Joint Operation Schemes (KSO): A Paradox Between Flexibility and Tax Compliance

Many business actors view Joint Operation Schemes (KSO) as a collaborative tool that offers flexibility. Therefore, this scheme is often chosen when two or more entities undertake a joint project.

However, that flexibility clashes with rigid tax administrative requirements, such as the need for clear contribution breakdowns and the disclosure of internal costs. It is this conflict between business practices and legal formalities that creates a paradox.

Normatively, the Minister of Finance Regulation (PMK) No. 79 of 2024 aims to provide clarity. The regulation affirms that a KSO must have its own Tax ID, file Annual Tax Returns (SPT), and even be confirmed as a VAT-Registered Person (PKP) if certain conditions are met.

These conditions include the transfer of goods/services, earning income or incurring expenses/payments to other parties. In essence, a KSO is treated similarly to a business entity in general, with all corresponding tax obligations.

Unfortunately, implementation in practice is far more complex. In many large-scale projects, KSO agreements do not always specify the individual contributions of each member.

Often, contracts only state the total (lump sum) project value without breaking it down by the goods or services provided. However, the regulation requires such details for purposes such as tax invoicing and report reconciliation.

Transparency vs. Confidentiality

Another issue that arises is the matter of confidentiality among members. The obligation to disclose detailed contributions means revealing cost information that was previously considered internal, such as staff salary expenses or overhead cost allocations.

For some parties, this level of transparency creates resistance, as it is seen as exposing trade secrets and internal management strategies.

Thus, while openness is intended to ensure compliance, it also has the potential to cause friction in the relationships between KSO members. This paradox often becomes a point of tension between the demands of tax authorities and the realities of business practices on the ground.

On Deductible Expenses

PMK 79/2024 also stipulates that member contributions can be recognized as deductible expenses. The condition is that they must be mutually agreed upon, set out in the agreement, and detailed according to the type of goods or services provided. If these requirements are not met, the contributions risk being rejected as deductible expenses.

In the context of a tax audit, such documentation can be a double-edged sword. It can protect the KSO from tax adjustments, but it can also become a vulnerability if not properly organized. This is where document management becomes crucial—not merely as a formality, but as a mechanism of accountability.

Timing Recognition Issue

Member contributions are not immediately recognized as income. Instead, they are only recognized once the KSO earns income and charges the contributions as expenses. Meanwhile, for contributions subject to final income tax, members simply remit the tax themselves and report it in their corporate annual income tax return.

This rule creates a timing recognition issue—a potential mismatch in income recognition between the commercial and fiscal books of KSO members. If the contribution amount is significant, discrepancies in recording can lead to tax adjustments. Therefore, KSO members must proactively align their reporting to avoid disputes in the future.

Finding the Middle Ground

The paradox of KSO reflects a classic dilemma: how to balance legal certainty with business flexibility. If regulations are too lenient, a KSO may be seen as non-compliant. But if transparency is too rigidly enforced, the collaborative appeal of a KSO may diminish, as it exposes too much of what should remain internal.

The middle ground lies in how the agreement is designed from the outset. A KSO agreement should be detailed enough to meet formal requirements, yet structured with mechanisms that preserve business agility. Contract drafting, administration, and inter-member coordination should not be seen as burdens, but as investments to reduce the risk of tax disputes and internal conflict.

In the end, the tax paradox surrounding KSOs is not just a challenge, but also an opportunity. What may appear to be rigid regulation can become a catalyst for improving internal governance, streamlining documentation, and fostering a healthy culture of transparency.

The key to successful implementation lies not only in formal compliance with the rules, but also in the commitment of all parties to maintain a balance between business practices and legal demands. If that balance is achieved, a KSO becomes more than just a project collaboration vehicle—it becomes a model for cleaner, more transparent, and accountable governance. (ASP/KEN)

Disclaimer! This article is a personal opinion and does not reflect the policies of the institution where the author works.