TAX ACCOUNTING EQUATION

early detection of tax avoidance

Oleh:
Joko Ismuhadi
Sr. Tax Auditor

LARGE TAX REGIONAL OFFICE

DIRECTORATE GENERAL OF TAXATION
MINISTRY OF FINANCE OF THE REPUBLIC OF INDONESIA
JAKARTA
2022
Quotations:
"There are two things that are certain in this world,
namely death and taxes, so prepare yourself".

i
 FOREWORD

All praise and gratitude the authors pray to the presence of Allah SWT who has bestowed
all His blessings so that the writer can finish this paper with the title "Tax Accounting Equations:
Early Detection of Tax Avoidance" which is expected to be useful for tax officers at the Directorate
General of Taxes, especially for tax officers at the Regional Office of Large Taxpayers.

The author is aware of the weaknesses and limitations that exist so that in completing this
paper has received assistance from various parties, on this occasion the author would like to thank:
• Mrs. Sri Mulyani Indrawati as Minister of Finance of the Republic of Indonesia.
• Mr. Suryo Utomo as the Director General of Taxes.
• Mr. Arief Yanuar as Head of Regional Office for Large Taxpayers.
• Mr. Mekar "Totok" Satria Utama as Director of International Taxation.
• Mr. Ikbal Thoha Saleh as Head of Audit, Investigation and Tax Collection Section at the Regional
Office for Large Taxpayers.
• Mr. Budi Prasetya as Head of Strategic Taxpayer Supervision Sub-Directorate.
• Mr. Imam Budi Raharjo as the Head of the Big Four Tax Service Office.

And all parties that I cannot mention one by one, thank you for the prayers and
encouragement to finish this paper.

I also don't forget to thank my beloved children and wife who have encouraged me to
continue writing this.

Hopefully this piece of writing can bring benefits to the Directorate General of Taxes,
especially the Regional Offices of Large Taxpayers as a tool for analyzing the financial statements
of Large Taxpayer Groups in order to explore more optimal tax potential.

The author realizes that this paper still has many shortcomings in both content and
structure. Constructive criticism and suggestions for improvement are highly expected by the
author.

Radjiman Senayan Building, 25 November 2022

Writer
Joko Ismuhadi

ii
 Daftar Isi

1. Introductiona………………………………………………………………………………….… 1
2. Theory and Literature Studies……………………………….……………………………….… 3
3. Debit-Credit Mechanism As Application of Mathematics..………………………………….… 5
4. Financial Engineering Transaction Scheme……………………………………………………. 6
5. Closing………..………………………………………………………………………………… 10

iii
 TAX ACCOUNTING EQUATION

ABSTRACT
This research comes from the author's experience as a tax examiner at the Office of the Directorate General of Taxes
who sees the phenomenon of Group Corporate Taxpayers who for 5 consecutive years report overpayment of corporate
income tax returns, and overpaid value added tax returns every month. . Therefore, the authors are interested in knowing
these problems. This research is a case study to determine the effect of financial engineering on taxpayer compliance.
The sample of this study used an integrated company from upstream to downstream engaged in the processing of fresh
fruit bunches (FFB) into crude palm oil (CPO) registered at the Regional Office of the Large Taxpayers for the period
2014-2019 through purposive sam pling. 15 com panies. T he results show that taxpayers w ho carry out accounting records
choose a balance sheet account compared to the profit and loss account which affects taxpayer compliance. The
implication of this research proves that taxpayers avoid taxes in a way that should record Income as Liabilities and
Expenses as Assets in an effort to avoid Corporate Income Tax (PPh) and Value Added Tax (VAT). The real impact of
financial engineering is the 5-year corporate income tax return report, the VAT SPT overpayment report.
Keywords: Financial Engineering, Tax Avoidance

INTRODUCTION
State revenue from the taxation sector is very important for financing Indonesia's development. Taxes
are people's contributions to the State treasury based on the Law (which can be enforced) without receiving
reciprocal services (counter-performance) which can be directly demonstrated and which are used to pay for
general expenses. The tax function includes two things, namely: taxes as a source of funds for the government
to finance expenses and taxes as a tool to regulate or implement government policies in the social and
economic fields.
Since the end of 1993 to improve tax collection performance, tax reform policy reforms have been
carried out, namely by changing the tax collection system, which was initially determined by the official
assessment system (taxes determined unilaterally by the government) to become a self-assessment system
(taxpayers are given the authority to calculate, calculate, deposit, and self-report the taxes). In this system,
the taxpayer is not only an object but also a subject. In addition, tax reform has also created new types of
taxes, namely income tax, value added tax on goods and services, sales tax on luxury goods, land and building
tax, stamp duty and fees on the acquisition of rights to land and or buildings. Currently, the government
continues to strive to increase revenue from the tax sector through tax reform, both in the aspects of tax
intensification and tax extensification. This is strongly influenced by several factors, namely economic factors
and institutional factors of the tax office concerned. Environmental factors include awareness and
compliance, accounting systems, institutional cooperation and law enforcement, while economic factors
include public revenues, exports and imports, investment, inflation and government spending. Likewise
institutional factors concerning aspects of taxation policy, administration and taxation apparatus. Tax
extensification is an activity related to the addition of the number of registered taxpayers and expansion of
tax objects in the administration of the Directorate General of Taxes (DGT).
To increase tax revenue in Indonesia, tax service offices (KPP) were expanded in various cities in
Indonesia. In order to reach taxpayers in DKI Jakarta Province to the District / Kelurahan level. One of the
tax service offices in DKI Jakarta is the Large Taxpayer DGT Regional Office. Large Taxpayer Regional
Offices include several Tax Service Offices (KPP) within the Large Taxpayer Regional Offices, namely:
1. Large Tax Office One;
2. Large Tax Office Two;
3. Large Tax Office Three; and
4. Large Tax Office Four;
seeks to increase tax revenue in accordance with the targets set each fiscal year. However, tax revenue is
influenced by several factors such as the number of taxpayers and taxable entrepreneurs (PKP). With the
implementation of tax extensification, the number of Taxpayers and Taxable Entrepreneurs will be increased.
The increase in taxable company taxpayers will have an effect on the increase in tax revenue at the large
regional tax offices. The number of PKP ranges from 70 to 80 percent of the Taxpayers, usually those who
do not register PKP are the types of small / individual businesses. Thus, both the number of taxpayers and the
number of PKP will have a direct effect on the amount of tax revenue.
In the current era of digitalization, where most human work has been replaced by computer programs
that are very influential in lightening the workload of humans. The rapid advancement in information
technology makes it easy for companies to run their business, especially in recording financial transactions.
Enterprise resource planning (ERP) systems, are integrated systems that manage all aspects of a production
or distribution-based business, aligning financial management, human resources, supply chain management,
and manufacturing or distribution with core accounting functions.
With the help of enterprise resource planning (ERP) systems, it is very easy for companies to record
financial transactions. Company financial transactions can be recorded in the right way or in a way that can
mislead readers. In the accounting recording system, it is known as a debit-credit account.
Financial engineering is a sensitive issue in the world of business and economics, especially in the
field of taxation, because it has a negative connotation, the company records correctly between debit-credit
accounts, but what is recorded is not a profit-loss account but a balance sheet account, for example sales
records that should be recorded. the accounting journal Accounts Receivable on Sales, but recorded as
Accounts Receivable in Clearing Accounts, then recorded again as Clearing Accounts in Accounts Payable.
This kind of recording the author calls a financial transaction engineering or financial engineering. Financial
engineering activities are usually carried out by group companies in one line of business, namely companies
that are integrated from upstream to downstream.
For example an integrated company from oil palm plantations to provide raw materials for palm
fresh fruit bunches (FFB) to be processed into Crude Palm Oil (CPO) and further processed into derivative
products in the form of several products, namely cooking oil, butter and soap as well as raw material products.
beauty industry.
This financial engineering activity affects the presentation of corporate financial reporting which
will affect tax payment obligations, which in turn will reduce compliance in paying taxes, both direct taxes,
namely Corporate Income Tax (PPh), and indirect taxes, namely Value Added Tax (VAT).
 STUDY OF THEORY AND LITERATURE
Financial engineering is carried out by group companies that have a high profit rate to minimize tax
payments. Ownership structure also influences management's decisions to transfer wealth to themselves or to a
majority shareholder. The decision to carry out financial engineering by the company when the company's
performance is good, then the company will certainly have a high level of profit which will result in higher tax
obligations that must be paid by the company. This is done by company management because it considers taxes
to be a burden for companies that can attract management or business owners to carry out financial engineering
to carry out tax planning in order to minimize tax payments.
Financial engineering can occur in a group of companies that are linked in a special relationship. Within
a group of companies, financial engineering is often referred to as financial engineering or quantitative finance,
financial mathematics and computational finance associated with derivative transactions, such as futures, swaps,
options, and forwards, which according to the author are also used by companies to conduct intracompany
transactions. , intercorporate transactions, interdivisional transactions and internal transactions. This term
indicates that the transaction scheme occurs between members of a company in a group within one line of
business or different lines of business.
In the implementation of tax collection by the government, it does not always get a good response from
companies that are taxpayers. Companies will try to pay the lowest possible tax because taxes are considered to
reduce income or profit (Vidiyana, 2018). According to Brian & Martani (2014), companies can do two ways
to reduce the amount of tax paid, namely reducing the value of the tax by following the applicable tax regulations
or what is known as tax avoidance and reducing the value of taxes by taking actions that are not in accordance
with the law taxation or what is known as tax evasion. Tax avoidance is an explicit tax rate reduction that
represents a series of tax planning strategies starting from tax management, tax planning,
The author conducted an analysis using a modified accounting mathematical model for tax purposes.
Accounting is based on the basic equation that assets equal liabilities plus equity. Equity is residual interest,
which is the calculated difference between assets and liabilities (Alfredson et al. 2007). This definition of equity
is intended to maintain a balance between the left and the right side of the accounting equation. However, most
books of accounting principles simplify the definition of equity as "owner's equity," which reflects the claims
of owners on the company. The use of the term "owner's equity" narrows the true meaning of equity (Warsono,
et al. 2009), so that the Basic Accounting Equation (BAE) can be written as follows:
Figure 1: Basic Accounting Equation

Assets = Liabilities + Equity

where a company's business activity is in order to increase company value, it can be further developed into
Expanded Accounting Equation (EAE) (Sony Warsono, 2009) to be as follows:
Figure 2: Expanded Accounting Equation - Conventional Rationality
Assets = Liabilities + Equity + [ (Revenues – Expenses) - Dividend ]
Rationally, the Mathematic Accounting Equation (MAE) equation can be written as:
Figure 3: Expanded Accounting Equation - Mathematic Rationality
Assets + Dividend + Expenses = Liabilities + Equity + Revenues

Mathematic Accounting Equation (MAE) above for the purposes of Taxation Analysis, in
accordance with the provisions of Article 4 paragraph (1) of the Income Tax Law which states that the
object of tax is income, namely any additional economic capacity received or obtained by the Taxpayer,
whether originating from Indonesia or from outside Indonesia, which can be used for consumption. or to
increase the assets of the Taxpayer concerned, under whatever name and form, the above equation can
be assumed that the Taxable Income which is the Net Income after Self Fiscal Correction is Zero (0) or
Loss (negative), then the additional Retained Earning which is an element of Equity is also Zero (0) ),
dividends are also Zero (0), thus the Tax Accounting Equation (TAE) can be written as follows: Figure
4a: Tax Accounting Equation - Profits Loss & Balance Sheet Equally

Revenues - Expenses = Assets - Liabilities

From the Tax Accounting Equation (TAE) equation above, it shows that Revenues are reduced
by Expenses (Variable Cost as a form of Cost of Goods Sold, Fixed Cost) is a form of Income Statement,
and Assets minus Liabilities are a form of Balance Sheet (in this case, Equity). From the TAE equation, it
can be seen that Profit & Loss is the same as the balance sheet or it can be said that the company's
operational activities for each accounting period are in order to increase corporate value, this is the purpose
of the company being established to increase the prosperity of its owner.

Figure 4b: Tax Accounting Equation - Tax Purpose Analytically

Revenues = Expenses + Assets - Liabilities

Likewise, the TAE equation above shows that Revenues have an opposite relationship with
Liabilities, which means that if Revenues decrease, Liabilities must increase and vice versa. That we all
know that Revenues and Expenses are profit and loss accounts, while Assets and Liabilities are balance
sheet accounts. Thus, the authors suspect that taxpayers avoid tax by recording accounting transactions
that are deliberately misleading, namely Revenues are recorded as liabilities, and Expenses are recorded
as Assets by utilizing Clearing Accounts, where Clearing Accounts are temporary accounts where at the end
of the accounting period or usually every month with a balance of Zero (0).
Whereas Taxpayers utilize banking services called Cash Management Service by providing Bank
Overdraft Account facility, which is a type of bank overdraft account facility with a certain balance. The
Bank Overdraft Account can be used by Taxpayers as an Clearing Account to finance the company's
operational activities while waiting for the down payment for sales by the buyer or the next line company
to be made.
In the last 5 years, the CPO Industry Taxpayers' Annual Income Tax Return (PPh) Report suffered
a loss and the Value Added Tax (PPN) SPT Report stated that it was overpayed and submitted a request
for restitution and equalization of the Tax Base of SPT PPh Article 21 was greater than the salary costs
allowances, bonuses and others related to employees which are charged to Profit and Loss. Based on the
above case phenomenon, it attracted the author's interest to find out the effect of financial engineering on
tax avoidance of group corporate taxpayers registered at the Regional Office of Large Taxpayers for the
period 2014-2019.

The author hopes that by analyzing this case it can be used to conduct Taxpayer Financial Statement
Analysis in similar business fields, even the results of this study can find tax avoidance modes that can
be applied in other types of businesses that can benefit the Directorate General of Taxes institution.

MECHANISM OF DEBIT-CREDITS AS A MATHEMATIC APPLICATION

We know widely that according to Luca Pacioli in his book Summa de Arithmetica, Geometria,
Proportioni et Proportionalita, which gave birth to the Double Entry Bookkepping (DEB) using
mathematical logic, therefore Accounting Science is actually a definite science in practice because the
work of an accountant has replaced by artificial intelligence in the form of computers. Therefore, the
authors argue that Accounting Science is a definite science that can use mathematical logic in practice.
Several scholars have studied the debit-credit mechanism from a mathematical perspective. Peters
and Emery (1978) believe that at the time when DEB was developed, mathematicians did not accept the
concept of negative numbers, which led to the idea of implementing a debit-credit mechanism. However,
Scorgie (1989) argues that Peters and Emery's claims are not supported by evidence. Assuming there is a
'Pacioli Group' operating only with non-negative numbers, Ellerman (1985; 1986; 2009) uses a modern
mathematical model to rationalize, at least in part, the debit-credit mechanism. However, there is no
explanation of the rational basis for the debit-credit mechanism accepted by accountants.
In essence, the debit and credit mechanism is a consequence of arithmetic equations whose records
are reflected in a double entry system. Through illustrations, here are some examples of how the DEB
approach from an arithmetic perspective underlies and establishes the rationality of the debit-credit
mechanism in the basic accounting equation.
For example Assume Assets = 10, Liabilities = 4, and Equity = 6. Applying the basic accounting
equation, we get 10 = 4 + 6. Suppose that the net amount / balance of assets (10) is the difference between
transactions valued at 25 and 15 (25 - 15) . Now, accounting doesn't recognize negative numbers (here, -
15). So, to get rid of negative numbers as well as accounts. For that reason, the value of 15 must be
recorded on the credit side (right) with a positive number. Under the Method, an increase in assets is
recorded as a debit, while a decrease is recorded in a credit (see Figure 5)
Figure 5: The Mathematics of Numbers - Debit / Left Side & Credit / Right Side

Debit / Left Side Credit / Right Side

10
25 15 14 18 30 36

Debit / Left Side Credit / Right Side

10 = 4 + 6

+ - - + - +
 FINANCIAL ENGINEERING TRANSACTION SCHEME
Accordance with debit and credit rules has been widely debated by experts. In their opinion,
the debit and credit mechanism does not make sense ("debit and credit are no more than pluses and
minuses", (Ingram 1998, 411). Mathematically, the debit and credit mechanisms actually have
arguments that are very clear and easy to understand by students. In essence, this debit and credit
mechanism is a consequence of an accounting equation whose records are reflected in a double entry
system.
Why should asset accounts be debited when they increase and credited when they decrease?
We can get the answer to that question by looking at the following picture and to illustrative cases (Sony
Warsono, 2009) .:
Figure 6: Position of Each Elements of Expanded Accounting Equation
(Dr) A S S E T S + D IV ID E N D S + E X P E N S E S = L IA B IL IT IE S + E Q U IT Y + R E V E N U E S (Cr)

ASSETS (+) LIABILITIES (+)

DIVIDENDS (+) EQUITY (+)
EXPENSES (+) REVENUES (+)

Figure 6 shows the position of each element in the accounting equation: assets, dividends, and expenses
on the left side (debit), while liabilities, equity, and revenues on the right side (credit).
Figure 7: Analysis of Transaction of Purchasing Supplies on Account Payable
(Dr) BALANCE SHEET (Cr)
(Dr) Supplies (Cr) (Dr) Account Payable (Cr)

Increasing, Increasing,
debited credited

Case A (see Figure 7): Suppose Firm A purchases inventory on credit. This transaction causes
changes in the Supplies account and Accounts payable account; both accounts increase. The Supplies
account is recorded on the debit side, while the Payables account is recorded on the credit side. This is in
line with the position of each account in the accounting equation (Sony Warsono, 2009).
Figure 8: Analysis of Transaction of Purchasing Supplies in Cash
(Dr) BALANCE SHEET (Cr)
(Dr) Supplies (Cr)

Increasing,
debited

(Dr) Cash (Cr)

Decreasing,
credited
 Case B (see Figure 8): Suppose Company A buys Supplies on a cash basis. This transaction resulted
in a change in the Supplies account and the Cash account; the Supplies account increased, while the Cash
account decreased. In this case, both accounts are Assets accounts. To maintain internal mathematical
consistency, the Supplies account must be debited because the Supplies account is an asset element; assets
have a positive value, and are on the left side (debit) of the accounting equation. Furthermore, following
a mathematical rule, a Cash account must be credited because of a decrease in cash as a result of the
transaction (Sony Warsono, 2009).
Figure 9: Analysis of Transaction of Purchasing Supplies on Bank Overdraft Account (IDR)
(Dr) BALANCE SHEET (Cr)
(Dr) Supplies (Cr) (Dr) Bank Overdraft Account (IDR) (Cr)

Increasing, Decreasing, Increasing,

debited debited credited

(Dr) Affiliated Liabilities (Cr)

Increasing,
credited

Case C (see Figure 9): Suppose Company A buys Supplies using a bridging loan, namely the Bank
Overdraft Account (IDR) facility, this bridging loan is paid by Company B, which is a cooking oil industry
company, then the Bank Overdraft Account (IDR) facility has a balance Zero (0), thus Company A has an
Affiliated Loan from Company B. This transaction causes changes in the Supplies account and the
Affiliated Loan account; the Supplies account increased, and the Affiliated Loan account also increased.
To maintain internal mathematical consistency, the Supplies account must be debited because the Supplies
account is an asset element; assets have a positive value, and are on the left side (debit) of the accounting
equation. Furthermore, following the rules of mathematics:
Figure 10: Analysis of Transaction of Sales on Account Receivables
(Dr) BALANCE SHEET (Cr)
(Dr) Account Receivable (Cr) (Dr) Sales (Cr)

Increasing, Increasing,
debited credited

Case D (see Figure 10): Suppose Company A sells Finished Goods on credit to Company B, which
is a cooking oil industry company, then the Account Receivables account increases, and the Sales account
will also increase. To maintain internal mathematical consistency, the Account Receivables account must
be debited because the Account Receivables account is an element of assets; assets have a positive value,
and are on the left side (debit) of the accounting equation. Furthermore, following a mathematical rule,
the Sales account must be credited because of an increase in sales on credit.
Figure 11: Analysis of Transaction of Sales on Cash
(Dr) BALANCE SHEET (Cr)
(Dr) Cash (Cr) (Dr) Sales (Cr)

Increasing, Increasing,
debited credited

Case E (see Figure 11): Suppose Company A sells Finished Goods in cash to Company B, which
is a cooking oil industry company, then the Cash account increases, and the Sales account will also
increase. To maintain internal mathematical consistency, Cash account must be debited because Cash
account is an asset element; assets have a positive value, and are on the left side (debit) of the accounting
equation. Furthermore, following a mathematical rule, the Sales account must be credited for an increase
in sales in cash.
Figure 12: Analysis of Transaction of Sales on Bank Overdraft Account (USD)
(Dr) BALANCE SHEET (Cr)
(Dr) (Cr) (Dr) Bank Overdraft Account (USD) (Cr)

Decreasing, Increasing,
debited credited

Affiliated Liabilibities

Decreasing,
debited

Reserve for Paid Up Capital

Increasing,
credited

Case F (see Figure 12): Suppose Company A delivers Finished Goods to Company B, which is a cooking
oil industry company, Company A does not receive cash anymore because at the time of purchase of
Supplies through Bank Overdraft Account (IDR) has been paid by Company B , then there is a barter
transaction scheme in which Company B finances the purchase of Supplies, and Company A no longer
receives payment for the delivery of Finished Goods. The scheme of this transaction, the authors call it an
offsetting (netting) transaction between Account Receivables and Affiliated Liabilities, while the Gross
Margin from this activity is recorded as Reserve for Capital Deposit. Thus the ultimate goal of a company
to increase company value is achieved without having to pay Corporate Income Tax.

Finally, and most significantly, bookkeeping now has the potential to make or destroy planets
(Gleeson-White, 2012, p. 8).
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