Bad debts are unavoidable in bad times. It is a risk of on-account trading transactions. For banks, the risk is even more critical, given that their main business is to provide loans to customers.
When a bad debt ultimately becomes uncollectible, a business has to charge it to expenses. This must be painful, as it means lowering business profits. However, it has its compensation, as the expenses may be used to reduce taxable income, which means lower corporate income tax.
Nevertheless, a bad debt write-off cannot be claimed automatically as a tax-deductible expense. The income tax law sets out a set of conditions that must be satisfied. The Finance Ministry issued Regulation No. 105/PMK.03/2009 in early June as an implementing regulation. However, complications may arise as what the ministry tries to regulate is inconsistent with what the law rules on.
The income tax law requires that to be claimable as a deductible expense, a bad debt write-off must satisfy three main conditions. First, the bad debts must have been charged to expenses for commercial purposes in the creditor's accounts. Second, the taxpayer (creditor) must provide a list of the bad debts written off to the Director General of Taxation upon filing the annual income tax return.
The third condition could be either one of the four prescribed options: (1) the collection of bad debts has been handed over to the State Court; (2) there is a written agreement between the debtor and the creditor about the write-off of the accounts receivable; (3) the bad debt write-off has been published in a general or specialist publication; or (4) there is an acknowledgement from the debtor that the debt has been written off or forgiven.
Regulation No. 105 provides clarification on certain pertinent issues.
It states, for instance, that the qualifying uncollectible accounts receivable include only the ones arising from the taxpayer's business activities.
Those arising from related parties are explicitly excluded. It also points out newspapers and magazines with a countrywide circulation as the general publication referred to in the income tax law. The publications issued by the State-Owned Bank Association (Himbara) and Private National Bank Association (Perbanas) are counted as the specialist publications referred to in the law.
Up to this point, Regulation No. 105 is helpful, although satisfying all the main conditions, especially the third one, is not easy. However, it does create more a serious difficulty in its attempt to replace the first condition with another requirement that the bad debt written off should be recognized by the relevant debtor as income. Hence, the debtor must completely mirror what the creditor does. As the creditor claims the bad debt write-off as a tax deductible expense, the debtor must recognize it as income.
In light of the "taxability-deductibility" concept, there should be nothing wrong about requiring debtors to book the debts written off by the creditors as income. However, it will become a problem if the creditor is charged with the burden of proof regarding the debtor's satisfaction of the requirement. This means requiring creditors to have power over something that is completely out of their control.
The solution to this problem should hark back to how the law rules on this matter: deductibility of a bad debt write-off should be acknowledged, provided the main three conditions set out in the income tax law are satisfied. Ascertaining that the debtor recognizes the bad debt write-off as income should be down to the Directorate General of Taxation, which has the authority and all other means to examine the debtor's books, and not to the creditor, who does not have any access to those books.
Hence, Regulation No. 105 needs urgent revision before uncertainty grows wider. This should be given top priority to keep the business climate attractive.
The writer is the technical director of the tax service at PricewaterhouseCoopers Indonesia.
