Page 18 - SUSTAINABILITY ISSUES & COVID-19

1.2.4 Analysis of Best Alternative Strategy
Analysis of best alternative strategy is an analysis used to determine which divestiture strategy has the least tax
implications for all parties by also considering non-tax benefits. The approach used in this analysis utilizes the table of
factors impacting the choice of divestiture strategy by Scholes et al. (2015) with some other considerations. This study
analyzes the three aforementioned divestiture strategy including the strategy taken by PT A, which are no transfer, sell-
off and capital reduction mechanism as shown in Table 3.

Table 3 Factors Impacting the Choice of Divestiture Method of PT A

Tax and Non-Tax Factors No Transfer Sell-off Capital reduction
The divesting company gains cash No Yes No
The divesting company still controls the business unit No No No
Taxable profits for the divesting company No Yes Yes
Taxable profits for the shareholders of the divesting company No No No
Increase in tax basis for the new companies No Yes Yes
Accounting profits admitted by the divested company No No No

Taxable transfer of rent No Yes, once Yes, twice
Business cost for capital reduction No No Yes

The assessment based on Scholes-Wolfson framework as shown in Table 3 shows that no transfer strategy does not have
impacts. Therefore, the assessment was focused on sell-off and capital reduction which from 8 assessed factors, 5 factors have
the same impacts and 3 others have different impacts. First, the difference is the factor of gaining cash. In sell-off method, the
divesting company raises cash, whereas the new companies do not. Although it seems that there is a contrast difference in this
factor, there actually is not much in the practice to the business group. In this method, the cash owned by PT B, PT C, PT D, PT
E and PT F from the shareholders are used to purchase the assets from PT A, so the cash is then possessed by PT A. However, in
capital reduction mechsnisms, the cash owned by PT B, PT C, PT D, PT E and PT F from the shareholders is still owned by them.
Therefore, for the business group, the cash owned by PT A and PT B, PT C, PT D, PT E and PT F is a non-tax benefit because it can
be used for other purposes. Second, the difference is in taxable transfer of rent. In sell-off method, the transfer of rent is carried
out once because it directly transfers to PT B, PT C, PT D, PT E and PT F. Whereas, with capital reduction, the transfer of rent is
carried out twice which impacts in double final income tax on transfer of rent from the business group’s perspective. Third,
sell-off method does not change the paid-in capital of PT A therefore it does not require business costs to reduce the capital as
did the capital reduction mechanism. Since this divestiture aims to meet government regulations, tax planning should result in
method that causes the minimum tax costs and non-tax costs. Moreover, this divestiture is carried out with companies under
common control so it must be considered from the business group’s perspective. Thus, the most optimal divestiture method
based on the Scholes-Wolfson Framework by considering the divestiture purpose is the sell-off method because it causes lower
tax implications than capital reduction mechanism and does not require changes in authorized capital.

5. CONCLUSION

This study aims to evaluate the policies of a private pawn in regard to an involuntary divestiture to comply with
government regulation POJK Number 31 of 2016. PT A, the object of this study, chose to not transfer their assets and
liabilities to their new business entities in order to avoid tax expenses. This policy is flawed because (1) the revenues
and expenses incurred will be recognized by different entities (a violation of matching cost against revenue principle),
and (2) although the company could manage to avoid the tax expense from a divestiture, the strategy will cause fiscal
correction in the future and the companies might be penalized for the misconduct.

Using the Scholes-Wolfson framework, this study analyzes all possible divestiture strategies and suggests that the
most efficient strategy is the sell-off method. Not only the sell-off method generates the lowest tax burden, but it also
does not cause a significant business cost. This study thus proposes that a company needs to consider both the tax
implications and non-tax implications for business strategy.

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