taxpayers are required to calculate, pay, and report their tax liabilities in accordance with prevailing tax laws and regulations. The DGT may then conduct a tax audit to test this self-assessment compliance with the tax obligations and issue tax assessment as a result of tax audit.
The tax audit of a company may cover only a particular tax or all taxes for a particular tax period (a tax month) or tax year. It may be conducted at the company’s premises, at the DGT offices, or at both.
Conditions triggering a tax audit
A tax refund request will always trigger a tax audit. Due to the requirement for the DGT to decide on a refund request within 12 months, a tax audit will typically begin from a few weeks to several months from the refund request date. A corporate income tax refund request will normally trigger a complete tax audit covering all taxes. A refund request of any other tax will normally trigger a tax audit covering only one particular tax. The DGT will likely broaden the tax audit scope to include other taxes.
Other events may trigger a tax audit, these include:
• A tax return in an overpayment position (not necessarily accompanied by a refund request);
• An annual income tax return presenting/claiming a tax loss;
• The taxpayer has changed its fiscal year or bookkeeping method or performed fixed assets revaluation;
• A tax return not filed within the prescribed time or filed after the deadline stated in a warning letter, which has been selected to be audited based on a risk analysis;
• A tax return meeting certain (undisclosed) DGT criteria.
Special tax audit may be conducted for certain purposes and will be subject to different timeline and procedures from the general tax audit.
Taxpayers being audited are required to provide documents and information requested by the tax auditors within a month of the request date. This may include transfer pricing documentation if the taxpayers are engaged in related-party transactions. Failure to provide the documents or information within a month may prompt the DGT to determine the tax liabilities on a deemed profit basis. Where documents and information are not supplied within the one month period, they cannot be used later by the taxpayer to dispute the amount of tax assessed.
At the end of a tax audit, the tax auditors will provide
the taxpayer being audited with a written notification of
the tax audit findings containing their proposed tax audit corrections. If there is a disagreement regarding the tax audit findings, the taxpayer must respond to the notification in writing within seven to ten working days prior to attending a closing conference (the final discussion) with the tax auditors.
In the closing conference the taxpayer may reassert
its position with regard to the tax audit corrections and present the relevant supporting documents. If there is still a dispute surrounding a legal basis of an adjustment during the discussion of the tax audit findings, the taxpayer may request a discussion with the Quality Assurance Team (QAT) from the Regional Tax Office. The Discussion will be recorded in a memorandum prepared by the QAT.
The tax auditors may change some of the suggested corrections in light of the taxpayer’s response to the tax audit findings notification, the discussion result with the QAT, and the closing conference discussion.
The results of the final discussion are then summarised in a closing conference document. The taxpayer will have to state Agree or Disagree to each of the proposed corrections in the document. The document should also set out which part of the taxpayer’s arguments are accepted by the
tax auditors and accordingly lead to the cancellation or
reduction of some particular suggested corrections. By the end of the closing conference, the tax auditors and the taxpayer have to sign the closing conference document.
The closing conference is to be completed within a maximum period of three weeks from the initial invitation.
The corrections agreed to in the closing conference document will constitute a basis for the minimum amount the taxpayer must pay of the tax assessment issued based on the document.
Products of a tax audit
The legal products of a tax audit consist mainly of Tax Assessment Letters (Surat Ketetapan Pajak/SKP) as mentioned above and Tax Collection Letters (Surat Tagihan Pajak/STP), which must be based on the closing conference document. An STP typically serves as a legal instrument to collect administrative tax sanctions not covered in an SKP. In certain other situations, it may also be used by the DGT to collect tax due in a particular tax period (month) within the current year and the interest penalty on this.