MASTER THESIS ORAL EXAM PRESENTATION

1. Tuesday, 15 May 2012 organization performance indicators: a study of RELATIONSHIP BETWEEN tax revenue target policy and taxpayers’ complaints (tax objection) in indonesian tax authority EXAMINER : PROF. YOSHITAKA YAMAZAKI SUPERVISOR : PROF. HUN MYOUNG PARK MASTER THESIS ORAL EXAM PRESENTATION raden ariyo bisawarno(1B0011)

2. PresentationAgenda • Introduction • Literature Review • TRT, Objection and Appeal • Data and Methodology • Analysis and Findings • Conclusion Introduction >>>

3. Introduction Background • DGT is a sub department under the Ministry of Finance • Main task is collecting more than 70% revenue of national state budget every year, and keep increasing • One of organization performance indicators is tax revenue target (TRT) achievement. Introduction >>>

4. Introduction Problems • In the past ten years, DGT could only meet the TRT in three years • Stakeholders measures DGT performance merely from its ability to achieve TRT • Lack of political support from legislatives in giving more authority to DGT to collect taxes • Number of complaints (objections) is increasing • Percentage of winning the tax disputes in tax court is relatively low Introduction >>>

5. Introduction Research Question • Is there a relationship between TRT policy with the number of complaints (objection and appeal) • Does TRT influence the increasing number of tax objections and eventually tax appeals • If it does influence the number of complaints, how does it work Literature >>>

6. Literature Review • Performance paradox : minor correlation between performance indicator and performance itself. (Thiel & Leeuw, 2002: 271). • As time goes, the information provided by a performance indicator is no longer valid as its original purposes (Meyer and Gupta, 1994). Literature >>>

7. Literature Review Four processes that decrease the function of a performance indicator (Meyer Gupta, 1994 : 330-342). • Positive learning • Perverse learning • Selection • Suppression TRT, Objection >>>

8. TRT, Objection and Appeal How the system works House of Representative And Ministry of Finance Tax Revenue Target Processes within DGT authority Directorate General of Taxes Tax Audit Handled by: 1.Regional Offices 2.Service Offices 3.Directorate of Tax Audit and Collection Objection Processing Handled by: 1.Regional Offices 2.Directorate of Objection and Appeal Tax Court TRT, Objection >>>

9. TRT, Objection and Appeal DGT Performance Indicators : • the amount of annual tax revenue, • number of additional individual taxpayers, • number of tax audit, • tax receivable collection. • number of additional individual taxpayers, • annual income tax return, • monthly value added tax return, • objection rate • auditing efficiency, • objection efficiency, • tax refund completion efficiency, Data and Methodology >>>

10. Data and Methodology 1. Data • Secondary data from tax office headquarter (Public Relations Division), and tax court (Secretary Office) • Interviewing result from senior managers involved in tax audit, objection, and appeal process. • Interviewing result from tax auditors 2. Methodology • Qualitative descriptive analysis based on the secondary data Analysis and Findings >>>

11. Analysis and Findings Does TRT make sense? (Figure 5.2) Analysis and Findings >>>

12. Analysis and Findings Tax Audit Data : audit coverage There is no sign of increasing number of tax audits and no increase in numbers of tax assessment letter issued; even though the TRT is increasing every year. Analysis and Findings >>>

13. Analysis and Findings Tax Audit Data : auditor’s workload and productivity Why number of auditors has increased but less audit were conducted and less tax assessment letters were produced? Did auditors want to go deeper instead of wider reach? Analysis and Findings >>>

14. Analysis and Findings Tax Audit Data : potential auditor’s workload Possible explanation : Given the potential workload/coverage for each auditor, DGT tried to be effective by only employing less audit order to the auditors Analysis and Findings >>>

15. Analysis and Findings Less and less actual workload, we could expect that auditors would have more focus on their audit and produced ‘strong’ tax assessment letter? discourage taxpayers the number of objections should have decreased Analysis and Findings >>>

16. Analysis and Findings Tax Objection Data : objection rate is increasing Analysis and Findings >>>

17. Analysis and Findings Auditors failed to produce ‘strong’ tax assessment, so that taxpayers have more grounds to challenge it. Why?Is it because of TRT? (TRT is reflected in qualitative indicators) Given the performance indicator, then it is possible that auditors did not focus on generating strong output, but instead, pursued more the tax payment. Analysis and Findings >>>

18. Analysis and Findings Legal documents obtained from 2007, 2009, and 2011 support the statement of auditors, that there is actually a particular amount of target that is assigned to each unit of tax audit division and TRT were assigned mostly to large taxpayers Auditors interview responses : each auditor’s unit is given a particular TRT to be achieved audited taxpayers, especially in large service offices, relatively similar every year. TRT gives a ‘pressure’for tax audit process Analysis and Findings >>>

19. Analysis and Findings HOW : TRT gives a ‘pressure’ for tax audit process performance indicators set earlier by the DGT top management focusing on the tax money collected from the audit process by holding as much as tax refund and exposing as many as underpaid findings. Tax auditors neglect some of the appropriate audit process and ‘maximizing’ one-sided interpretation of tax regulation Analysis and Findings >>>

20. Analysis and Findings Why taxpayers file an objection : Benefit : it is a right given by the tax law a possibility to earn additional monetary benefit to delay the payment Cost : If the objection is rejected, taxpayers should pay 50% penalty vs disagreement and unfairness occurred in the audit process will encourage taxpayers to go for objection 4. appeal process incentive Analysis and Findings >>>

21. Analysis and Findings Tax Objection Data : objection decision composition • Objection decisions could be crucial and influence the capacity of a (DGT) regional offices to achieve its revenue target. • There is a strong incentive for a senior manager to make a decision in favor on audit result. Analysis and Findings >>>

22. Analysis and Findings Tax Appeal Data : appeal rate on objection decision Analysis and Findings >>>

23. Analysis and Findings Tax Appeal Data : tax court decision composition • tax appeal is a process that independent from the DGT • no pressure or influence for decision makers (judges of tax court) in assessing the appeals from taxpayers. Analysis and Findings >>>

24. Analysis and Findings TRT pressure push the auditors to produce less objective and reliable tax assessment letters stimulate taxpayers to file tax objection objection is processed by the same institution (DGT) - same TRT pressure stimulate taxpayers to file tax appeal Analysis and Findings >>>

25. Analysis and Findings performance paradox : emphasize on securing the tax revenue target and keeping the complaint low is caused by the nature of performance indicators itself (contradictory) difficult to measure, which performance indicators, TRT, taxpayers compliance, or number of objections is the most important for the DGT, then is it also important for the stakeholders? (Thiel & Leeuw, 2002) Performance paradox exist : too much focus on performance indicators so that public organization’s managers give their effort only to performance indicator that is important for the stakeholders (tax revenue target) Conclusion >>>

26. Conclusion • there is a relationship between tax revenue policy with the increasing number of tax objection. • the audit were conducted in less ideal environment • combination of pressure from TRT and limited time and resources of audit push the auditors to produce less objective and reliable tax assessment letters and thus stimulate taxpayers to bring the audit result to the objection process • however, performance improvement could be expected based on tax court data

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