The Article 26 Income Tax dispute involving PT CSE originated from the Respondent's negative adjustment of interest expenses in Corporate Income Tax, subsequently reclassifying it as a withholding tax object (secondary adjustment) on funds from KENSB. The Respondent maintained that under Article 18 of the Income Tax Law and Article 12 of Government Regulation (PP) 94/2010, debts to affiliates must bear arm’s length interest (IndONIA) despite the absence of a written interest agreement. This rationale led to the issuance of an Underpayment Assessment (SKPKB) for Article 26 Income Tax for December 2018, totaling IDR 35.1 billion.
The core of the conflict lies in the interpretation of the "taxable moment" and the classification of the special relationship. The Petitioner firmly refuted the loan classification, stating that the funds from KENSB were advances for share purchases (CSSPA) that had not yet materialized, thus substantively not an interest-bearing loan. Furthermore, the Petitioner emphasized that no interest expenses were recorded in the 2018 audited financial statements, no funds were set aside for payment, and no cash outflow for interest occurred, meaning the obligation to withhold Article 26 Income Tax had not legally arisen.
In its resolution, the Board of Judges provided a legal consideration crucial for taxpayer certainty. The Board ruled that the application of Article 12 PP 94/2010 must be based on material facts, not merely on the assumption of arm’s length interest calculations. Since the Respondent could not prove that interest was paid, provided for payment, or due in December 2018, the cumulative requirements for Article 26 withholding under Article 15 paragraph (4) of PP 94/2010 were not met. The Respondent's correction was deemed to lack a strong evidentiary basis.
The implication of this decision reaffirms that tax authorities cannot unilaterally create withholding tax objects based solely on "arm’s length interest assumptions" if, factually, there is no recognition of expense or payment of interest. This ruling serves as an important precedent that the principle of substance over form and the certainty of the taxable moment must be upheld in tax audits of affiliated transactions. In conclusion, the Board of Judges annulled the Respondent's entire correction and granted PT CSE's appeal.
A Comprehensive Analysis and the Tax Court Decision on This Dispute Are Available Here
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