ALLOCATION OF JOINT COSTS TO DETERMINE TAXABLE INCOME

By: Bambang Pratiknyo

DSH Tax Consulting

The amount of Taxable Income is determined based on gross income minus expenses incurred to obtain, collect, and maintain income as regulated in Article 6 of the Indonesian Income Tax Law, apart from those that are not deductible under Article 9 of the Income Tax Law. In this regard, the principle stated in the Explanation of Article 6 paragraph (1) letter a of the Income Tax Law applies, namely that for an expenditure to be deductible as an expense, it must have a direct relationship with business activities or activities to obtain, collect, and maintain income that constitutes a taxable object. Thus, expenses related to obtaining, collecting, and maintaining income that is not a taxable object cannot be deducted as expenses.

Furthermore, Article 13 of Government Regulation No.94 of 2010 also stipulates that expenses incurred to obtain, collect, and maintain income subject to final tax and/or income taxed based on the Net Income Calculation Norms as referred to in Article 14 of the Income Tax Law, and Special Calculation Norms as referred to in Article 15 of the Income Tax Law, may not be deducted.

These rules are logically applied, considering that expenses for income that is not a taxable object are irrelevant, while for income subject to final tax and income taxed under norms, the cost elements have already been accounted for—so it would be excessive if not regulated this way.

In practice, a taxpayer may have more than one type of income: taxable income, non-taxable income, income subject to final tax, and income taxed under norms. The taxpayer is therefore required to allocate expenses related to each type of income. If the taxpayer can allocate them, then only expenses related to taxable income may be deducted. Conversely, expenses related to non-taxable income, income subject to final tax, or income taxed under norms cannot be deducted. However, to do this, Article 27 of Government Regulation No.94 of 2010 requires taxpayers to maintain separate bookkeeping.

Referring to the definition of bookkeeping in the General Taxation Law, maintaining separate bookkeeping means the taxpayer must conduct a systematic recording process to collect financial data and information, including assets, liabilities, capital, income, and expenses, as well as acquisition and delivery values of goods or services, closed with financial statements in the form of a balance sheet and income statement for a period. This implies that the taxpayer must prepare more than one financial report: one specifically for non-taxable income/finally taxed income/norm-based income, and another for taxable income.

However, the Explanation of Article 27 of Government Regulation No.94 of 2010 only clarifies that separate bookkeeping refers to systematic recording by separating each transaction, income, and expense between business activities taxed under Article 17 of the Income Tax Law, and those subject to final income tax, as well as between gross income that is a taxable object and income that is not, and also between businesses that do and do not receive tax facilities under Article 31A of the Income Tax Law.

Example:PT A, engaged in the fish canning industry and headquartered in Jakarta, owns a warehouse and processing machinery in Papua to expand its operations.Under Government Regulation No.1 of 2007 on Income Tax Facilities for Investment in Certain Business Fields and/or in Certain Regions (as amended by Government Regulation No.62 of 2008), fish canning and related aquatic industries in Papua may be granted income tax facilities.One such facility is accelerated depreciation and amortization.

In this case, separate bookkeeping must be maintained for depreciation expenses related to assets in the Papua facility (which enjoys tax facilities) and the Jakarta facility (which does not).

The problem arises when a taxpayer cannot allocate joint costs through separate bookkeeping. Joint costs are expenses directly related to generating one type of income but simultaneously related to generating another type of income. Joint costs forming the basis of allocation in determining taxable income are those costs after fiscal adjustments. To resolve this, Article 27 paragraph (2) of Government Regulation No.94 of 2010 stipulates that allocation must be done proportionally based on the amount of each income.

Example: PT A earns income subject to final income tax. In one fiscal year, PT A reports:

a. Income from business subject to final income tax Rp 300,000,000,-

b. Other gross income subject to non-final income tax Rp 200,000,000,-

Total gross income Rp 500,000,000,-

If the inseparable joint costs after fiscal adjustment amount to Rp 250,000,000, then deductible expenses are:2/5 × Rp 250,000,000 = Rp 100,000,000

Looking closely, the proportional allocation rule is interesting. Its application should consider the nature of income types. Non-taxable income or income subject to final tax is not always generated through business activities. For example, bank interest or deposit interest subject to final tax does not result from the depositor’s activities. In other words, no expenses are incurred to earn such interest. Therefore, if a taxpayer earns deposit/bank interest in addition to taxable income, they need not maintain separate bookkeeping or adjust all costs proportionally.

Similarly, proportional allocation should not apply when a taxpayer earns dividends that are non-taxable income. Generally, dividends are not derived from business activities, as they constitute passive income.

However, if deposit/bank interest or dividends are earned from savings or investments financed by loans, then the interest expense on those loans must not be deductible. Based on this reasoning, there was once a regulation under SE-46/PJ.4/1995 concerning the treatment of interest expenses paid or accrued when a taxpayer receives deposit or savings interest income. That rule limited deductible interest expenses based on the ratio of loans to deposits.

In conclusion, the allocation of joint costs when a taxpayer earns taxable income, final-taxed income, non-taxable income, norm-based income, or income with tax facilities depends on the taxpayer’s ability to identify whether expenses are truly related to those income types. Without this ability, allocation errors will occur, leading to incorrect tax calculations.

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