In preparing the Annual Income Tax Return, fiscal reconciliation is a stage that cannot be missed. It is carried out after Taxpayer prepares bookkeeping and financial reports. This stage includes mechanism for adjusting commercial income/profits recorded in financial reports.

Literally, reconciliation can be interpreted as a summary that contains details of the differences between two or more accounts. Fiscal reconciliation is carried out in accordance with taxation law provisions. The aim is to determine the amount of fiscal profit/loss which is the basis for calculating the tax payable.

Fiscal reconciliation occurs because of differences in treatment between accounting and taxation. Financial reports in accordance with accounting provisions are prepared based on the Statement of Financial Accounting Standards (PSAK), which is in line with IFRS convergence which follow principles based. In contrast to this, law provisions in the field of taxation have their own regulations regarding the classification of components in financial statements.

For example, tax regulations regulate costs that can be deducted (deductible expenses) and costs that cannot be deducted (non-deductible expenses) in determining taxable income. Thus, taxation is rule based.

Temporary Difference and Permanent Difference

As a result of these differences, taxpayers need to carry out fiscal reconciliation. The differences that arise in the reconciliation process are divided into two, namely:

1. Temporary differences or time differences, and
2. Permanent difference.

Temporary differences occur when there are differences in the methods used. Examples of temporary differences are differences in inventory valuation and differences in the useful lives of assets. These differences are temporary so they will be resolved in the future. Temporary differences are also called time differences, therefore the differences that occur only consider the time of recognition. Temporary differences will result in deferred tax assets or deferred tax liabilities.

The permanent differences occur because there are differences in the treatment of the two rules, namely between accounting and taxation. For example, according to accounting provisions, building rental income is included in the income component, but based on tax provisions, this type of income is subject to final rates, which means that rental income is not included in the calculation of taxable income.

For this reason, several things that must be considered in fiscal reconciliation include:

1. Income which is the object of final income tax  (Income Tax Article 4 paragraph (2), Income Tax Article 15 final, Income Tax Article 22 final, Income Tax Article 26);
2. Income that is not an income tax object (Income Tax Article 4 paragraph (3)); And
3. Costs which are Non-Deductible Expense as regulated in Article 9 of the Income Tax Law as last amended by HPP (Harmonization of Tax Regulations) Law.

Fiscal Corrections in the Reconciliation Process

Differences that occur in fiscal reconciliation require adjustments. This adjustment is also called fiscal correction. This correction can increase the amount of taxable income, or can even reduce the amount of taxable income. There are 2 (two) types of fiscal correction, namely:

1. Negative Correction, and
2. Positive Correction.

Negative corrections occur when adjustments or corrections made result in:

• Fiscal net income is reduced;
• Fiscal income < commercial income; or
• Fiscal expense > commercial expense.

Examples of negative corrections include corrections to final income and corrections to income that is excluded from income tax objects.

Positive corrections occur when the adjustments or corrections made result in:

• Fiscal net income increases;
• Fiscal income > commercial income; or
• Fiscal expense < commercial expense.

Examples of positive corrections include corrections to costs that cannot be deducted.

Determining Fiscal Income

Fiscal income is the amount of a taxpayer's income after adjusting it to tax regulations. To calculate fiscal income, taxpayers need to carry out a fiscal reconciliation process.

However, the amount of income tax payable is not calculated from fiscal income. Taxpayers calculate income tax by multiplying taxable income by the applicable income tax rate. In this case, taxable income is obtained from reducing fiscal net income with compensation for losses (if any).

Fiscal net income is calculated by subtracting fiscal income from fiscal expenses. In general, fiscal net income is obtained using the following formula:

Fiscal net income = commercial income – commercial expenses + positive correction – negative correction

This nominal fiscal net income is used as the basis for calculating the amount of income tax payable by Taxpayers. Furthermore, in accordance with the provisions of Article 6 paragraph (2) of the Income Tax Law, Taxpayers have the right to compensate for losses with income from the next consecutive tax year for up to 5 (five) years.

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