CASE STUDY: Tax Due Diligence In a Construction Company

Written by Wulan Azzahra Fitka and Zahrial Fakhri on 5/7/2024

The author’s views are entirely their own and may not always reflect the views of Putranto Alliance.

A construction foreign investment company in Indonesia received a request from tax authorities to clarify the company’s tax data and information. The company sought assistance from Putranto Alliance to provide a Tax Due Diligence report. By examining corporate tax aspects and checking transactions, the due diligence results identified errors in tax calculation, several transactions that are non-compliant with tax regulations, and potential disputes with the tax authorities. Based on these findings, the company could respond to the request, make informed decisions to prevent future tax disputes, and take necessary action to comply with tax regulations in the future.

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Situation

A construction foreign investment company engages in a variety of development projects, leveraging its expertise from overseas to implement innovative solutions in Indonesia.

The business activities span multiple sectors, encompassing real estate development, infrastructure projects, and business consultancy services. 

Their approach combines foreign technological advancements with local market insights, enabling them to deliver high-quality projects tailored to the Indonesian market.

Complication

The company experienced tax issues evidenced by Request for Explanation of Data and Information (Surat Permintaan Penjelasan atas Data dan/atau Keterangan/SP2DK) from the Tax Authority. The issues arise due to discrepancies between the information held by the Directorate General of Taxes and the data reported by taxpayers.

The complex operations and numerous transactions made identifying and addressing potential tax risks challenging. Thus, the company required a comprehensive review of its corporate tax aspects to ensure compliance with Indonesian tax laws and regulations.

Question

As a result of the matters above, the company asked Putranto Alliance to perform thorough tax due diligence. The processes involved are as follows:

  1. Identifying Potential Tax Exposures: Finding areas where the company might face tax liabilities due to non-compliance with tax laws and regulations.
  2. Identifying Errors in Bookkeeping and Tax Treatment of Transactions: Finding areas where the company might face tax liabilities due to errors in bookkeeping and tax treatment of transactions.
  3. Providing Recommendations: Propose changes in bookkeeping and other tax-related areas.

Answer

Putranto Alliance thoroughly examined the company’s transactions for the past few years for this due diligence. The errors are categorized to determine its potential impact on the company.

The key points in the Tax Due Diligence Report are as follows:

Tax Due Diligence Report Issue Tree

Tax Exposure

Putranto Alliance conducted comprehensive tax due diligence services to identify potential tax exposures, including:

  1. Non-compliant Withholding Tax;
  2. Transactions that are not being tax-withheld.

These issues may result in penalties and potential disputes with the tax authority. In turn, it may impact the profitability of the company and the shareholders may need to put in additional capital to resolve the issue.

Errors in Bookkeeping and Tax Treatment of Transactions

The tax due diligence also found errors in bookkeeping, including:

  1. Unrecorded Transactions, and
  2. Misclassified Transactions.

These findings consist of inconsistencies in data recording and other administrative issues which may result in misrecording in the general ledger that causes misstatement of financial statements submitted to the tax authorities.

Provide Recommendation

The comprehensive Tax Due Diligence ensures tax compliance for the company and provides strategic recommendations including:

  1. Recommendation in Classifying the Transactions;
  2. Recommendation in Bookkeeping; and
  3. Recommendation in Tax Compliance.

These recommendations could help the company to prevent potential issues, such as penalties by the tax authority.

By identifying previous errors, the company can effectively respond to the SP2DK inquiries related to the mentioned data discrepancies and ensure future compliance with Indonesian tax laws and regulations.

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