Overview

April is the month where corporations across Indonesia are required to submit the tax return (Surat Pemberitahuan Tahunan Badan - “Annual SPT”) of their income tax (pajak penghasilan – “PPh”). This is important as failure to submit their annual SPT could lead to administrative fines for the corporation.[1]

In line with its importance, the Directorate General of Taxes (Direktorat Jenderal Pajak - “DJP”) as of 17 April 2024 has reported that a total of 444.000 annual SPT have been submitted by corporate taxpayers, reflecting a 5,37% increase compared to the previous years.^[2] This number may yet increase further as the deadline for the Annual SPT is still on 30 April 2024.

For the tax report itself, Indonesia currently adopts a self-assessment tax regime which require taxpayers to calculate, pay, and report their own tax liabilities to the DJP. However, the DJP also subsequently authorized to conduct a tax audit to assess taxpayers’ compliance with prevailing laws and regulations, including issuing tax assessment notice if it is discovered that taxpayers in question is yet to fulfil their tax responsibilities.^[3]

With the abovementioned arrangement, tax disputes may emerge when there is a difference of interpretation on the implementation of certain tax provisions and/or difference of tax calculation between the taxpayers and the DJP. Statistics from the Tax Court Secretariat of the Minister of Finance also shows that the total number of tax disputes submitted by taxpayers has rose to 16.278 decisions in 2023.

In order to mitigate the risk of tax disputes, it is important for corporate taxpayers to understands the workings and mechanism of the cases related to taxation. Therefore, this edition of Indonesian Law Digest (“ILD”) shall provide analysis on the tax disputes which specifically relates to corporate PPh matter.

Our analysis is based on decisions of the Supreme Court at the Judicial Review level submitted by both corporate taxpayers and the DJP, where we will be drawing conclusions from various considerations issued by the presiding judges. In order to provide a clearer discussion of this important area, our analysis has been divided up as follows:

1. A Brief Outlook to Indonesia's Corporate PPh
2. Available Tax Dispute Settlement Mechanism in Tax Court
3. Analysis of Trends

1. General Findings
2. Analysis of Judges’ Considerations

I.    A Brief Outlook to Indonesia's Corporate PPh

The Law No. 7 of 1983 on Income Tax, as amended several times, most recently by by Regulation of Government in Lieu of Law (Peraturan Pemerintah Pengganti Undang-Undang/Perppu) No. 2 of 2022 on Job Creation (collectively referred to as “Law 7/1983”) addresses that corporate PPh is a tax imposed on the income received or acquired by corporate taxpayers during a fiscal year.[4] Said corporation may or may not be established and/or located within the territory of Indonesia, but the latter must engage in business or conduct activities specifically through Permanent Establishment (bentuk usaha tetap – “BUT”).[5]

In general, corporate taxpayers are subject to annual PPh rate of 22% of their net taxable income (“Standard Rate”).[6] It is worth mentioning that said net taxable income is obtained from the calculation of annual gross income received during a fiscal year which has been subtracted by various applicable deductible and non-deductible expenses under Law 7/1983.[7] This standard will determine the amount of payable (terutang) PPh that still needs to be paid by corporate taxpayers during annual SPT.

However, the above applicable rate is exempted to publicly listed companies that fulfil the 40% minimum share listing criteria and other specified criteria. In this regard, said companies are eligible to a 3% tax discount, which result in an effective rate of 19%.[8] Additionally, corporate taxpayers with certain amount of annual gross turnovers may also be subject to PPh rate facilities, as follows.[9]

Apart from the applicable standard rate above, corporate taxpayers are also subject to payment and reporting of other types of PPh under the framework of Law 7/1983, which are named after its respective articles, as summarized in the table below:

The above-outlined PPh types are typically calculated in monthly tax report and serve as tax credits to reduce the amount of payable PPh, except for PPh Art. 4 (2) and 15.[17]

As a follow-up to the calculation result above, Law No. 6 of 1983 on General Tax Provisions and Procedures, as amended several times, most recently by Regulation of the Government in lieu of Law of The Republic of Indonesia No. 2 of 2022 on Job Creation (collectively referred to as “Law 6/1983”) sets out that the DJP will then issue one of the following assessment letters:[18]

1. Underpaid Tax Assessment Letter (Surat Ketetapan Pajak Kurang Bayar – “SKPKB”), if the payable PPh amount exceeds the tax credit;
2. Nil Tax Assessment Letter (Surat Ketetapan Pajak Nihil – “SKPN”) if the payable PPh amount is equal to the tax credit;
3. Overpaid Tax Assessment Letter (Surat Ketetapan Pajak Lebih Bayar – “SKPLB”) if the payable PPh amount is less than the tax credit; or
4. Additional Underpaid Tax Assessment Letter (Surat Ketetapan Pajak Kurang Bayar Tambahan – “SKPKBT”), if there is an additional amount to the payable PPh that has been determined.

Although there are no specific provisions that addressed payment period for the underpaid taxes, the Law 6/1983 clarifies that such assessment letters will be issued within five years after the incurrence of a tax liability or at the end of the monthly or annual tax period.[19] Meanwhile, overpaid tax will be refunded within a month upon the taxpayers’ request or since the latest issuance of SKPLB, after deducting the amount to first settle any outstanding tax debt from the relevant taxpayers.[20]

Corporate taxpayers may file an objection to the DJP against the above-mentioned assessment letters within a period of three months from the delivery date of said letters.[21] Prior to submitting the objection, the relevant corporate taxpayers must first settle any agreed tax obligations from the final discussion of the examination results.[22] Upon receiving said objection, the DJP must issue an objection decree (Surat Keputusan Keberatan) within a year, which either fully or partially grant or reject the objection, or increase the outstanding tax amount.[23]

In addition to the aforementioned decree, Law 6/1983 also outlines that the DJP may issue other decrees for various purposes, including refund of excess tax, interest rewards, rectification, reduction or elimination of administrative sanctions, or reduction or cancellation of tax assessments (collectively referred to as “Other Decree”).^[24]

Based on our preliminary findings, the assessment letters and objection decree highlighted above are the two most frequently disputed objects which are submitted for judicial review in Supreme Court. However, before we further discuss these related cases, This ILD shall first elaborate the procedural mechanisms available in tax court.

II.  Available Tax Dispute Settlement Mechanism in Tax Court

When assessing taxpayers’ compliance, the DJP has the authority to conduct tax audit to be issued assessment letters. As briefly discussed upon above, submission of objection is one of the legal remedies that can be sought by corporate taxpayers who are disagree with the details stated in the assessment letters. However, said objection is an out of court settlement and can only be filed specifically against assessment letters or tax deductions or collections made by third parties.[25]

Meanwhile, in terms of court settlement mechanism, the framework of Law No. 14 of 2002 on Tax Court (“Law 14/2002”) sets out that tax court serves as both initial and final authority for handling tax disputes. As such, its decision cannot be appealed to the public courts, state administrative courts, or other judicial body, except in cases where the decision is deemed “unacceptable” due to jurisdictional or competence issue.[26]

The types of legal remedies that are available in tax court to settle tax disputes include appeals and lawsuits processes. Each of these processes examines and settles on different object of dispute, as further outlined in the table below:

It should be noted that relevant taxpayers must file a single appeal or lawsuit letter for each object of dispute outlined above in Indonesian.[29] Moreover, in terms of its procedural aspects, Law 14/2002 stipulates that both processes can be carried out through regular or expedited trial mechanisms.[30]

The flowchart below illustrates the process flow of appeal and lawsuit processes through regular trial mechanism, starting from the submission of appeal and lawsuit letter and concluding with an implementation of the decision through the issuance of a legally binding court decision:

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On the other hand, expedited trial mechanism is conducted in the event that various formal procedures requirements for regular trial mechanism do not fulfil, among others, including in relation to the submission of appeal and lawsuit, period of decision announcement, and content of decision.[31] Subsequently, this mechanism does not require the appeal decision, response, and rebuttal letter from the DJP.[32] The flowchart below summarizes the overall process flow under expedited trial mechanism:

While the tax court decision is final and has permanent and binding legal force, Law 14/2002 grants the rights for disputing parties to seek recourse through a judicial review at the Supreme Court.[33] However, said review shall not suspend or halt the implementation of the original decision and can only be submitted for specific reasons, including:[34]

1. The decision is based on false information or counterfeit evidence of the opponent party, which is discovered after the case has been settled or when it is found that the evidence later deemed false by the criminal judge;
2. There is a new, important and decisive written evidence, of which if it is presented at the trial stage may result in different decision;
3. There has been a granted matter that was not originally charged or overcharged, unless the court rules to fully or partially grant the relevant case or adjust the amount of outstanding tax;
4. A part of appeal or lawsuit has been decided without considering the causes; or
5. The decision is not in accordance with prevailing laws and regulations.

III. Analysis of Trends

Throughout the 2020 - 2023 period, some 235 tax dispute cases related to corporate PPh were processed by the Supreme Court at the judicial review level. Data that we have collected in relation to these cases reveal that the DJP has consistently lost to taxpayers during court cases and thus lacks any significant ability to defend its tax assessments, as summarized in the following bar graph.

In terms of the year 2023 specifically, a total of 71 tax disputes related to corporate PPh were processed by the Supreme Court. The above-described trend continued in terms of the results of these cases as the DJP only managed to record 22 wins against 49 losses. Our findings of the above-outlined percentages for disputes related to corporate PPh mirror trends observed in overall tax disputes between the DJP and taxpayers. Experts have also acknowledged that the low success rate of the DJP during tax disputes is a recurring issue that tends to rise annually. This opinion is backed up by official DJP data indicating that their loss ratio in overall tax disputes was as high as 62.4% during 2023.[35]

We have also identified the percentage of corporate taxpayer business sectors that are involved in the above-mentioned 71 cases in order to find out which sectors are the most vulnerable to being involved in corporate PPh tax disputes, as illustrated in the diagram below:

In order to gain a full understanding of the reasons that underlie the above-outlined corporate PPh tax case results, we first need to identify the court’s judgment and its consideration in each case. However, out of 71 cases in 2023, there are still several cases for which the relevant documents remain inaccessible or have yet to be made available through the Supreme Court’s database.

Therefore, excluding cases for which the relevant documents are not readily available, we have collected data on 49 cases that were heard during 2023 (including cases that the DJP both won and lost), as further detailed below. The first table below addresses the limitations and methodologies that were utilized during the collection of data relating to the above-mentioned 49 cases:

A.   General Findings

Referring to a total of 49 corporate PPh decisions that we managed to collect data on, we found that the Supreme Court decided 44 cases related to appeals and five cases related to lawsuits, both of which were filed by the DJP and Corporate Taxpayers. In this regard, each of said cases breaks down into the following types and percentages of disputed objects:

The data presented above indicates that most cases tried before the Supreme Court comprised appeal processes at the Tax Court that involved various Objection Decrees related to assessment letters issued by the DJP to relevant corporate taxpayers, as regulated under Article 25, Paragraph (1) jo. Article 26 (1) Law 6/1983. Of this majority percentage, we also found that the objects of disputes between parties not only related to disagreements over the final amounts that were still required to be paid or returned to the relevant corporate taxpayers but also related to the correction of related elements, including calculations of net income or deductible/non-deductible expenses.

Meanwhile, a total of only five decisions related to the lawsuit process, three of which were Decision No. 325 B/PK/PJK/2023, Decision No. 253 B/PK/PJK/2023 and Decision No. 1710 B/PK/PJK/2022 that involved Interest Reward Decrees (Surat Keputusan Pemberian Imbalan Bunga). Meanwhile, the remaining two were Decision No. 5402 B/PK/PJK/2023, which related to a lawsuit against the Minister of Finance, and Decision No. 5335 B/PK/PJK/2023, which related to a lawsuit against a Tax Correction Decree.

B.   Analysis of Judges’ Considerations

As elaborated upon above, we have collected data on 49 Tax Court cases specifically related to corporate PPh and have identified the relevant judges’ decisions, as well as their considerations in each case. In terms of these cases, it is interesting to note that throughout 2023, all of the DJP’s losses against corporate taxpayers occurred when they initiated judicial reviews as applicants. In contrast, the DJP gained most of its wins when corporate taxpayers submitted judicial review petitions.

However, we discovered a single case in which the corporate taxpayer’s submission was granted by the panel of judges. This case involved the handing down of decision No. 1710/B/PK/PJK/2022, in relation to which the panel of judges at the Tax Court had previously rejected the corporate taxpayer’s lawsuit regarding the request for an interest reward. In this regard, the Supreme Court believed that the Tax Court had misjudged the trial facts and had unfairly ruled against said taxpayer in this case. As a result, the Supreme Court fully granted the judicial review, thus entitling the taxpayer in question to receive interest compensation from the DJP.

In terms of judges’ considerations at the judicial review level, our research revealed that overall, judges’ considerations primarily reinforced and restated arguments that had been presented by the Tax Court. Moreover, these arguments emphasized material substance as opposed to procedural details.

Material arguments arise when discrepancies in calculations of tax amounts are found between the DJP and taxpayers. Said discrepancies often emerge as a result of different interpretations of legal bases, tax regulations or disputes related to specific transactions.[36] The following table summarizes several instances of decisions that contained such arguments in their considerations:

Based on the summary of several judges’ considerations in relation to the above-listed decisions, it seems clear that the success or failure of the DJP lies in its ability to provide supporting evidence during trials in order to support its arguments, as such evidence serves as the basis of the DJP’s tax audit calculations. This evidence includes such items as bank statements, public accountants’ reports, delivery orders and invoices.^[37]

In addition to the availability of evidence, the results of disputes also depend upon the material substance of said disputes regarding the interpretation of cost components that affect the amount of final corporate PPh. In order to understand and evaluate these cost components accurately, a practical understanding of the industry and business processes of the respective taxpayers is required.

Source : hukumonline.com