Doubtful Accounts Save Taxpayer from VAT Penalties: A Key Lesson from the Tax Court Decision

The dispute over the correction of the VAT Tax Base (DPP) once again highlights the weaknesses of the Reconciliation and Accounts Receivable Test methodologies, where PT CI successfully proved that the variance in the accounts receivable balance did not fully represent the taxable supply of Goods and Services (BKP/JKP) subject to VAT. Non-revenue accounting adjustments, such as the Allowance for Doubtful Accounts, proved to have superior evidentiary weight before the Tax Court Judges.

Tax Court Decision Number PUT-002817.16/2024/PP/M.VB sets an important precedent discussing the complexity of VAT attribution to data variances found through audit techniques. This case involves the correction of the VAT DPP for the May 2021 Tax Period performed by The Directorate General of Taxes (DJP) against PT CI, based on the reconciliation findings between the VAT DPP and the Corporate Income Tax Turnover, as well as the results of the Accounts Receivable Flow Test.

DJP firmly defended its correction, believing that the positive difference arising from the Accounts Receivable Test and Turnover Reconciliation was a strong indication of unreported turnover of taxable Goods and Services (BKP/JKP) where VAT had not been self-assessed and collected. DJP employed a formalistic approach, assuming that any increase in trade receivables that could not be reconciled constituted a taxable supply subject to VAT. The Taxpayer's refutation was rooted in the substance of the accounting treatment. The Taxpayer presented evidence that the accounts receivable variance of Rp. 3,974,480,856.00 was not exclusively linked to VAT-taxable sales transactions. They argued that fluctuations in the Trade Receivables account could be caused by non-turnover adjustments, such as the provisioning or write-off of Doubtful Accounts, which are profit-and-loss adjustments but do not constitute a taxable supply of BKP/JKP. This argument successfully challenged the fundamental assumption used by DJP in its Accounts Receivable Test.

The Panel of Judges, in its consideration, found that DJP failed to provide sufficient and convincing evidence to refute the Taxpayer's arguments. The Panel assigned the burden of proof to DJP to demonstrate that the corrected variance was de facto a VAT DPP. Since DJP was unable to substantially prove that the Trade Receivables variance entirely consisted of VAT-taxable supplies, the Panel of Judges decided to Fully Grant the Appeal filed by the Taxpayer and annul the majority of the VAT DPP correction. However, the correction did not result in a Zero (Nihil) status entirely. The Panel set the final VAT Underpayment (Principal Tax) at Rp. 8,819,798.00. Thus, the Total VAT Still Payable, after accounting for the increase penalty, was established at Rp. 15,434,646.00.

This Panel Decision has significant implications for auditing practices. Firstly, it reaffirms that the Reconciliation and Accounts Receivable Test techniques should not be the sole and absolute evidence for VAT correction. Secondly, the decision validates the critical importance of strong accounting documentation on the Taxpayer's side to explain every data discrepancy. If the Taxpayer can demonstrate in detail that the receivable variance was influenced by non-VAT elements (such as doubtful account write-offs), DJP’s correction can be overturned. The logical consequence of the principal VAT being set to Zero is the cancellation of the 75% increase penalty under the accessoir principle (penalty follows the principal tax), providing significant financial relief to PT CI. This case concludes that data accuracy and comprehensive accounting reconciliation are the key defense in turnover-based VAT disputes. Taxpayers must be proactive in preparing a robust defense file that explains every movement in the Trade Receivables account that is not related to VAT-taxable supplies.

A comprehensive analysis and the Tax Court Decision on This Dispute Are Available Here