Denial of Input VAT Credit for Intra-Group Promotion Costs: A Case Study on the Application of Article 9 Paragraph (8) Letter b of the VAT Law [(PUT-014079.16/2022/PP/M.XIIA Tahun 2025)]

The application of the Input Value Added Tax (VAT) crediting provisions within multinational corporate groups has once again been tested in the Tax Court through a decision rejecting the appeal filed by PT CCI.

The core dispute centered on a VAT Input Tax correction of Rp4,965,907,820.00 for the December 2019 Tax Period, where the tax authority deemed the Input VAT to originate from expenditures that did not have a direct connection to the Appellant’s business activities, as strictly regulated under Article 9 paragraph (8) letter b of the VAT Law. This rejection affirms the consistency of the Indonesian Directorate General of Taxes (DGT) and the Panel of Judges in applying the principle of legal entity formality over arguments of inter-affiliate economic substance.

The primary conflict in this case lies in the differing interpretations regarding the correlation between promotion costs and the Taxable Deliveries (PKP) generated by the Appellant.

PT CCI, which acts as the producer and seller of beverage base to affiliated entities, argued that promotion costs for the finished product (ready-to-drink beverages like Fanta and Sprite) sold by the affiliates were an essential effort to maintain and boost the brand awareness of the trademark embodied in the beverage base it produces and sells. The Appellant contended that the promoted trademark is the core of its product, therefore, the marketing expenditure directly contributed to the increase in its revenue, and thus the Input VAT should be creditable. Conversely, the DGT insisted that the Appellant is legally only in the beverage base business, while the promotion costs were aimed at products that it neither owned nor sold. For the DGT, there was no strong direct causal relationship that met the criteria of “directly related to business activities” under the VAT rules, a view also supported by the positive correction of the same costs in the Corporate Income Tax dispute.

After reviewing the evidence and arguments from both parties, the Tax Court Panel of Judges adopted a stance that upheld the DGT's correction.

The Panel referenced the principle of tax consistency, where the correction of the promotion costs in the Corporate Income Tax dispute for the same tax year—deemed as non-deductible expenses (not meeting the 3M criteria: Obtaining, Collecting, and Maintaining income)—served as a key foundation. The Panel reasoned that if an expense cannot be deducted from income because it is not directly related to the 3M effort, the Input VAT on that expense is also juridically non-creditable because it lacks a direct relationship with the Appellant's Taxable Deliveries. This decision explicitly rejects the Appellant’s economic substance argument, choosing instead to adhere to the legal facts of the entity producing and selling the goods.

The implications of Decision Number PUT-014079.16/2022/PP/M.XIIA Tahun 2025 are significant for multinational companies, especially those operating under a limited risk scheme or having strict functional separation among affiliates.

This ruling serves as a warning that shared costs such as promotion and marketing must be supported by robust intercompany agreements and functional documentation that proves the direct, not just indirect, benefit to the revenue of the entity incurring the cost. The Tax Court reaffirms that Input VAT crediting must be based on an explicit link between the acquisition of Taxable Goods/Services (BKP/JKP) and the Taxable Deliveries (PKP) generated by the Taxpayer itself.

The PT CCI case underscores the urgency for Taxpayers to conduct integrated tax reviews of Corporate Income Tax and VAT simultaneously. The rigid functional division within a group necessitates caution in allocating overhead costs to avoid the risk of double non-deductibility. The key takeaway is the need for comprehensive Transfer Pricing (TP) documentation, not just for Corporate Income Tax purposes, but also for the justification of Input VAT. This is crucial to ensure that every expenditure, particularly in the realm of marketing intangibles, has a strong and consistent direct benefit justification in the eyes of tax authorities and the judiciary.

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