Corporate income tax disputes in Indonesia commonly arise when a Directorate General of Taxes (DGT) audit results in an additional tax assessment. A company can challenge the assessment through an objection and, if necessary, an appeal to the Tax Court.
How Does a Corporate Income Tax Dispute Begin?
A corporate tax dispute commonly begins when the DGT audits a company’s tax position and disagrees with how income, expenses, related-party transactions, or other items have been reported.
The audit may result in an underpayment tax assessment (Surat Ketetapan Pajak Kurang Bayar or SKPKB). The company must then decide whether to accept the assessment or challenge it through Indonesia’s tax dispute process.
How Does a Tax Objection Work?
A taxpayer that disagrees with an assessment can generally file an objection with the DGT within three months from the date the assessment is sent, subject to the applicable filing requirements.
The objection must state the amount of tax the company believes is payable and explain why it disagrees with the DGT’s assessment. Before filing, the taxpayer must also pay at least the amount it agreed was payable during the final discussion of the audit results.
Challenging a DGT assessment? MAP can assist with the objection process at info@mapresourcesindonesia.com
The DGT must issue its decision on the objection within 12 months after receiving it. The DGT can accept the objection in full or in part, reject it, or increase the amount of tax payable.
If an objection is rejected or only partly accepted, a 30% administrative penalty can apply to the amount determined under the objection decision after taking account of tax paid before the objection. The 30% penalty does not apply if the taxpayer proceeds with an appeal.
What Happens If the Objection Is Rejected?
A taxpayer that disagrees with the objection decision can appeal to the Tax Court.
The appeal generally must be filed within three months from the date the objection decision is received. The Tax Court considers the disputed assessment, the taxpayer’s arguments, the DGT’s position, and the supporting evidence.
An appeal can involve accounting records, contracts, invoices, transfer pricing documents, calculations, correspondence, and evidence showing what occurred in the company’s Indonesian operations.
If the Tax Court rejects the appeal or accepts it only in part, a 60% administrative penalty can apply under the applicable calculation. Companies should consider this potential cost before proceeding with an appeal.
After the Tax Court issues its decision, a party may request judicial review by the Supreme Court if the requirements are met. Judicial review is not another ordinary appeal and is available only on the grounds allowed under Indonesian law.
Which Corporate Tax Issues Commonly Lead to Disputes?
Transfer pricing is an important source of disputes for multinational groups. The DGT may examine whether pricing and profit allocation between related companies reflect the functions performed, assets used, and risks assumed by the Indonesian company.
Related-party services and head-office charges can also be challenged where the Indonesian company cannot adequately support the service received, the basis for the charge, or its connection with the business.
Financing arrangements can create disputes over interest deductions, related-party pricing, debt levels, and the tax treatment of intragroup funding.
Foreign companies can also face permanent establishment disputes where the DGT considers that their activities in Indonesia create an Indonesian taxable presence.
Other disputes can concern deductible business expenses, withholding taxes, tax incentives, and the use of tax losses.
What Evidence Matters During a Tax Dispute?
The evidence depends on the adjustment being challenged. Contracts may show the terms of a transaction, but they may not by themselves prove that a service was provided, an expense was incurred for the business, or a related-party price was appropriate.
Companies may need invoices, accounting records, payment records, calculations, correspondence, reports, evidence of work performed, and other documents that support what happened in Indonesia.
For transfer pricing disputes, the DGT and the taxpayer may also examine the functions performed, assets used, and risks assumed by the Indonesian company rather than relying only on intercompany agreements.
Need support reviewing the evidence behind a tax adjustment? Contact info@mapresourcesindonesia.com
Documents provided during the tax audit can also affect the company’s position at the objection and appeal stages. Companies should be able to support the underlying transaction rather than relying only on explanations prepared after the assessment is issued.
When Can the Mutual Agreement Procedure Help?
A DGT adjustment involving a cross-border transaction can result in the same income being taxed in Indonesia and another jurisdiction.
Where an applicable tax treaty allows it, the taxpayer may be able to request the Mutual Agreement Procedure (MAP). Under MAP, the tax authorities of the two jurisdictions work together to resolve taxation that is not consistent with the applicable treaty.
The deadline for requesting MAP depends on the applicable tax treaty and Indonesian rules. MAP can also interact with an Indonesian audit, objection, or appeal, so companies should consider the domestic and treaty procedures together.
Can an APA Reduce Future Transfer Pricing Disputes?
An Advance Pricing Agreement (APA) can provide greater certainty for related-party transactions that are likely to recur.
Facing recurring transfer pricing adjustments? MAP can assist with your options at info@mapresourcesindonesia.com
An APA allows the taxpayer and the tax authority to agree in advance on the transfer pricing method or criteria that will apply to specified related-party transactions for covered periods.
An APA does not replace the objection or appeal process for every existing tax assessment. Its main purpose is to reduce uncertainty over transfer pricing issues that could arise again in future tax years.
Manage Corporate Tax Disputes With MAP Resources Indonesia
MAP Resources Indonesia supports foreign companies with tax audits, assessment reviews, tax objections, transfer pricing disputes, and coordination during the Tax Court process. Contact us at info@mapresourcesindonesia.com for support.
