in Article 3 of the GPTP Law.

Further, examinations are conducted, among others, of annual income tax (Pajak Penghasilan/PPh in Indonesian) returns. Pursuant to the Director General of Taxes Decree No. KEP-16/PJ./1996 concerning Procedures for the Receipt, Examination and Processing of Income Tax Returns, in general, examinations of annual income tax returns aim to obtain assurance that the taxpayers have filed the annual income tax returns completely. Read the article ‘This is What a Correct, Complete and Clear Tax Return Means’. 

In addition, examinations of annual income tax returns are also conducted to foster taxpayers’ compliance and sense of responsibility in filling out annual income tax returns correctly, completely and clearly. This is because Indonesia applies a self-assessment system that provides taxpayers with flexibility and trust, thereby, a mechanism is required to ensure taxpayers’ compliance.

Legal Products of Examinations

The legal product of an examination may be in the form of a Notice of Tax Collection (Surat Tagihan Pajak/STP) issued if based on the results of the examination, there is tax underpayment due to misspellings and/or miscalculations. Another legal product of an examination may be in the form of a notice issued if the examination is conducted of an income tax return stating an overpayment. 

In addition to tax returns, an examination is also conducted of the application for tax refunds submitted by certain criteria taxpayers or certain requirement taxpayers. For this examination, the legal product issued by the authorities is in the form of a decision in the form of a Preliminary Tax Refunds Decision Letter (Surat Keputusan Pengembalian Pendahuluan Kelebihan Pajak/SKPPKP in Indonesian).

Audits 

Pursuant to Article 1 number 25 of the GPTP Law, an audit refers to a series of activities to collect and process data, information and/or evidence conducted in an objective and professional manner based on auditing standards to assess tax compliance in fulfilling tax obligations and/or for other purposes to implement statutory tax provisions.

Further, pursuant to the Minister of Finance Regulation No. 17/PMK.03/2013 concerning Audit Procedures, the Director General of Taxes is authorised to conduct audits to assess compliance with tax obligations and/or for other purposes to implement statutory tax provisions. In further detail, the scope of audits to assess compliance with tax obligations may include one, several or all taxes, whether for one or several taxable periods, a fraction of a tax year or a tax year in the previous year or the current year. Audits to assess compliance are divided into two.

1. Special audits, conducted due to indications of non-compliance with the fulfilment of tax obligations, either based on concrete data or risk analysis results.

2. Routine audits, are audits conducted in connection with the fulfilment of tax rights and/or exercise of tax obligations of taxpayers.

In contrast, the scope of an audit for other purposes to implement statutory tax provisions may include the determination, matching or collection of materials related to the purpose of the audit. For example, an audit for the issuance of a Taxpayer Identification Number (Nomor Pokok Wajib Pajak/NPWP in Indonesian) and/or ex officio VAT registration.

Legal Products of Audits 

An audit to assess a taxpayer’s compliance is concluded with the preparation of a tax audit report (Laporan Hasil Pemeriksaan/LHP in Indonesian) and a legal product that may be in the form of a Notice of Tax Underpayment Assessment (Surat Ketetapan Pajak Kurang Bayar/SKPKB in Indonesian), Notice of Additional Tax Underpayment Assessment (Surat Ketetapan Pajak Kurang Bayar Tambahan/SKPKBT in Indonesian), Notice of Nil Tax Assessment (Surat Ketetapan Pajak Nihil/SKPN in Indonesian) and Notice of Tax Overpayment Assessment (Surat Ketetapan Pajak Lebih Bayar/SKPLB in Indonesian). 

In addition to being in the form of an assessment, an audit conducted by the tax authorities may also produce a legal product in the form of a notice of tax collection. The notice of tax collection is, among others, issued if based on audit findings, the taxpayer is subject to administrative penalties. In contrast, an audit for other purposes is concluded with the issuance of a tax audit report containing a proposal whether the taxpayer’s application is accepted or rejected. (kaw)