DJP Defeated in Directors' Salary and Entertainment Dispute: The Importance of Formal and Material Evidence

One of the most "grey areas" in tax disputes is the test of whether expenses are related to Getting, Collecting, and Maintaining income (the "3M" principle). In the dispute between PT FCI and the DJP (Decision No. PUT-016192.15/2020/PP/M.XB Tahun 2025), the DJP attempted to correct directors' salaries, commissioners' honorariums, and entertainment expenses, arguing they did not directly contribute to revenue.

The DJP corrected commissioners' honorariums (IDR 10.8 Billion) and directors' salaries (IDR 3.1 Billion), arguing the taxpayer failed to prove the specific contribution of these individuals to the company's income. The DJP also suspected double compensation as the directors held positions in affiliated companies. Additionally, entertainment expenses were corrected due to alleged invalidity.

The taxpayer argued that the existence of directors and commissioners is mandated by the Limited Liability Company Law (UU PT). Expenses incurred for these corporate organs are inherently operational costs. Withholding Tax (PPh 21 and 26) evidence was presented to show that the state had already received its tax share from these individuals' income. For entertainment, the taxpayer presented the "ultimate weapon": a complete Nominative List.

The Panel of Judges rejected the DJP's argument, which strayed too far into the business judgment rule. As long as the directors/commissioners are legally appointed (via Deed) and taxes are withheld, the costs are deductible under Article 6 of the Income Tax Law. The Court also reaffirmed the legal power of Circular SE-27/PJ.22/1986: as long as a Nominative List is fully prepared, entertainment expenses are legitimate deductions.

However, the taxpayer lost the Severance Reserve dispute. The Court remained conservative, adhering to Article 9(1) of the Income Tax Law which prohibits the deduction of reserves, reminding taxpayers that accounting standards (PSAK) regarding liability provisioning often do not align with cash-based or realization-based fiscal regulations.

This case teaches two lessons: First, do not fear claiming management salaries as expenses as long as legal documents (Deeds) and Withholding Tax compliance are in order. Second, administrative compliance, such as creating a Nominative List, is non-negotiable to save entertainment expenses from fiscal correction.