MASTER THESIS ORAL EXAM PRESENTATION

ORGANIZATION PERFORMANCE INDICATORS: A STUDY OF RELATIONSHIP BETWEEN TAX REVENUE TARGET POLICY AND TAXPAYERS’ COMPLAINTS (TAX

OBJECTION) IN INDONESIAN TAX AUTHORITY

MASTER THESIS ORAL EXAM PRESENTATION

RADEN ARIYO BISAWARNO (1B0011)

EXAMINER : PROF. YOSHITAKA YAMAZAKI

SUPERVISOR : PROF. HUN MYOUNG PARK

TUESDAY, 15 MAY 2012

Presentation Agenda

1. Introduction2. Literature Review3. TRT, Objection and Appeal4. Data and Methodology5. Analysis and Findings6. Conclusion

Introduction >>>

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 >>>

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 >>>

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 >>>

Introduction

• 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• As time goes, the information provided by a performance indicator is no longer valid as its original purposes (Meyer and Gupta, 1994).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 >>>

Literature Review

Four processes that decrease the function of a performance indicator (Meyer Gupta, 1994 : 330-342). 1.Positive learning2.Perverse learning3.Selection 4.Suppression

Literature Review

TRT, Objection >>>

TRT, Objection and AppealHouse of Representative And

Ministry of Finance

Tax Revenue Target

Tax Audit

Directorate General of Taxes

Objection Processing

Tax Court

Handled by:1.Regional Offices2.Service Offices3.Directorate of Tax Audit and Collection

Handled by:1.Regional Offices2.Directorate of Objection and Appeal

Processes within DGT authority

How the system works

TRT, Objection >>>

• 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,

DGT Performance Indicators :

Data and Methodology >>>

TRT, Objection and Appeal

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 auditors2. Methodology •Qualitative descriptive analysis based on the secondary data

Analysis and Findings >>>

Analysis and Findings

Does TRT make sense? (Figure 5.2)



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.



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 FindingsTax 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


Less and less actual workload, we could expect that auditors would have more focus on their audit and produced ‘strong’ tax assessment letter?

the number of objections should have decreased


discourage taxpayers

Analysis and FindingsTax Objection Data : objection rate is increasing




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.


Auditors interview responses :1.each auditor’s unit is given a particular TRT to be achieved2.audited taxpayers, especially in large service offices, relatively similar every year.

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

TRT gives a ‘pressure’ for tax audit process



focusing on the tax money collected from the audit process by holding as much as tax refund and exposing as many as underpaid findings.

HOW : TRT gives a ‘pressure’ for tax audit process

performance indicators

set earlier by the DGT top management

Tax auditors neglect some of the appropriate audit process and ‘maximizing’ one-sided interpretation of tax

regulation


Analysis and FindingsWhy taxpayers file an objection :

Benefit :1.it is a right given by the tax law 2.a possibility to earn additional monetary benefit 3.to delay the payment

disagreement and unfairness occurred in the audit process will encourage taxpayers to go for objection


Cost :If the objection is rejected, taxpayers should pay 50% penalty

vs

4. appeal process incentive

Analysis and FindingsTax 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 FindingsTax Appeal Data : appeal rate on objection decision


Analysis and FindingsTax 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.



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 Findings1. performance paradox : emphasize on securing the tax

revenue target and keeping the complaint low is caused by the nature of performance indicators itself (contradictory)

2. 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)

3. 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 >>>

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

THANK YOU

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MASTER THESIS ORAL EXAM PRESENTATION