Services » Accounting and Taxation Aspects of Joint Operation

Accounting And Taxation For Joint Operation

Written by Wulan Azzahra Fitka on 16/07/2024
The author’s views are entirely their own and may not always reflect the views of Putranto Alliance.

Introduction

Joint Operation (JO), known as “Kerja Sama Operasi (KSO)“ in Indonesia, refers to a collaborative effort where two or more entities pool their resources and expertise to complete a project, commonly undertaken in various industries such as oil and gas exploration, mining, and infrastructure development.

Definition

Based on the Director General of Taxes Letter Number S-323/PJ.42/1989 Year 1989 concerning Taxation Issues for Joint Operation, a joint operation is an association of two or more entities that join forces to complete a project.

The Importance

Before starting a joint arrangement, parties should understand the difference between Joint Operations (JO) and Joint Ventures (JV). These two forms are often confused and even mistakenly interpreted as the same. The following are some distinctions that may help in understanding the difference between JO and JV:

	Joint Operation (JO)	Joint Venture (JV)
Arrangement’s Rights	JO has rights to the assets and liabilities of the joint arrangement.	JV has rights to the net assets of the joint arrangement.
Establishment of a Legal Entity	There is no establishment of a new legal entity. Each party participates to achieve a common goal in a specific project or activity.	The establishment of a new legal entity is owned by two parties or more.
The Substance of Contractual Arrangements	The contractual arrangement establishes the allocation of revenues and expenses based on the relative performance of each party to the joint arrangement.	The contractual arrangement establishes each party’s share in the profit or loss relating to the activities of the arrangement.
Term of Arrangement	The parties often use JO for short-term projects or activities requiring collaboration for a specific purpose without creating a new legal entity.	The parties often use JV for long-term projects and to establish a stand-alone legal entity. It represents a more formalized form of joint arrangement, involving legal entities with long-term and sustainable business goals.

The types of JO can be categorized into:

Administrative Joint Operation: The type of JO that has a separate administration from its members. The administrative JO performs business transactions on its behalf, including signing work contracts, submitting tenders, processing invoices, and billing for work results.

Non-Administrative Joint Operation: The type of JO that serves solely as a coordination tool among its members. Each member of the JO actively takes on administrative responsibilities, including signing work contracts and assuming responsibility for their assigned tasks based on their agreement.

In addition, the type of JO will affect the taxation obligations and mechanism of the JO. The following are several aspects of JO taxation that can be considered:

	Administrative JO	Non-Administrative JO
Requirement to Register as a Taxpayer	Required to have a Taxpayer Identification Number (Nomor Pokok Wajib Pajak/NPWP) Required to register as a Taxable Entrepreneur (Pengusaha Kena Pajak/PKP).	Not required to have a Taxpayer Identification Number (Nomor Pokok Wajib Pajak/NPWP).
Obligation to Conduct Bookkeeping	Has the obligation to conduct separate bookkeeping from its members. As regulated in the Decree of the Director General of Taxes Number Kep-214/PJ./2001, when submitting the Periodic Tax Return of Income Tax Article 21, the JO must attach a Financial Report on the JO activities.	Do not have the obligation to conduct bookkeeping.
Obligation to Divided Separately the Proof of Income Tax Withholding or Collection	There is no obligation to divided separately the proof of income tax withholding or collection (bukti pemotongan atau pemungutan pajak penghasilan).	Has obligation to divide separately the proof of income tax withholding or collection (bukti pemotongan atau pemungutan pajak penghasilan).

The Best Time to Use Accounting
and Taxation Service on Joint Operation

The best time to plan the accounting system and tax planning for a joint operation is right from the establishment phase of the collaboration. Starting early ensures that financial transactions are accurately recorded from the outset, promoting transparency and accountability among the parties involved. This early planning also allows for effective tax planning, which can help minimize tax liabilities and ensure compliance with tax laws throughout the process.

Benefits

The Benefits of prioritizing the proper and correct accounting and taxation system in the JO include:

Transparency and Trust: Proper accounting fosters transparency among partners, building trust and improving collaboration.
Informed Decisions: Accurate financial records help in tracking performance and making smart decisions about resource allocation.
Tax Savings: Effective tax planning reduces tax costs by using deductions and credits, saving money for all involved.
Legal Compliance: Adhering to tax laws prevents legal issues and penalties, ensuring smooth operations.
Financial Optimization: Good accounting and tax practices lead to better financial outcomes, maximizing profits and minimizing expenses in joint operations.

The Process

According to Statement of Financial Accounting Standards (Pernyataan Standar Akuntansi Keuangan/PSAK) 66 the parties shall recognize their interest in a JO:

Its assets, including its share of any assets held jointly;

Its liabilities, including its share of any liabilities incurred jointly;

Its revenue, from the sale of its share of the output arising from the JO;

Its share of the revenue, from the sale of the output by the JO; and

Its expenses, including its share of any expenses incurred jointly.

The tax mechanism for JO based on the Director General of Taxes Letter Number S-251/PJ.313/1998:

Since JO is not subject to income tax, the income received by a JO represents the income of its members proportionate to their respective shares determined by the agreement.

If income such as interest, rent, or other earnings received or acquired by the JO from Domestic Corporate Taxpayers and designated Individuals (Providers) is subject to deduction under Income Tax Article 23, the withholding tax under Income Tax Article 23 must be divided separately for each member of the JO for proper allocation.

The calculation of Income Tax Article 23 for each member of the JO aligns with the terms specified in the JO Agreement that have been mutually agreed upon.

The JO is not required to submit an Annual Income Tax Return or pay Income Tax Article 25 and Income Tax Article 29. Its primary obligation lies in acting as a withholder/collector of Income Tax Article 21, Income Tax Article 23, Income Tax Article 26, and VAT/ Luxury Goods Sales Tax.

How We Can Help

Putranto Alliance provides comprehensive assistance regarding JO activities such as:

Tailored Tax Planning and Compliance Solutions: Optimize tax efficiency and mitigate risks.
Robust Accounting Services: Ensure transparency and regulatory compliance through financial reporting and analysis.
Strategic Advisory Support: Facilitate informed decision-making and enhance financial management within JO frameworks.
Business Establishment: Assisting through the business establishment process to ensure the company can conduct business operations in Indonesia.
Business License: Assisting through the intricacies of the licensing process to ensure all the requirements efficiently and effectively.

FAQs

What are the advantages of a JO?

Some advantages of a JO include shared resources, risk sharing, and specialized expertise, as participants pool their resources and skills to achieve a common objective without the complexity of forming a separate entity.

What is the significance of accounting and taxation in Joint Operations?

They ensure transparency, compliance, and efficient financial management. Accounting involves meticulous recording and reporting, while taxation focuses on optimizing tax efficiency and compliance.

Why does the Administrative JO have to register as taxpayers?

These are conducted to assist with the mechanism of collecting and withholding taxes such as Income Tax Article 21, Income Tax Article 23, Income Tax Article 26, and Value Added Tax.

Do non-administrative JOs need to do their bookkeeping?

Yes. Even though bookkeeping can be done by each JO member, it is better to conduct its bookkeeping to ensure the transparency of the JO members’ contributions and responsibilities, also helping to assess the JO’s business performance.

How to divide separately the proof of income tax withholding/collection?

JO can divide separately the Proof of Withholding Income Tax Article 23 to the Tax Office where JO is registered/domiciled, attached with a photocopy of the JO establishment document.

How can Putranto Alliance assist with accounting and taxation in JO? 

We offer tailored tax planning, robust accounting services, and strategic advisory support to enhance financial management and decision-making in JO frameworks.

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