Sunday, December 6, 2009

Deductibility of promotion and selling costs

There is a change in the treatment of deductibility of promotion and selling costs in the application of the amendments to the Income Tax (Law Number 36 Year 2008), which took effect on January 1 2009.

Article 6 (1) a of Law Number 36 Year 2008 on Income Tax stipulates that:

the amount of taxable income for resident taxpayer and permanent establishment, shall be determined based on the gross income minus costs to obtain, collect, and maintain the income, including costs directly or indirectly related to business activity, among other things costs for promotion and sale that are stipulated in or based on a Minister of Finance Decree.

Compared to the previous Income Tax Law (Law Number 17 Year 2000), this Income Tax Law defines more specifically and clearly that the marketing and selling costs can be deducted from the gross income when determining the taxable income. However, there are certain criteria and a limitation on those deduction treatments which is further regulated by the minister of finance.

That limitation comes from the government wanting to more dynamic competition between bigger and smaller companies in certain areas of industry. Furthermore, the limitation is also being designed to ascertain deductibility on promotion and selling costs as well, and also to limit promotion and selling costs which could be deducted in large-scale industry becoming small and limited, compared to the one stipulated by the previous Income Tax Law.

In addition, on June 10 this year the minister of finance issued Decree Number 104/PMK.03/2009 concerning "Promotion and Sales Costs that Can be Deducted from Gross Income". In this regulation, promotion cost is defined as the cost incurred by a taxpayer to introduce, promote and/or encourage the use of a product, either directly or indirectly, to maintain and/or increase sales.

On the other hand, sales cost is the cost incurred by a taxpayer to distribute goods and/or services up to buyers and/or customers, either directly or indirectly, including packaging cost, warehouse/storage cost, security cost and insurance cost, as well as the other costs that are incurred in the process of delivering the product to the buyer and/or customers until the goods and/or services are received by buyers and/or customers.

The promotion costs and/or sales costs can be deducted from gross income provided that they meet these criteria:

  • The costs are incurred for the purpose of maintaining or increasing sales;

  • They are reasonable;

  • They are in line with normal and proper business practice;

  • They are In the form of goods, money, services, and facilities;
  • They are acceptable to other parties.

Furthermore, the cigarette and pharmaceutical industries are also required to provide a nominative list of promotion costs and/or sale costs paid to third parties.

The nominative list should at least contain the data of the recipient (name, addresses, taxpayer identification number and the amount of expenditure incurred). If the obligation to make the nominative list is not met, then the promotion cost and/or sale cost may not be deducted from gross income.

The following is the deductible amount of promotion cost for cigarette and pharmaceutical industry:

Type of IndustrySubjectGross turnoverDeductible amount
Cigarette• Producer;

• Main distributor or

• Sole importer
up to Rp500 million ($53 million)Not more than 3% from revenue or maximum of Rp10 million
> Rp500 million up to Rp5 billionNot more than 2% from revenue or maximum of Rp30 million
> Rp5 billionNot more than 1% from revenue or maximum of Rp100 million
Pharmaceutical• Producer;

• Main distributor or

• Sole importer
N/ANot more than 2% from revenue or maximum of Rp25 million

If the promotion cost has been incurred either by a producer or main distributor, it will be the producer that has the right to charge the promotion cost. Furthermore, if such cigarette or pharmaceutical products are not produced in Indonesia then it will be the sole importer that has the right to charge the promotion cost.

If promotion is conducted by means of product samples, the amount of cost that can be deducted from gross income shall be as much as the cost of goods.

In the meantime, the procedures for charging and reporting the promo¬tion cost and/or sale cost are to be laid down in a regula¬tion by the director general of Taxation, which has not been yet issued. Moreover, the association of cigarette and pharmaceutical companies has lodged a protest against the limitations imposed on their companies because the new regulation will effectively increase the corporate income tax rate.


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