Appeal Won! Without Proof of Physical Presence, DGT Cannot Arbitrarily Assign PE Status to Foreign Vendors

Tax Dispute Analysis: Permanent Establishment Determination and Physical Presence (BUT NEC Corporation)

Tax authorities often use the engagement period approach to determine Permanent Establishment (PE) status for foreign taxpayers providing services in Indonesia. However, Tax Court Decision Number PUT-014540.12/2022/PP/M.XB Year 2025 emphasizes that PE determination based on a "time test" must be supported by evidence of actual physical presence, not merely assumptions regarding contract duration.

Origin of Dispute and Reclassification of Income Tax

The dispute began when the Respondent issued a positive correction to the Tax Base (DPP) of Article 23 Income Tax for the August 2018 tax period against BUT N. The Respondent argued that the Appellant's counterparty, KTS from South Korea, met the criteria for a PE in Indonesia due to its involvement in a subsea cable installation project for more than 6 months. Consequently, the Respondent reclassified the transaction from Article 26 Income Tax (Tax Treaty rate) to Article 23 Income Tax with a 4% penalty rate, as KTS was deemed a PE without a Taxpayer Identification Number (NPWP).

Appellant's Defense: Tax Treaty Thresholds

The Appellant firmly denied this qualification, stating that KTS is a non-PE foreign entity. Based on field facts, the physical presence of KTS personnel and equipment in Indonesian waters for the related project did not exceed the 6-month (183 days) threshold as stipulated in Article 5 paragraph (3) of the Indonesia-South Korea Tax Treaty (DTA). The Appellant argued that the Respondent miscalculated the duration, as preparation periods spent abroad should not be counted as physical presence in Indonesia.

Judicial Review: Burden of Material Proof

In its legal considerations, the Board of Judges emphasized the principle of material evidence pursuant to Article 76 of the Tax Court Law. The Board held that to establish PE status, the Respondent bears the burden of proof to provide competent evidence regarding exactly when personnel or equipment arrived and departed from Indonesia. The Respondent's argument relied solely on contract duration analysis without being supported by valid departure/arrival manifests or project daily logs. Conversely, the Appellant successfully demonstrated that the work duration in Indonesia lasted only a few months.

Conclusion and Implications

In conclusion, the Board of Judges overturned the Respondent's correction and granted the entire appeal. This decision serves as an important reminder for tax authorities that determining the status of a foreign taxpayer as a PE cannot be done unilaterally without strong physical evidence. For taxpayers, documenting the logistics and mobilization of foreign personnel is crucial to counter inaccurate time test claims.