Taxing Fringe Benefits

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.

Furthermore, fringe benefit tax can prevent any potential loopholes that could lead to tax evasion or avoidance. By subjecting fringe benefits to taxation, the government closes any gaps in the tax system that may have allowed individuals or companies to exploit these benefits for personal gain.

Fringe Benefit Tax Exemptions

However, in the interest of equity, it is important to note that not all benefits or facilities provided by employers will be subject to taxation. The regulations also encompass exemptions for various tax-free benefits and facilities. For instance, foods and beverages provided to all employees are considered non-taxable. Similarly, benefits related to security, health, and occupational safety, such as uniforms and safety equipment, are also exempt from taxation.

There are also nominal limitations for certain fringe benefits that are exempt from tax, such as meal vouchers or compensation up to a maximum of Rp 2 million per month, rent costs for an apartment or house up to a maximum of Rp 2 million per month, and non-religious day gifts up to IDR 3 million per year.

As informed in the press release from the Directorate General of Taxes, these limitations have been determined based on factors such as Purchasing Power Parity (OECD), Cost of Living Survey (BPS), Input Cost Standards (Ministry of Finance), Sport Development Index (Ministry of Youth and Sports), and benchmarks of several countries to ensure fairness and equity for the public.

In conclusion, the objective of the fringe benefits tax regulation goes beyond increasing government revenue or imposing additional economic burdens. Although employees are required to pay taxes on their fringe benefits, companies can also deduct their tax from the fringe benefit costs. This could potentially reduce government revenue and economic burdens on the other side.

Therefore, the primary objective of the fringe benefits tax regulation is to promote fairness and equality among employees. By upholding principles of fairness and equality, the fringe benefits tax regulation not only support the integrity and transparency of the tax system but also reinforces a harmonious and equitable work environment for all individuals involved.