Article 21 Income Tax on Employee Early Retirement Payments Through a DPPK: Final Rate or Progressive Rate?

Final Article 21 Income Tax (PPh Pasal 21) must be imposed on lump-sum pension benefit payments, according to the tax regulation written in Article 2 paragraph (1) of Government Regulation Number 68 of 2009. The implementation of this provision often becomes a loophole for disputes, as happened in the appeal case involving PT HIJ related to the Underpaid Tax Assessment Letter (SKPKB) PPh Article 21 for the September 2016 Tax Period. The core of this fiscal conflict centers on the correction made by the Directorate General of Taxes (DJP) because PT HIJ, which is the employer, did not apply the correct Final PPh Article 21 tariff on the payment of early pension benefits to its employees.

The core conflict in this dispute is rooted in a fundamental difference in determining the nature of the tax due. The DJP adheres to the provisions of PP 68/2009 and PMK 16/PMK.03/2010, which explicitly state that Lump-Sum Pension Benefit Payments are subject to PPh Article 21 that is final with a progressive tariff layer (0% up to Rp 50 million and 5% above Rp 50 million). The DJP's correction argument focuses on PT HIJ's failure to comply with this final tariff.

On the other hand, PT HIJ argues that the payment of pension benefits to resigning employees, where funds have already been transferred to the Employer Pension Fund (DPPK), should be subject to non-final PPh Article 21 calculated based on the tariff in Article 17 of the Income Tax Law. PT HIJ felt that the withholding obligation had been fulfilled by the DPPK under a non-final scheme.

Article 6 of PMK No 16/PMK.03/2010 states that the transfer of severance pay to the labor severance fund manager through a lump-sum payment is subject to final PPh Article 21 and is withheld by the employer. When the labor severance fund manager pays the severance pay to the employee, no income tax Article 21 withholding is performed.

Article 7 of PMK No 16/PMK.03/2010 states that if the transfer of severance pay is made through phased or periodic payments, it is not subject to final PPh 21. When the labor severance fund manager pays the severance pay to the employee, a final PPh 21 withholding will be performed by the labor severance fund manager.

This is because when the employer transfers the severance pay lump-sum to the severance fund manager, the employee is deemed to have received the right to the severance pay. However, if the transfer of severance pay is done in stages, the employee is deemed not yet to have received the right to the severance pay.

In its decision, the Tax Court Panel provided a clear legal affirmation. The Panel verified the fact that the payment made to the early retired employee met the criteria as a lump-sum pension benefit payment. Therefore, PT HIJ's claim regarding the application of non-final PPh Article 21 was rejected. The Panel validated the substance of the DJP's correction that the PPh Article 21 due is Final. However, the Panel also showed independence in quantitative testing. After recalculating the application of the progressive tariffs of 0% and 5% to the gross Tax Base due, the Panel found a calculation error made by the DJP, so the amount of the Underpaid Tax correction and the penalty interest under Article 13 paragraph 2 of the KUP Law had to be significantly reduced.

The implications of this Decision are very important for all entities that make severance or pension benefit payments in Indonesia. This Tax Court Decision definitively affirms the legal standing of Final PPh Article 21 on Lump-Sum Pension Benefit Payments as a non-negotiable provision. Consequently, Taxpayer compliance does not only stop at determining the nature of the tax (Final) but must be extended to the accuracy of technical calculations in applying its progressive tariff layers. A small technical error in calculating the percentage can trigger the issuance of an SKPKB and penalty interest that must be settled, even if the legal basis (Final PPh) has been acknowledged. The decision rejecting PT HIJ's appeal is a valuable lesson that tax litigation is often not only a battle of substance, but also a battle of calculation accuracy.

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