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Most tax disputes in Indonesia originate from tax assessments issued by the tax or customs authorities based on the results of tax audits or customs audits, in which the authorities do not agree with what is stated by the taxpayer in the Tax Return or Customs Form Declarations. Other tax dispute stems from the imposition of administrative sanctions which according to the taxpayer is incorrect. In some cases, disputes are caused by mis-procedures in tax collection, decisions on refusal to provide interest compensation, and similar decisions related to taxpayers' tax rights and obligations.

The procedure for resolving tax disputes in Indonesia has largely remained the same since 1983. Tax dispute resolution could take four to five years from the issuance of tax assessment to the issuance of Supreme Court decisions. All tax disputes fall under the jurisdiction of the Tax Court, with the exception of criminal tax offences and third-party claims with respect to seized goods.

Taxpayers initiate disputes by submitting objections to tax assessments or requests for cancellation of administrative sanctions to the Directorate Unit at the Tax Authority. There is not much expected to be resolved at the objection stage. Furthermore, a taxpayer who does not agree with the decision of tax authority on objection or cancellation of administrative sanctions is entitled to file an appeal or lawsuit to the Tax Court. In this stage, tax disputes are resolved through a two-tier resolution system: firstly, at the Tax Court, and secondly, the Supreme Court. Settlements of tax disputes in the Tax Court are decided by tax judges, the majority of whom come from former tax authorities. In the Supreme Court, only few judges have experience and expertise in the tax field.

Moreover, a taxpayer will be subject to administrative penalty in the event that the taxpayer objection is rejected. Pursuant to the Harmonization of Tax Regulations Law that was ratified in 2021, this administrative penalty will be up to 30 per cent of total taxes payable based on the decision of tax objection minus taxes paid prior to the objection decision being submitted.

While this 30 per cent administrative penalty will be waived if taxpayer files an appeal to the Tax Court against the objection decision, the taxpayer will be subject to administrative penalty of 60 per cent in the event that their appeal is rejected by the Tax Court. The administrative penalty of 60 per cent is also applicable if the Supreme Court decision results in an increase in the tax payable.

Over the past decade, the number of tax disputes heard by the Indonesia Tax Court is increasing significantly. Data shows that in 2020 there were 18,849 objection decisions issued by the Tax Authority and the Tax Court received 16,454 cases. On average, cases received by the Tax Court have increased by 20 per cent during the last three years. Approximately 40 per cent of the Tax Court's decisions are submitted to the Supreme Court for reconsideration. The majority of Supreme Court decisions uphold the Tax Court's decisions.

Improvement in data management and the initiation of paperless processes has proven to accelerate decision making and reduce the backlog of cases at the Tax Court in recent years. However, the acceleration in decision making seems to have compromised the quality the decisions, resulting in an increase of the number of tax disputes submitted to the Supreme Court.

Further, increasing numbers of tax disputes is most likely connected to the increasing volume of tax audits and queries. Law enforcement seems to be high priority for tax authorities in raising revenue and tax ratio. Improvement in information technology will be key to tax administration in monitoring tax compliance. Although the pressure to increase tax revenues and tax ratios have resulted in unnecessary disputes going to the Tax Court, the dispute resolution system does not recognise alternative dispute resolution processes.

Below, we provide a summary of tax dispute resolution procedures under the Indonesian tax system, focusing on the central government taxes administered by the Directorate General of Taxation (DGT) and customs duties administered by the Directorate General of Customs and Excises (DGCE).

Commencing disputes

i Taxes administered by the DGCE

Generally, tax disputes administered by the DGCE begin with an assessment of import and export declarations, customs facilities requests or renewals, and unloading activities declared in a certain area. The DGCE assesses these and can issue:

  1. a customs official assessment resulting in an import duties tariff or a value assessment and other items;
  2. a customs audit resulting in an assessment other than that of a customs tariff or value and penalties; or
  3. a customs audit resulting in a customs tariff and duties assessment.

Assessments resulting from (a) and (b) could be opposed by filing an objection letter to the DGCE within 60 days of the assessment date. This generally requires bonds equivalent to the amount of taxes or duties assessed to be provided. The DGCE will make a decision regarding a taxpayer's objection within 60 days after receipt of the objection letter. If the DGCE has not made a decision regarding the objection within 60 days, the taxpayer's objection will be deemed granted, and the bonds will be released back. A customs tariff and duties reassessment and objection decision can only be appealed to the Tax Court within 60 days of the date of the assessment or objection decision. When filing an appeal to the Tax Court regarding a DGCE objection or customs tariff and duties assessment (resulting from an audit), the taxpayer is required to pay the full amount of assessed taxes.

With respect to excises disputes, the taxpayer is entitled to file an objection letter against the DGCE notice of excises collection within 30 days of being notified. The DGCE must issue an objection decision within 60 days of the receipt of the objection letter. Prior to filing an objection, the taxpayer is required to provide a cash or bank guarantee or excise bond from the insurance company equivalent to the amounts of excises assessed. Taxpayers who disagree with the DGCE objection decision may file an appeal to the Tax Court within 60 days from the date of the objection decision. The taxpayer must pay at least 50 per cent of the total underpaid excises before filing an appeal to the Tax Court.

ii Taxes administered by the DGT

Taxes administered by the DGT include income tax (i.e., corporate income tax, individual income tax and withholding tax scheme), VAT and the sales tax on luxury goods. Pursuant to Article 3, Paragraph 1 of the General Rules of Taxation Law (the GRT Law), the self-assessment system must be completed by taxpayers filing tax returns and paying taxes due without reliance on DGT assessments. DGT assessments subject to dispute with taxpayers can be classified as follows:

  1. a tax collection notification letter;
  2. a tax assessment letter (and withholding tax receipt); and
  3. other tax letters (i.e., private letters).

Generally, tax collection notification letters and tax assessment letters are the result of tax audits. Other tax letters issued by the DGT could be subject to dispute depending on the content of such letters. A tax audit is generally initiated by a taxpayer's request for a refund. Every tax refund request is followed by a tax audit prior to receiving the refund except for advance refund request, which the tax audit would happen later after the refund. The tax refund audit timeline is 12 months from the date the tax return requesting a refund is filed. A taxpayer's refund request is deemed granted if the DGT fails to issue a tax assessment letter within 12 months. In a non-tax refund audit, while there is a procedural timeline, an audit exceeding such timeline cannot be invalidated. A taxpayer who meets certain criteria can receive an advance tax refund, but the DGT still has the authority to audit and issue an assessment. In the case of a tax assessment letter issued in relation to the previously administered advance tax refund, if the tax assessment letter issued shows that the taxpayer has been underpaid, the unpaid tax is added with a penalty of 75 per cent.

According to the DGT audit policy, the DGT can also audit a taxpayer based on selective criteria. The DGT issued Circular Letter No. SE–15/PJ/2018 (CR–15 of 2018) regarding a tax audit policy that in particular sets out the DGT's aim to revitalise the audit process through determination of a list of priority targets for tax audit. The list of priority targets for tax audit was compiled as a result of the relevant tax office determining which taxpayers should be included based on the list of priority targets for potential investigation. The list of priority targets for potential investigation is a list of target taxpayers alleged as non-compliant taxpayers.

The indicators of non-compliance are determined based on the type of taxpayer (i.e., corporate or individual) and the type of tax office the taxpayer is registered with. In general, the indicators for corporate taxpayers include:

  1. the existence of an intra-group transaction with a value of more than 50 per cent of the total transaction value;
  2. the issuance of more than 25 per cent of tax invoices to taxpayers whose taxation registration numbers begin with 000 in a tax period;
  3. no audit on all taxes for the past three years; and
  4. as a result of analysis of other information, data, reports or complaints, including results of data analysis from the Centre for Tax Analysis.

For individual taxpayers, the indicators include:

  1. non-compliance with tax payment and submission of annual tax returns;
  2. no audit on all taxes for the past three years; and
  3. as a result of analysis of other information, data, reports or complaints, including results of data analysis from the Centre for Tax Analysis.

During an audit, a tax audit officer will perform direct and indirect tests as governed by DGT audit procedures. In some cases, a tax audit officer will perform indirect testing such as reconciliation of tax accounts with financial accounts on a tax adjustment basis. However, tax laws require that tax adjustments by the tax officer be based on valid and competent evidence, which in our view does not include the results of indirect testing. Tax Court judges, confirmed by Supreme Court judges, also hold this view. Thus, reconciliation of tax accounts with financial accounts would not qualify as evidence.2

In addition, the CR–15 stipulates the tax audit criteria based on concrete data. While the GRT Law is silent on the definition of concrete data and only states the confirmation result of tax invoices and withholding slip as examples of concrete data, the CR–15/2018 extends the classification of concrete data by including any data or information that could directly prove the non-compliant behaviour of taxpayers. The audit timeline for special tax audits based on concrete data is in total one month and 10 days from the issuance of the audit instruction letter. Considering the time frame of the special audit based on concrete data, taxpayers should be aware and prepare to face a special audit based on concrete data especially in relation to the tax year in which the issuance of assessment will expire.

Pursuant to Article 12, Paragraph 3 of the GRT Law, the DGT can only issue a tax assessment letter if it has evidence that the tax disclosed in the tax return is incorrect. This sets the foundation that the burden of proof under the Indonesian tax system lies with the tax authority. The notion that the burden of proof lies with the DGT has been confirmed in a civil review decision by Supreme Court judges.3 However, this would not be the case for a taxpayer who does not maintain proper accounts and records. If it affects underpaid income tax or withholding tax, the DGT can issue a tax assessment letter with an underpaid amount and add an interest penalty. Such an interest penalty is based on Ministry of Finance decree on reference interest rate plus 20 per cent uplift factor divided by 12 for a maximum period of 24 months. Meanwhile, the DGT can issue a tax assessment letter with an underpaid amount, and add a 75 per cent penalty in the case of withholding tax collected but not paid to the government treasury, or in the case of underpaid VAT and sales tax on luxury goods if the taxpayer does not maintain proper accounts and records.

During a tax audit or tax objection, submissions of data and documents should be managed with great caution. The DGT could deny a taxpayer's objection if data or documents requested are not submitted during the tax audit pursuant to Article 26A, Paragraph 4 of the GRT Law. The DGT could also request the Tax Court omit data or documents submitted in the Tax Court that were not submitted previously during a tax audit and a tax objection (other than those in the possession of a third party), and this has been confirmed by Supreme Court judges.4 In another Supreme Court decision, this would not be the case if the data or documents, although not submitted during a tax audit, are submitted during a tax objection. In such case, they would still qualify as evidence.5

Prior to a tax audit, the taxpayer can amend his or her tax return resulting in overpaid tax or tax loss within three years of the end of the tax period. An amendment resulting in underpaid tax that is subject to interest equal to the monthly interest amounting to the reference rate plus 5 per cent with a maximum of 24 months.

During a tax audit, taxpayers can voluntarily disclose errors in their tax returns by applying Article 8, Paragraph 4 of the GRT Law. If the submission of voluntary disclosure result in underpaid tax, then the underpaid tax is subject to interest equal to the reference interest rate based on Ministry of Finance decree plus 10 per cent uplift factor divided by 12 for a maximum period of 24 months. Taxpayers can only disclose errors in making tax returns before the DGT issues a Notification of Tax Audit Result.

Prior to the final findings of a tax audit, taxpayers can request a quality assurance review at the higher level of the DGT. The basis for requesting a quality assurance review is if there is a violation of the law and its application by a tax audit officer. The quality assurance team will issue a legally binding decision as a basis for the final findings of a tax audit and its tax assessment letter. At the end of a tax audit process, the DGT will issue tax assessment letter which could be nil, overpayment or underpayment. In the event of underpayment tax assessment, the underpaid tax is subject to interest equal to the reference interest rate based on Ministry of Finance decree plus 15 per cent uplift factor divided by 12 for a maximum period of 24 months

Following a DGT tax collection notification letter, a taxpayer can file for administrative remedies pursuant to Article 36 of the GRT Law as follows:

  1. a penalty reduction or write-off (Article 36, Paragraph 1a of the GRT Law);
  2. a reduction or cancellation of the tax collection notification letter (Article 36, Paragraph 1c of the GRT Law); or
  3. a cancellation of a tax collection notification letter resulting from a tax audit that was completed without the taxpayer receiving temporary audit findings and a final audit closing conference letter (Article 36, Paragraph 1d of the GRT Law).

Following a DGT tax assessment letter, the taxpayer can file administrative remedies pursuant to Article 36 of the GRT Law as follows:

  1. a penalty reduction or write-off (Article 36, Paragraph 1a of the GRT Law);
  2. a reduction or cancellation of a tax collection notification letter (Article 36, Paragraph 1b of the GRT Law); or
  3. a cancellation of a tax assessment letter resulting from a tax audit that was completed without the taxpayer receiving temporary audit findings and a final audit closing conference letter (Article 36, Paragraph 1d of the GRT Law).

Administrative remedies set out in Article 36, Paragraph 1 of the GRT Law are generally resolved within the following timelines:

  1. an indefinite timeline if filing an application for the first time;
  2. a DGT decision must be made within six months of receipt of the first application;
  3. a second application must be filed within three months of the DGT decision on the first application; and
  4. a DGT decision must be made within six months of receipt of the second application.

A taxpayer's first or second application is deemed granted if the DGT fails to issue a decision letter within six months of the application being received.

Upon a DGT decision on the first or second taxpayer application of Article 36, Paragraph 1 of the GRT Law, the taxpayer can file a lawsuit to the Tax Court appealing the decision. The lawsuit should be made within 30 days of the decision.

Further to the above, following a DGT tax assessment letter and withholding tax receipt, a taxpayer can request administrative remedies pursuant to Article 25 of the GRT Law by filing an objection to the DGT within three months of the tax assessment letter being sent or the date of the withholding tax receipt. The three-month timeline is not applicable when the taxpayer is able to demonstrate a force majeure situation. Upon filing a tax objection, the administrative remedies set out in Article 36, Paragraph 1 of the GRT Law will be denied when the two remedies are closely related. Pursuant to Article 26, Paragraph 4 of the GRT Law, the burden of proof still lies with the DGT, unless the tax assessment was issued based on the grounds of insufficient accounts or records.

The taxpayer's objection will be deemed granted if the DGT fails to issue an objection decision letter within 12 months of the objection letter being received. Upon the DGT objection decision, the taxpayer can file an appeal to the Tax Court. The DGT objection decision could be fully accepted, partially accepted or denied, or could increase the amount of taxes.

Other letters issued by the DGT, such as tax audit instruction letters or private letters, can be resolved by filing a lawsuit with the Tax Court. Generally, the Tax Court will consider the case and decide whether such letter is subject to resolution in the Tax Court provided that certain criteria are met, especially if such letter has resulted in specific tax consequences for the taxpayer.6 A lawsuit regarding such letters should be filed within 30 days of the date the letter was sent.

Law No. 30 Year 2014 regarding Governmental Administration (GA Law) provides rules and guidance for governmental bodies when performing their duties. The GA Law is also applied by the administrative courts, a system which the Tax Court is part of. Administrative products of governmental bodies are defined broadly under the GA Law, which provides more criteria for administrative products. The grounds to challenge administrative products under the GA Law include abuse of power, procedural error and principles of good governance (i.e., the principle of legitimate expectation). However, such grounds have not been applied significantly by Tax Court judges in precedent cases. Nonetheless, arguably, the GA Law still provides grounds for the Tax Court in deciding tax disputes both under appeal or lawsuit.

In 2015, the Supreme Court issued Supreme Court Regulation No. 5 of 2015, which allows a person to file a 'request for decision' to the administrative court with regard to their rights to receive an administrative decision from a government body. The ground to file such 'request for decision' is generally when a person's prior request to a government body is deemed granted, but the government body has not issued an executorial decision. With regard to taxation, it has happened that a taxpayer's request for interest has been granted ultimately by the Tax Court, but the DGT has not issued any executorial decision allowing the interest to be paid to the taxpayer.

A seizure letter as a result of tax collection forces a taxpayer to surrender an amount of money or assets to settle the taxes owed. The taxpayer can file a lawsuit on such seizure letter within 14 days of the date of the letter in the following situations: where the taxpayer has filed for dispute resolution on the taxes due and is in financial distress, and thus requests that any tax collection, including seizure, be halted until the relevant dispute resolution has been issued; or where the process of seizure is procedurally flawed, which could result in the reprocessing of the seizure.

Unpaid taxes or penalties set out in a tax collection notification letter should be followed by active tax collection efforts, including those that end in a seizure letter. On the other hand, the collection of unpaid taxes and penalties set out in a tax assessment letter should be postponed pursuant to the taxpayer's objection to the DGT. However, such unpaid taxes and penalties are subject to a 30 per cent penalty of the unpaid amount if the DGT issues a decision partially granting or denying the taxpayer's objection. The 30 per cent penalty is not imposed if the taxpayer paid the unpaid taxes and penalties prior to objection, or if the taxpayer has filed a tax appeal to the Tax Court. The interest on an unpaid tax assessment letter will not be imposed if the taxpayer files an objection to the DGT.

Legitimate businesses should declare their taxes properly according to the law and should not be afraid of tax audits if everything is in order. The operations of tax audits are to verify what has been reported in the tax return and by doing so it is intended to ensure that those who should be paying taxes are actually doing so and those who have reported their taxes have done so correctly. The DGT shall ensure that any past practice agreed to is respected, and if that practice is overturned, then it should be done prospectively and not retrospectively. When there is a tax audit, the taxpayers have to recollect claims made years ago and if they do not have the details and documents to support the transactions then they face the consequences of the expenses being disallowed. The taxpayer is, therefore, recommended to have a proper tax risk control, especially documentation and the rationale to justify any specific transactions.

The courts and tribunals

Tax dispute resolution at the judicial level is first settled in the Tax Court. If the taxpayer or tax authority wants to challenge the Tax Court decision, either or both can file a civil review to the Supreme Court. The Tax Court will only be able to accept an application for a lawsuit or an appeal from a taxpayer.

The Tax Court is part of the administrative court system under the judicial power of the Supreme Court, pursuant to Article 27, Paragraph 1 of the Judicial Authority Law. It is located in Jakarta, and uses several cities as its place of trials or hearings, including Jakarta, Yogyakarta and Surabaya. For the purpose of developing its judiciary techniques, the Tax Court is managed by the Supreme Court, while for the purpose of developing its organisation, administration and finance, it is managed by the Ministry of Finance. Although it is managed by two different institutions, Tax Court judges are independent in resolving tax disputes (Article 5 of the Tax Court Law).

Full Tax Court decisions are not provided by the Tax Court. Instead, the Tax Court provides summaries of its decisions, which are available on its website7 and on the Supreme Court's website.8 The Secretary of the Tax Court has said that the Tax Court could not issue its decisions in full because of an instruction by the Tax Court Chief.9 Contrary to that, the Supreme Court provides full decisions, even those concerning tax disputes, on its website.10

Pursuant to Article 81 of the Tax Court Law, the Tax Court is required to issue a decision on an appeal within 15 months (12 months plus a three-month extension) and on a lawsuit within nine months (six months plus a three-month extension). Tax Court decisions that exceed this timeline will not cause the decision to be invalidated by the Supreme Court.11

In a lawsuit, a taxpayer is not required to pay unpaid taxes as a procedural requirement, while in an appeal, a taxpayer is required to pay at least 50 per cent of unpaid taxes (Article 36, Paragraph 4 of the Tax Court Law). When an appeal is made on decisions or assessments by the DGCE, by law the unpaid taxes must be paid in full. However, the Supreme Court has issued two decisions ruling that the requirement to pay unpaid taxes for appeals against DGCE decisions or assessments is omitted and not required based on jurisprudence or precedent.12 For appeals made on objection decisions by the DGT, the unpaid taxes in dispute are not required to be paid, as the unpaid taxes are postponed until one month after the Tax Court decision is made (Article 27, Paragraph 5a of the GRT Law). Prior to an appeal on the DGT objection decision, a taxpayer is only required to pay the amount of unpaid taxes agreed during the tax audit.

If the Tax Court decision is considered unfavourable to either taxpayer or tax authority, either or both could file a civil review application to the Supreme Court. Under Article 91 of the Tax Court Law, the grounds for such applications are:

  1. the Tax Court's decision was based on deception by the counterparty, which was only known after the case was decided, or the Tax Court decision was made based on evidence judged to be inauthentic by a civil court;
  2. there is new written evidence that is decisive and that, if known during the Tax Court's proceedings, would have resulted in a different decision;
  3. an ultra petita decision;
  4. part of the requisition has been decided without consideration; and
  5. the Tax Court's decision clearly violated the applicable laws.

A civil review application is required to be filed within three months of:

  1. the discovery of a deception or a civil court decision adjudicating that there is an inauthentic evidence (Article 91a of the Tax Court Law);
  2. the discovery of new evidence of which the date of discovery must be made under oath and authorised by a competent authority (Article 91b of the Tax Court Law); or
  3. the Tax Court decision being sent (Article 91c–e of the Tax Court Law).

Currently, there are 63 judges associated with the Tax Court, with a small minority having legal education backgrounds and the majority having accounting backgrounds and general tax knowledge. Most members of the Tax Court are retired tax or customs officials. It is therefore unsurprising there has been criticism regarding the independence of the Tax Court.13 The number of tax disputes filed with the Tax Court in 2020 amounted to 16,434 applications. In 2020, 67 per cent of the Tax Court's verdicts were in favour of the taxpayer, with 45 per cent decisions, among others, fully approved and the rest partially approved. The Supreme Court received 5,313 applications to reconsider Tax Court verdicts in 2020, up 16 per cent from reconsideration application in 2019. Lastly, the percentage of wins at the Supreme Court was 11 per cent in 2020,14 and the majority of Supreme Court decisions upheld the Tax Court's verdicts.

Penalties and remedies

In the case of a Tax Court decision that denies or partially grants an appeal, the taxpayer is subject to a penalty of 60 per cent of the amount of unpaid taxes less the taxes paid prior to filing an objection to the DGT. Payments made after filing an objection to the DGT will not be considered in the penalty computation. On the other hand, if a Tax Court decision partially or fully grants an appeal on an underpaid objection decision, the taxpayer cannot request interest on the taxes paid prior to the objection or appeal. Interest for taxpayers would be available if an overpaid tax in a tax return was not granted for refund during a tax audit, yet was granted for refund during a tax objection or appeal or civil review. If the DGT is late in issuing a tax refund instruction letter, the taxpayer could also request interest for a maximum period of 24 months. Further, in cases where a Supreme Court decision results in an increase in the tax payable, an administrative sanction in the form of a fine of 60 per cent of the total tax based on the Judicial Review Decision is imposed, minus the tax payments that have been paid prior to filing the objection.

In addition to the use of tax audits for official assessment, tax audits can be used to collect preliminary evidence where a tax crime is suspected. Where a tax audit has been completed, provided that a tax crime investigation has not commenced, a taxpayer could voluntarily disclose an inaccuracy and pay any underpaid tax along with a penalty of 100 per cent of the underpaid tax. Thus, a tax crime investigation will not commence provided that the DGT accepts such voluntary disclosure.

The punishments for a tax crime would be imprisonment and a financial penalty. Generally, the individual taxpayer or the director of a company and his or her accomplices will be held accountable for the tax crime, and only the person or company charged with the tax crime will bear the punishment. Not reporting a tax return or reporting an incorrect or incomplete tax return, or attaching incorrect information in the tax return, are generally considered as tax crimes. There is a difference between 'intention' and 'gross neglect': in the latter, if conducted by a taxpayer for the first time, the taxpayer may avoid imprisonment if he or she pays the monetary penalties. There are further, although not significant, differences between intention and gross neglect.

The tax investigation can be terminated if the taxpayer pays underpaid tax plus a fine. If the tax crime due to negligence, the taxpayer shall pay the underpaid tax plus a fine equal to the amount of underpaid tax. If the tax crime is found to be due to deliberate action, the taxpayer shall pay underpaid tax plus a fine of three times the amount of underpaid tax. If the tax crime relates to producing fictitious tax invoices or withholding slips, the taxpayer shall pay underpaid tax plus a fine of four times the amount of underpaid tax.

Tax claims

i Recovering overpaid tax

As explained in Section II (supra), a taxpayer can request a tax refund by stating such request in his or her tax return. Where a foreign company's income tax exceeding its tax limitation in a tax treaty is withheld, such an overpayment could be recovered through an application to the DGT by an Indonesian taxpayer.

ii Challenging administrative decisions

The principle of equal treatment is applicable as a ground in resolving tax disputes, as explained in Article 31a of the Income Tax Law, Article 16b of the Law on VAT and Sales Tax on Luxury Goods, and Article 28d Paragraph 1 of the Indonesian Constitution. To confirm this, a Supreme Court decision upheld a Tax Court decision allowing a taxpayer's appeal against a DGT's objection decision on the grounds of the principle of equal treatment.15


The Tax Court does not have the power to adjudicate costs related to legal proceedings to a taxpayer or the tax authorities. However, the Supreme Court can adjudicate the cost of a civil review application in an amount of 2.5 million rupiah, to be borne by the losing party.

Alternative dispute resolution

Indonesian tax laws do not provide for arbitration or mediation for tax disputes between taxpayers and the tax authorities in Indonesia. The same applies regarding advance rulings. However, a taxpayer could request a letter to confirm certain tax rules or the tax treatment of a transaction. The DGT is not bound to respond to such a confirmation letter. If the DGT responds, a private letter will be issued and would be legally binding under the principles of legitimate expectation. In many cases, the DGT can also arrange a consultative hearing with the taxpayer, and provide a non-written explanation that is not legally binding.

During a tax dispute resolution at the administrative or court level, both the taxpayer and the tax authority can agree on something previously disputed without mediation.


Indonesian tax laws do not have a general anti-avoidance rule with a straightforward meaning. Rather, the substance over form principle enshrined in Elucidation of Article 18 of the Income Tax Law as amended by Harmonization of Tax Regulations Law. Under this provision, the government has an authority to prevent tax benefit obtained by transactions scheme which does not correspond to actual situation of economic substance and that is indicated infringe the intention and purposes of the provision of tax legislation.

In most cases, Tax Court implemented the substance over form principle to interpret the term 'beneficial owner' in Indonesian double tax treaties.16 Recently, the Supreme Court held that the decision of the Tax Court to implement the substance over form principle to recharacterise an interest payment transaction under the scope of interest clause in the Indonesia–Netherlands double tax treaty was incorrect.17 The exemption from taxes in Indonesia as a source of interest paying country is compatible with the purpose of bilateral tax treaties under the double taxation agreement of Indonesia and the Netherlands, and as such, the good faith principle underlying the bilateral tax treaty is held to be applied in this case, according to the judges of the Supreme Court.

Further, the Indonesian Income Tax Law embodies specific anti-avoidance rules:

  1. Thin capitalisation rules (Article 18, Paragraph 1 and Article 18, Paragraph 3): in September 2015, the Ministry of Finance again issued a debt-to equity ratio for denying interest deductions by companies. According to Ministry of Finance Decree No. PMK-169/PMK.101/2015, in effect since January 2016, the applicable debt-to-equity ratio is 4:1.
  2. Transfer pricing rules (Article 18, Paragraph 3): these rules state that related-party transactions should be based on an arm's-length principle by applying transfer pricing methods, namely comparable uncontrolled price, cost-plus, resale price, profit split and the transactional net margin methods. Indonesia's first transfer pricing guideline was DGT Decree No. KEP-01/PJ.7/1993, which was an audit guideline for tax officers and which was subsequently replaced by DGT Regulation No. PER-43/PJ/2010 on 6 September 2010 and further amended by DGT Regulation PER-32/PJ/2011, which adopts most of the OECD Transfer Pricing Guidelines 2010.
  3. Controlled foreign corporation (CFC) rules (Article 18, Paragraph 2 and Ministry of Finance Regulation No. PMK-93/PMK.03/2019): the previous regulation provides the deemed divided is based on tax after profits of controlled companies, and income was not differentiated into active and passive income. In contrast, in the latest regulation of PMK-93, the calculation is based on after-tax net income derived only from passive income. Passive income includes dividend, interest, royalties, rent obtained from the controlled non-stock exchange foreign business entity or from the use of land or buildings as well as lease property other than property originating from transactions with related parties, and profits from sale or transfer of properties.
  4. Indirect transfer of shares (Article 18, Paragraph 3c and Ministry of Finance Decree No. PMK-258/PMK.03/2008).
  5. The beneficial owner test: this was modified from limitations on benefits rules (DGT Regulation No. 25/PJ/2018). The rules specify criteria and forms to be filed by foreign taxpayers to be entitled to a treaty benefit. One questionnaire form includes a checklist concerning beneficial ownership that adopts the limitation on benefits test.

The DGT has issued a regulation on tax treaty application to strengthen the anti-tax treaty abuse rule (DGT Regulation No. 25/PJ/2018). Prior to the issuance of DGT Reg 25/2018, the DGT issued DGT Regulation No. 10/PJ/2017, which contains the principal purpose test where treaty abuse is considered to have occurred where one of the purposes or the sole purpose of the transaction arrangement is to obtain the treaty benefit, which is contrary to the object and the purpose of tax treaties. Under DGT Reg 25/2018, tax treaty abuse may be considered to have occurred if there are transaction arrangements either directly or indirectly with the aim of obtaining tax treaty benefits that are contrary to the object and purpose of tax treaties.

In addition to the transaction purpose test, DGT Reg 25/2018 also sets out the criteria that must be fulfilled to obtain the tax treaty benefits based on the economic substance doctrine. The criteria to obtain tax treaty benefits are as follows:

  1. there is economic substance in the establishment of the entity and carrying out of transactions;
  2. the legal form is the same as the economic substance in the establishment of the entity or carrying out of transactions;
  3. the business activities are managed by a company's own management that has sufficient authority to carry out the transactions;
  4. there are fixed assets and non-fixed assets (other than the assets generating income from Indonesia) that are adequate and sufficient in the carrying out of business activities in that treaty partner jurisdiction;
  5. it has sufficient employees with the expertise and certain skills in accordance with its line of business; and
  6. it has activities or an active business18 other than receiving income in the form of dividend, interest, royalty from Indonesia.

Moreover, even though Indonesia is not a member of the OECD, Indonesia expressed its support on the OECD views that base erosion and profit shifting (BEPS) presents a high risk to state revenue. Apparently, the BEPS effects in Indonesia will significantly affect transfer pricing and the entitlement to treaty benefits rules. These topics have been the major issues in the international tax disputes arena in Indonesia.

Double taxation treaties

Indonesia has concluded and ratified tax treaties with 70 countries, the legal status of which prevails over Indonesian domestic tax laws according to Article 32A of the Income Tax Law. Although Indonesia is not a party to the Vienna Convention on the Law of Treaties, it has a law concerning international treaties which establishes that international treaties shall be applied in good faith. This is similar to what is directed in the Vienna Convention. As demonstrated in the non-tax case of Pulau Ligitan and Pulau Sipadan (Indonesia/Malaysia) at the International Court of Justice, Indonesia considers the provision of the Vienna Convention by virtue of customary international law and therefore considers itself bound by its provision.19

With regard to tax cases, the Tax Court has unanimously held that the domestic rules of limitation on the benefits of tax treaties shall not be applied in excess of that which has been agreed in such tax treaties by considering application of Article 27 of the Vienna Convention.20 The Vienna Convention was also considered by the Supreme Court in its decision concerning the branch profits tax (BPT) rate, where the Supreme Court held that the BPT rate in tax treaties prevails over the clause in production sharing contracts in the oil and gas sector.21

The use of the OECD's works on tax treaty interpretation and application are also considered by the court. The Tax Court quoted the revised Discussion Draft of the OECD Commentary (2012) as an aid in the interpretation of tax treaties concerning the term 'beneficial ownership'.22 In another case, the OECD Report on the Attribution of Profits to Permanent Establishment was cited as a primary reference with regard to the deductible expenses of permanent establishments.23

Some Indonesian scholars observed that the Tax Court does not take into account the legal status of interpretation materials, but rather whether such materials have a persuasive value for the judges to decide a case.24 The use of the OECD Commentaries in interpreting uncertain or unclear meaning in a tax treaty is considered widely accepted by most judges in the Tax Court and Supreme Court. In some cases, the judge prefers to use the latest version of the OECD Commentaries, even if the tax treaty in question was signed and came into force long ago. We also observed that the Tax Court is willing to apply a dynamic interpretation when the interpretation materials considered are not domestic laws or regulations, but on the other hand, tends to apply a static interpretation when it comes to domestic legislation.

The Indonesian government signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) on 7 June 2017. The Issuance of the Presidential Regulation No. 77 of 2019 has thus finally ratified it as a basis for domestic law, hence the articles adopted in the convention can apply to the Covered Tax Agreements (CTA) in the reservation.25 The Presidential Regulation contains of list of 47 countries and a total 69 double tax treaties that considered as CTA. This domestic ratification announced that, in the event of any difference in interpretation between the translated manuscript and the original manuscript, the original convention text in English and French will be applied.

In 2019, the Ministry of Finance issued MoF Regulation No. 35 of 2019 concerning the implementing of guidelines of determination of permanent establishment. The Regulation asserted that a place of business is deemed to exist regardless of whether the foreign entity or foreign person owns or rents or whether the foreign person or entities has the legal rights to use the place of business. The regulation affirms that a business that meets the criteria of preparatory or auxiliary activities is excluded from the definition of permanent establishment for the implementation of bilateral tax treaties.

In 2021, additional provisions related to the Mutual Agreement Procedure (MAP) are enshrined in the Harmonization of Tax Regulation Law (HPP Law). The new article concerning MAP stipulates that MAP may be applied for in conjunction with objection and appeal. Further, the HPP Law authorises the Minister of Finance to cooperate in the implementation of assistance in tax collection with partner countries. The DGT may provide an assistance in tax collection and request assistance in tax collection from partner jurisdictions.

Areas of focus

Transfer pricing is still the significant area of tax disputes and litigation, followed by tax controversy in mining and agricultural industries, which contributes significantly to the tax revenue. Corporate restructurings involving transfer of tangible and intangible properties and workforce, both domestic and international, are also targeted.

Tax controversy on the definition of associated enterprises criterion raise controversy in the Siemens Indonesia case. There is no capital participation between Siemens Indonesia and Nokia Indonesia at the time of sale of communication division to Nokia Indonesia. However, the DGT claims its position on the ground that there is control or de facto relationships based on framework agreement between Siemens Global and Nokia Global. The Tax Court agree with the DGT and reject the taxpayer appeal. In accordance with this judgment, the Minister of Finance regulation No. 22 of 2020 was issued and stipulates the definition of controlled transactions are not only transactions with related parties, but also transactions carried out between unrelated parties in which the related party of one or both of the parties of the transaction determine the counterparts and the price of the transaction.

In a 2019 Supreme Court verdict,26 the majority of the judges made the surprising decision to prioritise the judicial activism of judges' authority and decide the case differently from the tax calculations created by both the taxpayer and tax authorities. This Supreme Court verdict has also shown that tax authorities have the authority to calculate the value the goodwill from taking over restructuring of subsidiaries, even if the tax authority's valuator has no licence on valuation issued by the official of the financial services authority. Paying attention to this Supreme Court verdict is the judge's decision that he has a dominus litis to evidentiaries and sources of data and information. The Supreme Court has decided to use an income approach combined with the method of accumulation and discount of future economic income based on sources published by the Fiscal Policy Agency of the Ministry of Finance, the Directorate of Customs, industrial sectors, and many more specific organisations in the field of industrial sectors, to calculate taxable income derived from restructuring activities.

Further, the DGT regulation on treaty abuse could bring a wave of disputes related to the entitlement of treaty benefits owing to no valid measures or definition concerning economic substance. The domestic anti-tax treaty abuse regulation is adopting the economic substance doctrine by highlighting the conditional circumstances of the foreign taxpayer, such as tax payment in its domicile, assets and employees as indicators of sufficient economic substance to access the tax treaty benefits.

Having no detailed guidance in determining the reasonable 'sufficient economic substance', the implementation of the anti-tax treaty abuse measure is likely to become uncertain. The wording of the domestic anti-treaty abuse rules would make it easy for the DGT to assume that there is treaty abuse or, as such, will be tempted to presume intention of abuse simply because of the presence of benefits. In the authors' view, it is important to undertake an objective analysis of the aim and objects of all persons involved in putting that arrangement or transaction in place. All relevant facts and circumstances should be weighed to determine whether it is reasonable to conclude that an arrangement or transactions were undertaken or arranged for such purpose.

For individual taxpayers, the use of data and information from the automatic exchange of information and data exchange with other institutions will potentially be challenging in the future. The increasing impact of exchange of information attracts the DGT to focus on the access to wealth information, such as banking information and land ownership of wealthy individuals, by targeting potentially non-compliant taxpayers from a list of taxpayers targeted for tax audit purposes.

Outlook and conclusions

The government officially enacted Law Number 11 of 2020 concerning Job Creation (Job Creation Law) in November 2020. This law consists of 15 chapters and 186 Articles. The taxation cluster includes amendments to four tax laws:

  1. the Income Tax Law;
  2. the Value-Added Tax Law and Sales Tax on Luxury Goods (VAT and STLGs);
  3. the General Provisions and Tax Procedures Law; and
  4. the Regional Tax and Retribution Law.

In 2021, The Harmonization of Tax Regulations Law (HPP Law) was ratified into law by the government and the House of Representatives. The HPP Law revises six laws:

  1. the General Provisions and Tax Procedures Law;
  2. the Income Tax Law;
  3. the Value-Added Tax Law and Sales Tax on Luxury Goods (VAT and STLGs);
  4. the State Financial Policy and Financial System Stability to Control Corona Virus Disease 2019 (Covid-19) Pandemic and/or in Response to Dangerous Threats to the National Economy and/or the Stability of the Financial System;
  5. the Job Creation Law; and
  6. the Excise Law

Tax revenue collection policy is to concentrate on intensified law enforcement and the continued implementation of the exchange of information. Currently, the DGT is actively in making improvements at every stage of the process related to tax disputes, starting from data validation and supervision and integrations system to improve quality of tax audit and to establish knowledge management in resolving tax disputes.

The accuracy and quality of the Tax Court's decisions may have been affected by the court's efforts to accelerate clearing the enormous number of cases it faces. In addition, there is no pre-litigation system to preventing unnecessary disputes. There are several proposals to improve the quality of tax dispute resolution systems in Indonesia, such as changes in institutional structure of objection procedure, recognition of alternative dispute resolution processes, or adding a new tier in judiciary system to resolve tax disputes. However, the resolution of tax disputes is a neglected part of the tax field so far.