Observing the Income of Social Foundations that Become Non-Taxable Objects in Indonesia

Social activities, also commonly referred to as philanthropy, are described as actions taken voluntarily for the public benefit without expecting any reward. These activities are essentially associated with the values of generosity and mutual cooperation, which are commonly implemented in Indonesian culture. Furthermore, Indonesia ranks first as the most generous country in the world, based on the World Giving Index report released by the Charities Aid Foundation in 2023.

In its development, social activities are not only limited to individuals but also through the establishment of foundations. This condition, of course, raises questions about the tax regulations for social foundations.

Based on Law Number 16 of 2001 concerning Foundations as amended by Law Number 28 of 2004, a foundation is a legal entity consisting of separated assets designated to achieve specific goals in the fields of social, religious, and humanitarian activities, which does not have members. According to tax regulations (General Provisions and Tax Procedures Law), a foundation is categorized as an entity defined as a group of people and/or capital which is a unity, both those conducting business and those not conducting business. Therefore, it can be concluded that a social foundation is classified as a tax subject entity, even though it is non-profit.

Income of Social Foundations Classified as Non-Taxable Objects

A social foundation will become a taxpayer if it meets subjective and objective requirements according to tax regulations. Subjective requirements refer to fulfilling the criteria of tax subjects as regulated in Article 2 paragraph (3) of Law No. 7 of 1983 on Income Tax as amended by Law No. 6 of 2023 (or the Income Tax Law), while objective requirements refer to the condition when a foundation (including social foundations) has income as regulated in Article 4 of the Income Tax Law. For social foundations, there is income classified as non-taxable objects according to Article 4 paragraph (3) of the Income Tax Law, namely:

1. Donations or contributions, provided there is no business, employment, ownership, or control relationship between the concerned parties.

2. Endowment assets, provided there is no business, employment, ownership, or control relationship between the concerned parties.

3. Gains from the transfer of assets in the form of endowments, donations, or contributions as long as the requirements are met, namely that endowments, donations, or contributions are given by a social foundation to religious, educational, or social bodies, and there is no relationship between the concerned parties.

4. Dividends originating from within the country.

5. Surplus, provided the surplus is reinvested in the form of social and religious infrastructure within a maximum period of 4 years from the receipt of the surplus or the surplus is placed as an endowment fund.

However, social foundations are still required to report income excluded from taxable objects in the Annual Income Tax Return (SPT) along with the attachment of the usage of the surplus according to applicable regulations. As a corporate taxpayer, income not included as taxable objects for social foundations will be reported in SPT 1771 in Appendix-IV part B.

Procedure for Assessing Income in the Form of Donations, Contributions, or Endowment Assets for the Recipient

The transfer of assets received by social foundations is not limited to cash but can also take the form of goods as regulated in Article 7 and Article 55 paragraph (2) of Government Regulation 55/2022. These provisions also mandate the valuation and calculation of the transfer of assets in the form of goods to be further regulated in a ministerial regulation.

Different from the transfer of assets in the form of cash which is recorded based on the amount received, Article 8 paragraph (1) in conjunction with Article 11 paragraph (1) of Ministerial Regulation 90/2022 stipulates that the receipt of donations, contributions, or endowments in the form of goods can be recorded based on the acquisition value as the residual fiscal book value or other values. The residual fiscal book value is used in conditions where the income provider is a party required to maintain bookkeeping.

Furthermore, other values that can be used as the acquisition value of assets in the event that the donor is not required to maintain bookkeeping based on Article 8 paragraph (2) in conjunction with Article 11 paragraph (2) of Ministerial Regulation 90/2022 include:

a. For assets in the form of land and/or buildings, the amount is:

1. NJOP (Tax Object Sales Value) stated in the SPPT PBB (Land and Building Tax Return) in the tax year when the transfer occurs; or

2. A certificate from the Government Agency responsible for local tax affairs where the land and/or buildings are registered if there is no SPPT PBB as mentioned in point 1.

b. For assets other than land and/or buildings, the amount is the market value of the assets at the time of the transfer.

Through these provisions, social foundations need to carefully consider the form of asset transfers received and the bookkeeping maintained by the donor, as this will affect the asset valuation procedures.

Gains from the Transfer of Assets in the Form of Donations, Contributions, or Endowments

In principle, gains from the transfer of assets in the form of endowments, donations, or contributions are included as taxable objects for the income provider, as regulated in Article 4 paragraph (1) letter d point 4 of the Income Tax Law. The gain in question is the difference between the market price and the residual fiscal book value or acquisition value. However, the regulation states that gains from the transfer of assets can be excluded from taxable objects for the provider as long as the following conditions are met:

a. The endowments, donations, or contributions are given to:

1. Blood relatives in a direct lineage of one degree;

2. Religious bodies;

3. Educational bodies;

4. Social bodies, including foundations;

5. Cooperatives;

6. Individuals running MSMEs (Micro, Small, and Medium Enterprises); and

b. There is no business, employment, ownership, or control relationship between the concerned parties.

It cannot be denied that there is a possibility that social foundations may act as the income provider and gain from the transfer of assets in the form of donations, contributions, or endowments. In such cases, it is necessary to pay attention to whom the asset transfer is given and the relationship between the parties to determine whether the resulting gain is classified as a taxable object or not.

Observing Surplus as Non-Taxable Income for Social Foundations

Based on Article 16 paragraph (2) of Government Regulation 55/2022, it can be understood that the surplus is the excess difference from the calculation of all income received or obtained, excluding income subject to final income tax and/or non-taxable income, reduced by costs to obtain, collect, and maintain (3M).

Since the substance of the surplus is income, it should be subject to income tax according to applicable tax regulations. However, Article 4 paragraph (3) letter p of the Income Tax Law provides an exemption for the surplus received by social and religious bodies. If the surplus has met the criteria to be reallocated into social and religious infrastructure within 4 years from when the surplus is received/obtained, then the surplus value becomes non-taxable income.

If the surplus exceeds the 4-year period for reinvestment, the amount of surplus not used for infrastructure development will be reported as additional taxable income in the following tax year.

Furthermore, there are additional regulations on the conditions for surplus received by social foundations to be considered non-taxable income in Article 48 of Ministerial Regulation 18/2021. These conditions include the amount of surplus used for infrastructure development or procurement of at least 25%. Then, the remaining use of the surplus for development can be allocated as an endowment fund as long as it meets the requirements stated in Article 49 paragraph (2) of Ministerial Regulation 18/2021.

Thus, it can be concluded that the tax treatment of social foundations is essentially the same as that of domestic corporate taxpayers. However, in understanding the tax treatment of social foundations, it is important to consider the fulfillment of conditions for income exemption from taxable objects according to applicable laws and regulations.