The Directorate General of Taxes (DGP) frequently corrects Article 26 Income Tax rates from treaty rates to the domestic 20% rate if a taxpayer is deemed to have failed in meeting the administrative requirements of the Certificate of Domicile (CoD). This dispute originated from the Respondent's correction of service transactions with Hammerking Roller Ltd and NCI Brokers, as the submitted CoD was considered invalid or did not accurately cover the transaction period. The Respondent insisted that the failure to meet formal requirements under PER-25/PJ/2018 or its implementing regulations nullifies the taxpayer's right to enjoy preferential tax treaty rates.
However, the Petitioner defended its position by arguing that the substance of the counterparty's presence in the treaty partner country is genuine. The Petitioner emphasized that administrative hurdles or delays in updating the CoD should not eliminate the substantial rights guaranteed by international agreements (Tax Treaties). During the trial, the Board of Judges conducted a thorough evidentiary review of the existence of the foreign entities and the character of the income, which was classified as business profits.
The Board of Judges ultimately issued a progressive ruling by partially canceling the Respondent's correction. The Judges held that as long as the substance of the recipient's domicile can be proven and there is no Permanent Establishment (PE) in Indonesia, the taxing rights reside in the country of domicile according to Article 7 of the relevant Tax Treaty. This decision reaffirms that material substance can override administrative rigidity as long as other supporting evidence is robust. For taxpayers, this case serves as a crucial lesson to maintain correspondence and physical presence evidence of counterparties beyond just the DGT/CoD document.
A Comprehensive Analysis and the Tax Court Decision on This Dispute Are Available Here
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