The Input VAT Direct Use Trap: Hundreds of Billions in Advertising Costs Forfeited for Lack of Connection to Core Product

The implementation of the direct relation principle mandated by Article 9 Paragraph (8) letter b of the Indonesian Value Added Tax Law (VAT Law/UU PPN) has once again become a central issue in tax litigation. In the context of multinational group structures, the VAT dispute case for the December 2020 Tax Period involving the beverage base producer, PT CCI highlights the crucial importance of proving the causality between the expenditure and the VAT-able supply generated by PT CCI itself. PT CCI must demonstrably prove that the Input VAT (PM) credited from promotional costs for finished products has a direct impact on increasing the Output VAT (PPN Keluaran) generated by its core business activity.

The conflict arose when the Directorate General of Taxes (DJP) denied the crediting of PM amounting to IDR 4,622,972,737.00 originating from marketing, promotion, and advertising expenses. The DJP argued that PT CCI's core business was limited to producing and selling beverage base (syrup), while the promotional costs were aimed at boosting sales of the finished products (ready-to-drink beverages) sold by an affiliated entity (the distributor). Consequently, the DJP deemed the Input VAT to lack a direct relation to the beverage base supplies that are subject to VAT by PT CCI. PT CCI's defense argued that as the global trademark owner, any successful promotion of the finished product automatically increases the demand and sales of the raw materials (beverage base) they provide. These promotional costs were claimed as ordinary and necessary business expenses and not subject to the exceptions under Article 9 Paragraph (8) of the VAT Law.

The Tax Court Panel consistently upheld the DJP's correction, focusing on the fundamental difference between the product being promoted and the product being sold by the Taxpayer. The Panel's legal consideration indicated that the corrected PM was predominantly for finished products sold by the affiliate, with evidence showing that for certain brands, PT CCI did not even produce the underlying beverage base. The absence of a direct link between the finished product's promotional costs and PT CCI's core activity (selling beverage base) formed the basis for denying the credit. The Panel affirmed that to be creditable, the Input VAT must directly relate to the business activities of the Taxpayer concerned, not merely the group's activities in general, thus violating the provisions of Article 9 Paragraph (2) juncto Article 9 Paragraph (8) letter b of the VAT Law.

This decision sets an important precedent for Taxpayers within multinational enterprise (MNE) structures with segregated value chains. The key implication is the affirmation that the direct relation test in VAT is entity-specific and cannot be overlooked merely because the expenditure benefits the group as a whole. PT CCI and similar Taxpayers must re-examine their service agreements and cost allocation methodologies. If marketing costs for the final product are charged to the base producer, the agreements must convincingly define the service/benefit received, and the corresponding VAT must be proven to correlate with the Output VAT generated by the charge-receiving Taxpayer. This case warns that consistency between the treatment of Input VAT and the deductibility of Corporate Income Tax (PPh Badan) expenses is vital, given that the Panel also referred to the previous PPh Badan decision.

A Comprehensive Analysis and the Tax Court Decision on This Dispute Are Available Here