FOREIGN CAPITAL LOSS, FOREIGN INCOME TAX CREDIT, AND DOMESTIC INCOMES / Foreign Capital Loss, Foreign Income Tax Credit, and Domestic Incomes

Year 2021, Volume: 5 Issue: 1, 96 - 112, 30.04.2021

Muhammad Santoso

https://doi.org/10.29216/ueip.868563

Abstract

A taxpayer has a different interpretation about compensation for capital loss in the USA with taxable income in Indonesia from the tax authority (DGT). This compensation is related to foreign income tax credit. Tax court states that if the capital loss is recognized in calculating the foreign income tax credit, the capital loss must be considered in calculating the taxable income. By using the case in the tax court decision in Indonesia and analysis of existing regulations, this paper finds that are multiple interpretations in a regulation. The capital loss in the USA only can be compensated in the USA, not in Indonesia. This paper finds that besides the actual tax payments, the calculation of foreign income tax credit can use the tax rates in the tax treaty and effective tax rate from tax payment in a foreign country. The existing tax regulations should be revised to reduce multiple interpretations.

Keywords

Foreign Income Tax Credit, Capital Loss, Compensation

References

• Bayer, Ralph, and Frank Cowell. (2016). Tax Compliance by Firms and Audit Policy. Research in Economics, 70(1), 38–52.
• Bond, Eric W., and Larry Samuelson. (1989). Strategic Behaviour and the Rules for International Taxation of Capital. The Economic Journal, 99(398), 1099–1111.
• Cooper, Maggie, and Quyen T.K. Nguyen. (2020). Multinational Enterprises and Corporate Tax Planning: A Review of Literature and Suggestions for a Future Research Agenda. International Business Review, 29(3), 101692.
• Dickescheid, Thomas. (2004). Exemption vs. Credit Method in International Double Taxation Treaties. International Tax and Public Finance, 11(6), 721–39.
• European Commission. (2006). Risk Management Guide For Tax Administrations.
• Fandel, Günter, and Michael Lorth. (2009). On the Technical (in)Efficiency of a Profit Maximum. International Journal of Production Economics, 121(2), 409–26.
• Graham, John R., Michelle Hanlon, Terry Shevlin, and Nemit Shroff. (2014). Incentives for Tax Planning and Avoidance: Evidence from the Field. Accounting Review, 89(3), 991–1023.
• Hoffman, William H . Jr. (1961). The Theory of Tax Planning. The Accounting Review, 36(2), 274–81.
• Indonesia, and the USA. (1988). Convention Between The Government of The Republic of Indonesia and The Government of The United States of America. The Government of the Republic of Indonesia and The United States of America. https://www.ortax.org/ortax/?mod=treaty&page=show&id=47&q=&hlm=1&isi=1&type=list#top.
• IRS. (2020). TITLE 26—Internal Revenue Code § 1212.
• Johansson, Åsa, Øystein Bieltvedt Skeie, Stéphane Sorbe, and Carlo Menon. (2017). Tax Planning by Multinational Firms: Firm-Level Evidence from a Cross-Country Database. OECD Economics Department Working Papers, 1355: OECD Publishing, Paris. http://www.oecd-ilibrary.org/economics/tax-planning-by-multinational-firms_9ea89b4d-en.
• Keuangan, Menteri. (2002). Kredit Pajak Luar Negeri. Keputusan Menteri Keuangan Republik Indonesia Nomor 164/KMK.03/2002: 1–2.
• Kim, Jeong Bon, and Tiemei Li. (2014). Multinationals’ Offshore Operations, Tax Avoidance, and Firm-Specific Information Flows: International Evidence. Journal of International Financial Management and Accounting, 25(1), 38–89.
• Kurauone, Ophias et al. (2020). The Effects of International Financial Reporting Standards, Auditing and Legal Enforcement on Tax Evasion: Evidence from 37 African Countries. Global Finance Journal, 100561. https://doi.org/10.1016/j.gfj.2020.100561.
• Kurniawan, Anang Mury. (2017). Pokok Pokok Tax Treaty. Jakarta: Mitra Wacana Media.
• Lietz, Gerrit M. (2013). Ssrn Tax Avoidance vs. Tax Aggressiveness: A Unifying Conceptual Framework.
• Lu, Xiangyuan, and Zhiqiao Wu. (2020). How Taxes Impact Bank and Trade Financing for Multinational Firms. European Journal of Operational Research, 286(1), 218–32.
• Mills, Lillian F. (1998). Book-Tax Differences and Internal Revenue Service Adjustments. Journal of Accounting Research, 36(2), 343. http://proquest.umi.com/pqdweb?did=36605675&Fmt=7&clientId=20270&RQT=309&VName=PQD.
• Pajak, Direktur Jenderal. (2004). Kompensasi Kerugian Fiskal Dalam Penghitungan Pajak Penghasilan. Surat Edaran Direktur Jenderal Pajak Nomor, SE-03/PJ.31/2004: 1–2.
• Pajak, Direktur Jenderal. (2020). Kebijakan Pengawasan Dan Pemeriksaan Wajib Pajak Dalam Rangka Perluasan Basis Pajak. Surat Edaran Direktur Jenderal Pajak Nomor, SE-07/PJ/2020 (1): 1–9.
• Pajak, Pengadilan. (2019). PUT-108701.14/2010/PP/M.XVA Tahun 2019. Indonesia.
• (Paramonova) Kuchumova, Yulia. (2017). The Optimal Deterrence of Tax Evasion: The Trade-off Between Information Reporting and Audits. Journal of Public Economics,145, 162–80.
• Pemerintah Republik Indonesia. (2008). Tentang Perubahan Keempat Atas Undang-Undang Nomor 7 Tahun 1983 Tentang Pajak Penghasilan. Undang-undang Nomor 36 Tahun 2008 23-09–2008: Lembaran Negara RI No 4893, Jakarta.
• Pemerintah Republik Indonesia. (2020). Cipta Kerja. Undang-undang Nomor 11 tahun 2020: Lembaran Negara RI Tahun 2020 No 245.
• Pieretti, Patrice, and Giuseppe Pulina. (2020). Does Eliminating International Profit Shifting Increase Tax Revenue in High-Tax Countries?, Economic Modelling, 93, 717–27. https://doi.org/10.1016/j.econmod.2020.01.020.
• Poterba, James M., and Scott J. Weisbenner. (2001). Capital Gains Tax Rules, Tax-Loss Trading, and Turn-of-the-Year Returns. Journal of Finance, 56(1), 353–68.
• Rego, Sonja Olhoft. (2003). Tax-Avoidance Activities of U.S. Multinational Corporations. Contemporary Accounting Research, 20(4), 805–33. http://doi.wiley.com/10.1506/VANN-B7UB-GMFA-9E6W.
• Snow, Arthur, and Ronald S. Warren. (2007). Audit Uncertainty, Bayesian Updating, and Tax Evasion. Public Finance Review, 35(5), 555–71.