From Market Support to Core Business: Where Did BUT Begin?

The dispute arose from the issuance of an Underpayment Tax Assessment Letter (SKPKB) for Final Income Tax Article 15 for the January 2021 Tax Period against CAP Pte. Ltd, a Singapore-based company operating a representative office in Indonesia. The Directorate General of Taxes (DGT) determined a Tax Base of IDR 38,297,723,927, resulting in Final Income Tax Article 15 payable amounting to IDR 168,509,985, along with administrative sanctions of IDR 71,178,618, bringing the total tax assessed to IDR 239,688,603.

The correction was based on the DGT’s view that the activities carried out by the representative office of CAP Pte. Ltd in Indonesia had exceeded the scope of preparatory or auxiliary activities. Based on the audit findings and the Minutes of Examination (BAPK), the representative office was considered to be actively involved in product introduction, promotional activities, and liaison functions supporting sales. Accordingly, the DGT concluded that the representative office met the criteria of a Permanent Establishment (PE), and that export income derived from Indonesia was subject to Final Income Tax Article 15.

CAP Pte. Ltd disputed the correction and asserted that its representative office had no authority to conduct sales, execute contracts, or determine pricing. All sales transactions were fully negotiated, decided, and concluded by the head office in Singapore. The activities performed in Indonesia were limited to marketing support, market research, and liaison functions, which, pursuant to Article 5 paragraph (3) letters d and e of the Indonesia–Singapore Tax Treaty, constitute preparatory and auxiliary activities.

The Panel of Judges of the Tax Court agreed with CAP Pte. Ltd. In its considerations, the Panel emphasized that the determination of PE status cannot be based solely on the existence of promotional activities, but must assess whether such activities constitute a core and decisive part of the enterprise’s overall business activities. Referring to the OECD Commentary on Article 5 (2010 and 2017 Models), the Panel concluded that the marketing functions performed by the representative office of CAP Pte. Ltd did not stand independently as a principal business activity, but merely served a supporting role and did not extend to the realization of sales.

The Panel further emphasized that although the activities were conducted on a continuous basis, there was no evidence that the representative office played a substantive role in key business decision-making, such as price determination, contract negotiation, or the conclusion of transactions. Accordingly, the activities of the representative office remained within the scope of preparatory and auxiliary activities and therefore did not give rise to a Permanent Establishment as contemplated under the Indonesia–Singapore Tax Treaty. Based on these considerations, the Panel granted the appeal in its entirety and declared that the DGT’s corrections to the Tax Base of IDR 38,297,723,927, Final Income Tax Article 15 amounting to IDR 168,509,985, and administrative sanctions of IDR 71,178,618 were not legally sustainable.

Comprehensive Analysis and Tax Court Decision on This Dispute is Available Here