Correction of Income Tax Article 21 (PPh 21) Resulting from Equalization Difference Using a Flat 3% Tax Rate is Annulled by the Tax Court

The appeal filed by PT TMS concerns the Underpayment Tax Assessment Letter (SKPKB) for Income Tax Article 21 for the tax period January to December 2020, issued by the Pekanbaru Medium Tax Office (KPP Madya Pekanbaru). During the tax audit, the Directorate General of Taxes (DGT) made an adjustment to the Article 21 Income Tax Base (DPP) amounting to IDR968,899,020.00, based on an equalization analysis between salary expenses recorded in the accounting books and the DPP reported in the Article 21 tax return. The DGT argued that there were payments in the form of vehicle repair and maintenance wages and professional service fees that had not been subject to withholding under Article 21, resulting in additional tax due of IDR41,344,859.00, including administrative interest sanctions.

However, PT TMS rejected this adjustment on the grounds that the DGT’s calculation was not based on sufficient evidence and was inconsistent with Article 12 paragraph (3) of the General Taxation Provisions and Procedures Law (UU KUP). The taxpayer explained that all payments had been recorded in accordance with the company’s accounting system, and that the Article 21 tax returns for 2020 were prepared based on employees’ actual income. The adjustment made by the DGT was deemed disproportionate because it applied a flat rate of 3% across the board, without taking into account the progressive tax brackets stipulated under Article 17 paragraph (1)(a) of the Income Tax Law (UU PPh), and without considering monthly tax periods.

PT TMS further argued that the fiscal adjustment violated the self-assessment principle, as the DGT failed to present sufficient evidence to prove that the taxpayer’s reporting was inaccurate. The additional tax base of IDR968,899,020.00 was viewed as a unilateral interpretation that disregarded the substance of transactions and the company’s internal accounting system. The company also contended that applying such corrections without considering the jurisdictional allocation of payroll functions across operational units contradicted the territorial jurisdiction principle under Article 21 paragraph (1)(a) of the Income Tax Law.

In its decision, the Tax Court Panel of Judges held that the DGT lacked adequate evidence to justify the alleged unreported income subject to withholding under Article 21. The DGT’s adjustment relied on an average rate of 3% without accounting for the applicable progressive brackets, and without detailed supporting evidence demonstrating errors in PT TMS’s Article 21 tax returns. According to the Panel, this approach was inconsistent with Article 17 paragraph (1)(a) of the Income Tax Law and violated the principle of proportionality in tax assessment.

The Panel further emphasized that the DGT should have considered the taxpayer’s income structure, tax periods, and properly recorded company expenditures. Since there was no convincing evidence proving that the taxpayer’s filing was incorrect or untrue, the DGT’s adjustment was deemed legally invalid. Consequently, the Tax Court fully granted PT TMS’s appeal and annulled the 2020 Article 21 Income Tax SKPKB amounting to IDR968,899,020.00, including all administrative sanctions.

This ruling underscores the importance of accuracy and a strong legal basis in conducting tax adjustments, particularly for withholding-type taxes such as Article 21 Income Tax. The Court also highlighted that adjustments must be based on substantive evidence and legally compliant calculation methods, not on administrative estimates or average rates. This case serves as a reminder that within the self-assessment system, the burden of proof regarding the correctness of the tax return lies with the taxpayer—unless the DGT can present lawful and competent corrective evidence.

Comprehensive Analysis and Full Tax Court Decision Available Here