GR-20/2026: Bold Step to Mitigate Illegal Business Expense Claims

By: (Ika Hapsari), the Directorate General of Taxes employee

Many justifications can be rationalized to facilitate corrupt practices. One of the most common methods is disguising “under-the-table” payments as legitimate business expenses. Such practices are not confined to domestic cases. They have also become a recurring issue in the international business landscape.

In a press release published on its official website, the U.S. Securities and Exchange Commission (SEC) detailed the bribery case involving the German multinational Siemens AG. Bribes paid to public officials across various countries were recorded as consulting fees, management fees, commissions, and other business-related expenditures. As a result, these fictitious operating expenses reduced the company’s taxable profits and income tax liabilities. The case became one of the largest corporate corruption scandals in modern history, attracting global attention and resulting in penalties totaling USD 1.6 billion.

One of the most prominent foreign bribery cases, KBR, a subsidiary of Halliburton, was found to have paid more than USD 180 million through agents in the United Kingdom and Japan. It funneled the funds to Nigerian officials in exchange for securing LNG projects worth over USD 6 billion. To conceal the illicit payments, the company relied on sham contracts with third parties, disguising the transactions as legitimate business arrangements. This case illustrates how complex corporate structures and fictitious contractual arrangements can be used to mask corrupt payments while creating the appearance of ordinary business expenses.

Similarly, The Telegraph cited a survey by Transparency International indicating that companies from Russia and China were among those who most likely to pay bribes when conducting business abroad. In response, the Russian Ministry of Finance explicitly stated that expenditures arising from unlawful activities including bribes and illegal commissions could not be recognized for tax purposes. Consequently, any individual involved in such practices remains liable for the standard 20 percent income tax.

Tax authorities in many jurisdictions have adopted a similar stance. The principle that “bribes are not tax deductible” has been consistently promoted by the South African Revenue Service (SARS), the Canada Revenue Agency (CRA), and the U.S. Internal Revenue Service (IRS). At the international level, the Organisation for Economic Co-operation and Development (OECD) has established the Anti-Bribery Convention, which requires signatory countries to impose effective, proportionate, and dissuasive criminal sanctions on those who bribe foreign public officials in international business transactions.

Understanding the “3M” Principle

Indonesia has long embraced a similar principle within its tax system. Article 9 paragraph (1) letter i of the Income Tax Law stipulates that, in calculating taxable income, taxpayers may not deduct expenses incurred for personal interests or those of their dependents.

In essence, expenditures that are not directly related to business activities or to the efforts of obtaining, collecting, and maintaining income, commonly known as the “3M” principle, cannot be treated as deductible expenses. The examples include personal expenses of shareholders, interest payments on loans used for personal purposes, and insurance premiums paid for the private benefit of business owners. If such prohibited expenses are identified, they must be added back through a positive fiscal adjustment.

A New Provision Under Government Regulation No. 20 of 2026

The issuance of Government Regulation Number 20 of 2026 (GR-20/2026), amending GR Number 55 of 2022 concerning Income Tax Regulatory Adjustments, reinforces the application of the 3M principle.

The newly introduced Article 20A explicitly states that expenditures related to bribery, gratuities, and other benefits associated with corruption or bribery offenses cannot be treated as deductible expenses. This amendment reflects Indonesia’s commitment to OECD accession and its willingness to adopt internationally recognized standards within its domestic legal framework. More importantly, it signals the government’s seriousness in combating corruption.

The provision prohibits taxpayers from recognizing any bribes, gratuities, or other forms of benefits, regardless of their label or form, provided to public officials, civil servants, state administrators, or foreign public officials as business expenses. The latter category includes individuals holding legislative, executive, administrative, or judicial positions in foreign jurisdictions, as well as those performing public functions for foreign governments, public agencies, state-owned enterprises, and international public organizations.

Importantly, these white-collar crime schemes are not limited to cash payments. Benefits in kind and other forms of gratification that meet the elements of corruption offenses under Indonesia’s Anti-Corruption Law, such as travel tickets, luxury gifts, exclusive facilities, and similar perks are likewise prohibited from being claimed as deductible expenses.

Effective Supervision as Supported Tools

Robust oversight is essential to detect hidden expenditures that may be disguised as legitimate operating costs. A study by Mutascu (2025) argues that policymakers should invest in audit technologies and increase inspection frequency to improve the probability of detecting tax-related misconduct. Beyond establishing a strong legal framework, the development of Coretax DJP system becomes one of Indonesia’s efforts to establish an early-warning mechanism for monitoring taxpayer tax return's filings.

The recent adjustment to the criteria for taxpayers eligible to benefit from the final tax regime for micro, small, and medium enterprises (MSMEs) through GR-20/2026 also carries important implications for the implementation of Article 20A. As more taxpayers transition back to the ordinary income tax regime, where tax liabilities are calculated based on net profits, expenses become a critical factor in determining taxable income.

In this context, prohibiting the deduction of expenditures related to bribery, gratuities, and corruption is not merely a legal necessity, it is a fiscal imperative. The regulation helps prevent tax base erosion, strengthen financial accountability, and ensure that the government does not inadvertently provide tax benefits for activities that violate the law. Ultimately, a tax system should never subsidize corruption, whether directly or indirectly.

*)This article represents the personal opinion of the author and does not reflect the official stance of the institution where the author works.

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