Beware: Some Cashbacks Constitute Income Tax Objects
Question:
MY NAME is Fransisca. I am a tax employee at an electronics equipment distributor company in Surabaya. To boost sales, our company plans to offer a cashback programme to our customers. However, the cashback mechanism we intend to provide will vary.
Under certain promotional programmes, cashback will only be given to customers who successfully achieve a specific purchase target during the promotional period. Under other promotional programmes, all customers will immediately receive cashback in the form of a discount at the time of purchase. For your information, we are currently having difficulty determining the appropriate tax treatment for these planned promotional programmes.
My question is: are there any provisions governing the tax treatment of our planned promotional programmes? If so, how should these planned promotional programmes be treated for tax purposes? Please explain.
Fransisca, Surabaya.
Answer:
THANK you for your question, Ms Fransisca. In practice, there is still a widespread assumption that all types of cashback are regarded as discounts. This leads to the assumption that the provision of cashback does not constitute an income tax object and therefore carries no tax consequences.
This situation raises a fundamental question: how can one distinguish between cashback that constitutes an income tax object and cashback that does not? The short answer is that the nature of the cashback payment must be examined further. See: 'Annual Return Shows Tax Underpaid Due to Cashback Withholding Receipts’
To examine the nature of cashback payments, we can generally refer to the clarification issued by the director general of taxes through the Director General of Taxes Circular Letter Number SE-24/PJ/2018 concerning the Tax Treatment of Benefits Received by Buyers in Connection with Certain Conditions in Sales and Purchase Transactions (SE-24/2018). This circular letter can technically serve as a reference for further analysis of the tax treatment of cashback payments, particularly with regard to the nature of cashback that constitutes an income tax object.
Referring to SE-24/2018, it can be noted that there is clarification concerning benefits received by customers (buyers) under certain conditions in sales and purchase transactions. Such benefit is classified as a reward and therefore treated as an income tax object. In practice, such benefit may essentially be provided in the form of money (cashback), which is relevant to your situation. This is as stipulated in Section E number 3 letters b and d of SE-24/2018.
Please not that the treatment as an income tax object applies to benefits received by customers, including cashbacks, where it arises from the fulfilment of certain conditions. The fulfilment of certain conditions may take the form of (i) purchases by the customer reaching a specified amount, (ii) sales by the customer reaching a specified amount and/or (iii) payment by the customer within a specified period. This is as set out in Section E number 2, letter a, number 3 subparagraph a of SE-24/2018.
As an illustration, the following provides further explanation along with examples of cashback transactions based on their nature and tax treatment.
Cashback as a Reward
As previously explained, cashback provided as a benefit for the fulfilment of a specific target or condition may constitute an income tax object. For example, your company provides a cashback of IDR5 million to an agent that successfully achieves a purchase target of IDR2 billion over one semester. See also: ’DGT: Not All Cashbacks Are Income Tax Objects and Must Be Filed’
In such circumstances, the cashback is no longer regarded as a discount. Instead, the cashback is treated as a reward or incentive that increases the economic capacity of the recipient, as it is granted upon the achievement of a specific condition. Accordingly, the cashback constitutes an income tax object, and your company is therefore obliged to withhold income tax. This is as explained in Section E number 3 of SE-24/2018.
Cashback as a Discount
In addition, cashback may also be treated as a discount at the time of the transaction where it is offered to all customers as part of a marketing strategy without requiring the fulfilment of any specific condition or without any element of reward. For example, your company offers a cashback promotion in the form of a discount of IDR100,000 to all customers without requiring the fulfilment of any specific condition. See: ’Tax on Cashback in Sale and Purchase Transactions’
In such circumstances, customers are not required to fulfil any purchase target, sales target or other condition to receive the cashback in the form of a discount at the time of the transaction. Accordingly, such cashback does not constitute an addition to economic capacity, but merely constitutes a discount. Therefore, cashback in the form of a discount does not constitute an income tax object, and your company is accordingly not obliged to withhold income tax.
Important Points to Note!
Revisiting your question above, we can conclude that the cashback promotional programmes your company plans to offer may be classified into two groups based on their nature and tax treatment, as follows.
- the promotional programme involving cashback subject to specific conditions shall bbe treated as an income tax object, and your company is therefore obliged to withhold income tax; and
- the promotional programme involving cashback in the form of a discount without any specific conditions shall be treated as not constituting an income tax object, and your company is therefore not obliged to withhold income tax.
So, will the type of withholding tax applicable to cashback transactions that constitute an income tax object always be the same? The answer is: not necessarily.
The type of withholding tax depends on the status of the party receiving the cashback. In general, pursuant to Section E number 3 letter d of SE-24/2018, the following provisions apply. First, where the cashback recipient is a resident individual taxpayer, the cashback provider is obliged to perform Article 21 Withholding Tax.
Second, where the cashback recipient is a resident corporate taxpayer or a permanent establishment (PE), the cashback provider is obliged to perform Article 23 Withholding Tax. Third, where the cashback recipient is a non-resident taxpayer that does not conduct business through a PE in Indonesia, the cashback provider is obliged to perform Article 26 Withholding Tax, whilst still taking into account the possible application of a tax treaty (persetujuan penghindaran pajak berganda/P3B in Indonesian) where the relevant requirements are satisfied.
That concludes our answer. We hope it is helpful.
For your information, the Tax Consultation column is published weekly to answer selected questions from loyal DDTCNews readers. If you would like to submit a question, please send it to the following e-mail address: [email protected]. (dik)
