Page 9 - SUSTAINABILITY ISSUES & COVID-19

2. LITERATURE REVIEW

1.1 Divestiture and Related Tax Laws
According to Capron et al. (2001), asset divestiture is the partial or complete sale or disposal of all assets and organizations,
including the reduction of manpower and facilities shut down. Divestiture can also be pursued by a parent company by
establishing a new venture (Garvin, 1983). The Law of the Republic of Indonesia Number 40 of 2007 on Limited Liability
Company state that divestiture is an action of corporate restructuring that can be taken by acquiring and separating a
business. Divestiture can be administered through the sale or acquisition of a business unit by another party through
a business separation by establishing a new company, as also stated by Garvin (1983). A divestiture that is carried
out in reaction to legal and regulatory concerns, such as anti-monopoly, is categorized as an involuntary divestiture
(Kaplan & Weisbach, 1992; Moschieri & Mair, 2005; DePhampilis, 2015). DePamphilis (2015) believes that asset transfer
in the context of divestiture can be held in several methods, which have implications on the taxation. Two of the most
common methods of transferring assets are selling business units (sell-off) and redistributing a non-cash dividend to
the parent company’s shareholders (spin-off). Sell-off is an asset transfer mechanism in which an existing company
sells their business units, including the assets and liabilities, to create a new independent company. This method allows
the existing company to raise cash or its equal from the divested assets. Since this method involves cash in the transfer
process, sales tax is imposed because the cash can be used for other business purposes (Prezas & Simonyan, 2015).
On the other hand, spin-off is an asset transfer mechanism through non-cash distribution to shareholders to establish
a new independent company. However, according to Indonesian tax law, spin-off is the separation of one corporate
taxpayer into 2 (two) or more corporate taxpayers by establishing a new company by transferring part of the assets and
liabilities to the new company without liquidating the old company.

The choice of divestiture method, whether to use a tax-free divestiture method based on Section 355 of the Internal
Revenue Code (spin-off) or via taxable sales of shares and subsidiaries assets (sell-off), has been studied by Alford
and Berger (1998) and Maydew et al. (1999) in the United States of America. Scholes et al. (2015) and DePhampilis
(2015) study more on divestiture methods and their tax implications. Tax-free divestiture is a divestiture that fulfills the
requirements constituted under Section 355 of the Internal Revenue Code in the United States of America (Maydew et
al., 1999; DePamphilis, 2015), Circular 59 in the People’s Republic of China (Ling-li & Hua-ming, 2012), and the Minister of
Finance Regulation (PMK) Number 52 of 2017 in Indonesia. Alford and Berger (1998) and Maydew et al. (1999) examined
several voluntary divestitures in the United States of America to study the consideration of tax and non-tax factors in
determining the divestiture method used, whether it is through sell-off with third-parties or spin-off with shareholders.
Alford and Berger (1998) found that companies that aggressively report their income in their financial statement always
take into consideration the accounting income and taxes, and they even prefer using sell-off method in order to gain
accounting earnings even though they are obligated to pay taxes. Using Scholes-Wolfson framework, Maydew et al.
(1999) documented that companies choose the taxable divestiture method because the non-tax benefits in the forms
of accounting income, cashflow benefits, and acquisition premia exceed the avoidable tax costs. Scholes et al. (2015)
made a conclusion from the research by Alford and Berger (1998) and Maydew et al. (1999) that the decision to choose
which divestiture method to use is affected by tax and non-tax factors. However, the determining factor is the condition
of the company itself. For example, if a company needs to raise cash, they might choose the taxable divestiture method.
Dephampilis (2015), on the other hand, states that the condition of the company is not the sole factor in choosing
a divestiture method, because the divestiture motives also need to be considered. Specifically, Dephampilis (2015)
explains that if complying to the laws and regulations is the motive of divesting the business, the company can choose
sell-off or spin-off methods.

In Indonesia, the company is eligible to utilize book value facility in order to use nontaxable divestitures if it can
meet the requirements in Minister of Finance Regulation Number 205 of 2018 in conjuction with Minister of Finance
Regulation Number 52 of 2017. The requirements of book value facility for sell-off method is regulated under Article 1
paragraph 7 of the Minister of Finance Regulation Number 205 of 2018. It is stated that acquisition of business that can
utilize book value is a merger of Permanent Establishment who carry out business of banking with domestic corporate
taxpayers by transferring all or part of the assets and liabilities of the Permanent Establishment to corporate taxpayers
and dissolves the Permanent Establishment. The requirements of book value facility for spin-off method consist of two
aspects, which are the condition of the company and its business purpose. The criteria for eligible company condition

8 International Conference on Sustainability
(5 Sustainability Practitioner Conference)
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