Tax Perspectives on Donations

Tax Perspectives on Donations

Donations are expenses that are incurred voluntarily and without coercion. Under Indonesian tax regulations, donation costs are not allowed to be deducted when calculating taxable income. This is regulated in the Income Tax Law in Article 9 Paragraph (1) Letter G, which states:

“Gifts, aid, or donations, and inheritances as referred to in Article 4 paragraph (3) subparagraph a and b, except donations as referred to in Article 6 paragraph (1) subparagraph i to subparagraph m, and zakat received by an Amil Zakat Board or other amil zakat institutions established or approved by the government, or compulsory religious donation for the followers of religions acknowledged by the Government, received by religious institutions established and approved by the Government, which are stipulated by or based on a government regulation,”

In terms of law, contributions, donations, and charitable activities are divided into several types in order to be classified in regulations such as tax regulations. When a company wants to do charity work, it is better if it understands the types of donations that are included and which are not included as income tax objects, because it turns out that not all donations are subject to tax. Article 6 paragraph (1) of the Income Tax Law has stated the types of donations that can be deducted for determining the amount of taxable income, including donations for national disaster management, donations for research and development in Indonesia, donations for educational facilities, and donations for sports development.

Based on the explanation in the regulations above, it is known that donations are expenses, which are examples of CSR, or Corporate Social Responsibility expenses. In running their businesses, business owners no longer focus on profit alone but are required to care about society and the environment. They set aside a portion of their profits to realize an ethical business through CSR, which is a form of corporate moral responsibility. In other words, donation costs are an example of the implementation of CSR by companies as a form of social responsibility aimed at the social or surrounding environment.

Based on Article 6 paragraph (1) of the Income Tax Law, Government Regulation Number 93 of 2010 states several CSR expenses that can be deducted from gross income in calculating taxable income for taxpayers, including:

  1. Donations for research and development carried out on the territory of the Republic of Indonesia were submitted through research and development institutions.
  2. Donations for national disaster relief
  3. Donations for sports coaching aimed at fostering, developing and coordinating a/group of branch/type of sports organizations
  4. Social infrastructure development costs incurred to build facilities and infrastructure for the public interest and are non-profit in nature
  5. Donations for educational facilities through educational institutions

Furthermore, there are conditions for donations to be used as deductions as stipulated in Article 2 of Government Regulation 93/2010, as read below:

  1. The taxpayer has net fiscal income based on the annual income tax return for the previous tax year;
  2. Giving donations and/or incurring costs does not cause a loss in the tax year the contribution is given;
  3. supported by valid evidence, and
  4. Institutions that receive donations and/or fees have a Taxpayer Identification Number, except for entities that are exempted from being tax subjects as regulated in the Law on Income Tax.

In addition, Minister of Finance Regulation Number 90/PMK.03/2020 concerning Aid or Contributions, as well as Granted Assets That Are Excluded As Income Tax Objects stipulates objects that are excluded as income tax objects in Article 2 paragraph (3), that grants, assistance, or donations will be exempt from tax objects if given to:

  • blood relatives in a straight line of one degree;
  • religious institutions;
  • education institutions;
  • social institutions, including foundations;
  • cooperative; or
  • individuals who run micro and small businesses

Then Minister of Finance Regulation Number 76/PMK.03/2011 concerning Procedures for Recording and Reporting Donations further explains that the amount of donations for one  year is limited to not exceeding 5% (five percent) of net income for the previous tax year.

From all the explanation above, we can get the information that donations are expenses which incurred without any coercion. Furthermore, donation under the Indonesian Tax regulation are categorized as non deductible expense and not allowed to be deducted when calculating taxable income. In conclusion, donations in the tax perspective is known as expenses which are examples of Corporate Social Responsibility that incurred voluntarily and categorized as non deductible expenses with certain provision.

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