Definition and Purpose of Imposition of Final Income Tax

IN the tax system known as income tax (PPh) which is final. In general, this final income tax scheme is only applied to certain types of income with special mechanisms and rates. This tax scheme is also applied in the Income Tax Law in Indonesia. So, what is the definition and purpose of the imposition of final income tax?

In various tax literature, the terms used to refer to final income tax include final tax, final tax liability, or final withholding tax ( Darussalam, 2020 ). The definition of final income tax itself is still limited and there is no adequate understanding yet.

However, 2 institutions define final income tax, namely the Organization for Economic Co-operation and Development (OECD) and the International Bureau of Fiscal Documentation (IBFD).

Based on the OECD Glossary of Tax Terms, final tax can be understood as a withholding tax based on a tax treaty and imposed by the source country with a lower rate limit than the rate that would be imposed under other conditions.

Meanwhile, the IBFD Tax Glossary (2009) describes the final tax used to describe income subject to withholding tax and not included in the calculation of income subject to progressive tax rates. Therefore, the tax liability concerning the relevant income is final at the time the withholding tax has been made.

Based on the definitions of the two institutions, there are at least 6 points that can be concluded ( Kristiaji and Mukarromah, 2020 ). First, the final tax is attached to the context of PPh. This is because the IBFD mentions the ‘income’ clause and the OECD mentions the ‘double taxation avoidance agreement (P3B)’ clause which is also indirectly related to PPh.

Second, the final tax is attached to the withholding tax mechanism. The withholding tax mechanism is a tax collection system that contains a scheme for the obligation to withhold and deposit taxes submitted to third parties.

Third, is the difference in tax rates. The application of final income tax is related to a special applicable tariff. The OECD shows this through the difference in withholding tax rates between those listed in the P3B and those that are generally different.

Meanwhile, IBFD states that the final tax rate applies specifically and is different from the generally accepted rate which applies a progressive rate. Both definitions show that final tax is also related to the tax rate that applies specifically.

Fourth, there is a separation of tax treatment. IBFD implicitly defines final tax as a tax on income that is not included in the calculation of the tax value in the generally accepted payment system. Fifth represents the final value so that withholding and deposit are not included in the calculation of the tax payable.

Sixth, generally related to international taxes. This point can be demonstrated by the OECD’s definition of final taxes linked to P3B. Then, IBFD also uses the international tax context in its final tax practice.

In addition, a complete and adequate description of the justification for the application of final income tax is also difficult to find. However, when viewed from the point of view, one of the main objectives of implementing a final income tax scheme is to simplify the imposition of income tax on certain tax objects.

The simplicity of the final PPh is shown by its calculation which is done by multiplying the gross income by the rate (Kristiaji and Mukarromah, 2020). The simple nature of the imposition causes final PPh to be used to provide administrative convenience for taxpayers (Darussalam, 2020).

These administrative conveniences can reduce tax compliance costs. Seeing this goal, the application of final income tax is an integral part of 2 policy breakthroughs to increase compliance, namely the presumptive tax and the withholding tax mechanism.

This is a brief description of the definition and objectives of the final PPh implementation. The next tax class will describe the history of the application of final PPh in Indonesia.

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