Good News for Importers! Overseas Warranty Claim Costs Are Not Tax Objects, Here’s the Judge's Explanation 

The strict separation between service fees and cost reimbursement is the core of the Article 26 Income Tax dispute in Decision Number PUT-000770.13/2024/PP/M.XVA Year 2025. The Board of Tax Judges conducted an in-depth examination of the warranty claim transaction scheme involving LG entities abroad and third parties, reinforcing the substance over form principle in determining tax objects.
The dispute began when the Directorate General of Taxes (DGT) classified warranty cost payments by PT LGEI to overseas affiliated entities as service compensation subject to a 20% Article 26 Income Tax withholding. The DGT argued that there was added value and services provided by the counterparty in handling customer warranty claims. However, PT LGEI strongly countered, arguing that the payments were pure reimbursements without markup for costs previously incurred by overseas LG entities to pay third parties (service workshops). PT LGEI also emphasized that after-sales guarantees are a legal obligation under the Consumer Protection Law inherent in the product price.
The Board of Judges agreed with the Petitioner after examining documentary evidence such as the Service Cost Warranty Agreement and sample invoices. Trial facts showed that the overseas LG entities merely passed on invoices from third parties to PT LGEI at their original value. No profit component or service compensation enjoyed by the foreign entities was found. Therefore, the Board of Judges ruled that this transaction did not meet the criteria for "consideration in connection with services" as stipulated in Article 26 of the Income Tax Law.
This decision provides significant legal certainty for multinational businesses, especially in the electronics sector. The implication is a confirmation that not all outward remittances are automatically subject to tax withholding if, in economic substance, the transaction is a pure cost reimbursement. PT LGEI's victory in this case highlights the importance of detailed transaction documentation, such as reimbursement contracts and third-party invoices, to mitigate future tax correction risks.
A Comprehensive Analysis and the Tax Court Decision on This Dispute Are Available Here