Page 8 - SUSTAINABILITY ISSUES & COVID-19

01 Tax Planning in an Involuntary

Divestiture

Aktivani Naza Khoirunnisa, Yulianti Abas

Abstract: This research aims to evaluate tax planning under a forced divestiture condition. The object of this study, a
private pawn company, had to carry out a business divestiture to comply with a new government regulation. Using
the Scholes-Wolfson framework, this study applies a case study method to analyze the tax planning conducted by a
company to achieve greatest tax efficiency. The results of this study show that the transfer of assets through a sell-off
is the most efficient strategy because (1) the strategy has a lower tax burden compared to other mechanism, and (2)
the business costs incurred are very insignificant. In overall, this study proposes that company needs to account the tax
implications as well as the non-tax implications in determining the best divestiture strategy.

Keywords: Divestiture, Tax Planning, Scholes-Wolfson

1. INTRODUCTION

In 2016, the Indonesian Financial Services Authority (OJK) promulgated the Regulation of the Financial Services
Authority (POJK) Number 31 of 2016 that regulates the capital, business licensing, business administration, reporting,
and supervision of private pawn companies. POJK Number 31 of 2016 is the first regulation that governs private
pawning activities in Indonesia. The regulation aims to bring order to the existing pawnshop business and to increase
the financial inclusion of middle-lower class and micro, small, and medium enterprises (MSMEs). The regulation requires
existing pawnshops to obtain a business license by complying with the provisions stipulated in the POJK including the
provisions on the scope of the business area. The pawn business’ scope is stipulated under Article 4 that is limited
to province area. This scope limitation thus significantly affects the existing private pawn companies that previously
operate nationwide. Such private companies, thus, are obligated to be denationalized. Failure to comply with this POJK
can merit a rejection or revocation of business license from OJK, for it is considered illegal.

Pawnshop businesses in Indonesia have showed a rapid development since the enactment of this POJK. The
requirement that business scope is limited to a province area has led to an increase in the number of licensed pawn
companies. The number of registered and licensed pawnshops increased from 4 pawn companies in 2016 (OJK, 2017)
to 87 pawn companies per March 2020 (OJK, 2020). However, the data could not explain how and to what extent the
POJK affect pawn company’s business. In order to adhere to POJK’s regulation on the business scope, some private
pawn companies had to involuntarily divest part of their operations.

PT A, the object of this study, is a private pawn company that involuntarily divested their operations in the form of
business separation, hereinafter referred to divestiture. The divestiture of PT A was done by splitting its business and
establishing several branches (limited liability companies) that operate in different provinces. In addition to that, a
holding company was established as the new majority owner of both the limited liability companies and PT A. In other
words, in the new form, PT A and the newly established limited liability companies are a business group.

In the divestiture process, the management of PT A decided not to transfer the assets to the new companies. For
instance, the receivables that were recorded by PT A’s branch remains in PT A’s book although the branch has now
become a new company. PT A will then wait until the maturity of the receivables and should a customer decide to
extend the transaction, such transaction will be administered as a new pawn transaction by the new company. The
Fixed assets that were recorded under PT A’s branch offices were also not transferred to the new companies, and they
remained recorded in PT A’s books despite the assets were used by the new companies. The same policy applies to the
liabilities of PT A. In other words, assets or liabilities were still recorded in PT A’s book and were not transferred to the
new companies.

This research aims to evaluate PT A’s tax planning policy in the divestiture process using the Scholes-Wolfson framework.
This research expects to provide more detail evidence regarding a tax planning aspect of an involuntary divestiture.

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