The dispute began when PT NSI faced a correction from the Respondent regarding interest expenses on loans from VI Pte Ltd and PI Ltd for the December 2020 tax period. The Respondent argued that based on loan agreement amendments, the interest had matured; thus, a 20% Article 26 withholding tax was mandatory under the accrual principle of Article 26 Paragraph (1) of the Income Tax Law jo. Article 15 Paragraph (4) of Government Regulation 94/2010.
PT NSI countered using the subordination argument. Through a valid Debt Subordination Agreement, PT NSI was legally bound not to pay interest to specific/affiliated creditors until the debt to the Senior Creditor (Bank) was fully settled. In substance, this covenant created a "not yet matured" condition for the interest. The Board of Judges agreed that the subordination agreement is a valid legal document under Article 1320 of the Indonesian Civil Code and must be respected in tax law.
The Board of Judges provided a crucial consideration: accounting recognition (accrual) does not automatically trigger tax withholding obligations if, legally, the maturity date has shifted or been deferred by a valid supplementary agreement. Furthermore, the fact that the interest was eventually waived in 2021 and reported as income by the taxpayer proves there was no loss of state revenue, but merely a timing difference. This decision serves as an important precedent that supporting legal documents such as subordination deeds and evidence of debt waivers are vital instruments in mitigating tax withholding risks in cross-border financial transactions.
A Comprehensive Analysis and the Tax Court Decision on This Dispute Are Available Here
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