Beware! Failure to Segregate Services and Goods, Multi-Billion WHT 23 Correction Confirmed, Only a Small Portion Granted by the Tax Court

This Tax Court Decision serves as a critical examination of Withholding Tax (WHT) Article 23 Taxable Base correction arising from the reconciliation of Value Added Tax (VAT) input data from counter-parties. This specific case, involving PT AALI, saw the Directorate General of Taxes (DJP) uphold a multi-billion rupiah WHT Article 23 correction for the December 2015 tax period, arguing a significant discrepancy between the WHT objects reported by PT AALI and the total value of taxable services received from third parties. This dispute underscores the crucial challenge of proving the transactional substance when PT AALI is alleged to have failed their tax withholding obligation.

The core conflict in this case lies in the fundamental difference in the scope of the two tax objects. The DJP insisted that the total value of VAT services recorded in the input invoices must be entirely deemed as compensation for services subject to WHT Article 23, unless proven otherwise. The absence of adequate tax withholding slips and PT AALI's failure to provide complete transaction documentation (contracts, detailed invoices) during the audit and objection stages were the main basis for confirming the correction. Conversely, PT AALI argued that the total VAT service value included the purchase of goods/materials (which are not WHT Article 23 objects), as well as lease payments subject to WHT Article 4(2) Final. For PT AALI, the reconciliation of these two taxes with differing scopes inherently led to an inaccurate and distorted correction amount.

The Panel of Judges acknowledged that the reconciliation method used by the DJP was valid prima facie evidence, particularly given PT AALI's lack of cooperation in document submission. Nevertheless, the Tax Court’s role is to test the substance of the dispute. Based on the additional evidence presented by PT AALI during the trial, the Panel successfully identified that a portion of the correction was indeed for transactions legally excluded from WHT Article 23. This value included elements of WHT Final (lease) and purchases of goods. By considering the principle of substance over form, the Panel invoked the authority of Article 80 paragraph (1) of the Tax Court Law to partially grant the appeal, cancelling the correction amount that was demonstrably non-WHT Article 23 object, and confirming the remaining correction value.

The implication of this decision for taxpayers' tax practices is unequivocally documentation-driven. The ruling confirms that theoretical arguments against the incompatibility of WHT Article 23 and VAT service objects are insufficient. Taxpayers must systematically segregate the value of services, goods, and leases in all contract documents, invoices, and accounting records. Failure to clearly separate the value of goods/materials from services risks the entire transaction value being corrected under WHT Article 23. Furthermore, this decision reiterates that formal disputes concerning SKP issuance procedures must be pursued through a separate Lawsuit, not an Appeal (Presumptio Iustea Causa). This case is a vital lesson on the importance of correct WHT Article 4(2) Final compliance as a mitigation strategy against WHT Article 23 correction risks.

A Comprehensive Analysis and the Tax Court Decision on This Dispute Are Available Here