Indonesia - Tax impact on warranty clauses | KPMG | GLOBAL

Indonesia - Tax impact of warranty clauses

Indonesia - Tax impact of warranty clauses

Tax impacts of warranty clauses in Indonesia.

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Does the seller grant warranties or indemnities to the purchaser when acquiring a company?

Yes, the seller grants warranties or indemnities to the purchaser when acquiring a company.    

Does the tax treatment of the warranty depend on its legal classification (e.g. indemnity vs. reduction in the purchase price vs. others)?

Yes, but this would be at the level of the purchaser or vendor and not impact the target company whose shares are being sold.    

Is classification of the contractual warranties as a price reduction clause or an indemnity clause relevant in your jurisdiction?

Yes, the classification of the clause (price reduction or indemnity) is relevant for tax purposes.   

Are mixed clauses included in the SPA (for instance, a warranty drafted partially as a price-reduction clause for the portion corresponding to the purchase price and as an indemnity clause for the amount exceeding the purchase price)?

Yes, mixed clauses can be included in the SPA.  

Is the classification usually mentioned in the SPA?

Yes, although this would be heavily negotiated by both parties.   

Are there criteria to distinguish between a price reduction clause and an indemnity clause? Could you briefly describe these criteria?

There is no regulation or criteria and the classification is made on a case-by-case basis regarding the result of the negotiation.   

What is the most common type of warranty in your jurisdiction?

Price adjustment clause in the purchase price is the most common type of warranty.

This can be done in a reduction of the sale price to be put into an escrow account or by later submitting a claim letter for an agreed period of time, say 5 years.

Is a tax warranty usually provided by way of a separate warranty agreement (different from the SPA)?

We have seen both cases.  

Is it usual / a market practice to negotiate after-tax settlements, i.e. to reduce the price adjustment to a net payment (i.e. indemnity minus the tax effect of the deduction for the acquirer or target) or to guarantee full indemnification (i.e. gross-up payment to guarantee a net indemnity)?

Yes, it is a market practice to negotiate after-tax settlements and the most common practice is to guarantee full indemnification.

If the indemnity paid by the seller to compensate the harm (of any kind) is taxable for the acquirer, the seller in general will reimburse the corresponding tax to the acquirer.    

Acquirer

  Corporate Income Tax Personal Income Tax
Price reduction clause The price adjustment has no direct impact on the taxable income of the purchaser. It is treated as a decrease in the investment value of the shares. Consequently, future capital gains will be increased The price adjustment has no direct impact on the taxable income of the purchaser. It is treated as a decrease in the investment value of the shares. Consequently, future capital gains will be increased
Indemnification clause The indemnity payment is treated as taxable income The indemnity payment is treated as taxable income

Vendor

  Corporate Income Tax Personal Income Tax
Price reduction clause The price adjustment is treated as a non-deductible capital loss on the basis that the price reduction would happen in the future while the transaction has been recognized and tax has been paid (no clear regulation on how to “refund” this tax) The price adjustment is treated as a non-deductible capital loss on the basis that the price reduction would happen in the future while the transaction has been recognized and tax has been paid (no clear regulation on how to “refund” this tax)
Indemnification clause The indemnity is technically a tax deductible as the gain has been recognized in the previous year. However, this is not clear because this indemnity payment would be related to the target company and not the vendor’s expense so it would likely be challenged by the tax official The indemnity is technically a tax deductible as the gain has been recognized in the previous year. However, this is not clear because this indemnity payment would be related to the target company and not the vendor’s expense so it would likely be challenged by the tax official

Target

Price reduction clause Not applicable (target will not get involved here)
Indemnification clause Possible taxable income if there is a payment made to the target and non-deductible for the related 3rd party claim. It is better that the new shareholder (after receiving the indemnification payment) injects more capital into the target for the target to pay a 3rd party claim

Contacts

Pierre Abraham

KPMG inIndonesia

Partner, Head of Tax Services

Tel : (+)62 (0) 21 570 4888

Abraham.Pierre@kpmg.co.id

Jacob Zwaan

KPMG in Indonesia

Partner - International Tax

Tel : (+)62 (0) 21 570 4877

jacob.zwaan@kpmg.co.id

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