Reimbursement Costs Rejected by DJP but Accepted by the Tax Court: The Key to Proving Business Relevance

Input VAT corrections on costs classified as reimbursements (cost recovery) often become a trap during tax audits. The dispute faced by PT HWH involved the DJP's correction of Input VAT related to reimbursement items.

The DJP corrected the Input VAT related to the reimbursement costs by arguing that these costs were not directly related to PT HWH's business activities that incurred Output VAT, or because the underlying Tax Invoices were deemed not materially compliant (for instance, invoices addressed to other parties or irrelevant items). Essentially, the DJP claimed that this Input VAT fell into the non-creditable category under Article 9 paragraph (8) of the VAT Law.

PT HWH refuted this by presenting reimbursement details per transaction and per Tax Invoice. The Taxpayer employed a reversed burden of proof by explaining in detail that these costs, although characterized as reimbursement, were integral components of the company's core operations. For example, the reimbursement of certain costs might be necessary to ensure smooth production or distribution, which directly generates Output VAT.

The Panel of Judges agreed with the Taxpayer. The Panel emphasized that the right to credit Input VAT must be based on the substance and economic correlation of the cost to the supply of Taxable Goods/Services that incurs Output VAT.

Although the final verdict was Partially Granted, the Panel annulled the Input VAT correction on the reimbursement items where the Taxpayer successfully proved their relevance and connection to the business activities. This decision serves as an affirmation that clear segregation between relevant and irrelevant reimbursement costs, supported by strong evidence (such as internal documents and payment proofs), is the key to the Taxpayer's success in the Tax Court).

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