At the end of June 2023, Government has issued technical regulation on taxation of fringe benefits. The regulation is a derivative provision of The Tax Regulations Harmonization Law (UU HPP). Specifically, it is outlined in Minister of Finance Regulation (PMK) Number 66/2023, which aims to provide legal certainty and ensure fair treatment regarding tax income for benefit related to work or services.
The introduction of this regulation indeed marks a significant shift in the tax treatment of fringe benefits. Previously, benefits and facilities obtained employee from company were not seen as income. Recipients were not obligated to report them into their tax returns.
These benefits encompass a wide range of offerings, such as company cars, health insurance, housing allowances, golf memberships, holiday tickets, employee discounts, cafeteria subsidies, and more. Companies used to serve them as additional incentives for employees, especially to increase overall job satisfaction and well-being.
But, under this new regulation, they are object to fringe benefits tax. Recipients must report them in tax returns. The objective of this regulation is to ensure that the value of these fringe benefits is included as taxable income.
The inclusion of these benefits in the tax system can create fairness and equity by treating all forms of compensation equally. In the past, top management of company such directors and managers may have receive certain advantages from fringe benefits that were considered non-taxable income.
This discrepancy in the tax treatment of fringe benefits among different levels of employees could lead to an unfair advantage. For instance, while all staff members had taxable benefits as they received only salary or wages from the company, directors enjoyed non-taxable benefits. Directors, in addition to their salary, received fringe benefits such as company cars or golf memberships that were exempt from taxation.
To address this inequality, the implementation of fringe benefit tax aims to eliminate such disparities and ensure that all employees, regardless of their position within the company, are subject to the same tax treatment for the benefits they receive. This helps to create a level playing field and promote fairness among all employees.
The new regulation also brings the fringe benefits received by top management, including directors and managers, into line with other employees and eliminates any preferential treatment or tax advantages previously enjoyed.
Treating all forms of compensation equally, including fringe benefits, in the tax system strives to establish fairness and equity in the workplace. It ensures that employees are appropriately taxed based on their total compensation and maintains transparency in the tax system by accounting for all income, including fringe benefits.
Additionally, the new regulation provides fairness to companies as well. Previously, fringe benefit expenses could not be tax-deductible. However, under the new regulation, they can be deducted as expenses as long as they constitute costs to acquire, collect, and maintain business income.
