Indonesia-Malaysia Tax Treaty Lacks Service Article, Tax Court Rules in Favor of Taxpayer in Article 26 Income Tax Dispute

The Tax Court has reaffirmed a fundamental principle in the application of Double Taxation Agreements (DTA), particularly concerning service transactions with partner countries whose DTAs lack a specific article for services. In the decision on the dispute between PT CI (Appellant) and the Directorate General of Taxes (Respondent), the Panel of Judges granted the entire appeal regarding the Article 26 Withholding Tax (WHT) correction on Management Fee payments to Malaysia.

The context of this dispute was a correction to the Article 26 WHT Tax Base for November 2021 amounting to IDR 8.87 billion for Management Fee payments to CLM SDN. BHD. (CLM). The Respondent based the correction on Article 26 of the domestic Income Tax Law, arguing that the Appellant failed to prove the substance of the service execution and its benefits, even though a Form DGT-1 had been submitted.

The core conflict centered on the interpretation of the Indonesia-Malaysia DTA. The Appellant argued that the DTA does not contain a specific article for Fees for Technical Services (FTS). Therefore, the service income must be classified as Business Profit under Article 7 of the DTA. Based on Article 7, the taxing right rests with the country of residence (Malaysia), as long as CLM does not have a Permanent Establishment (PE) in Indonesia. The Respondent, conversely, focused on the failure to prove the substance of the service as the reason for denying the DTA facility.

The Panel of Judges provided a clear resolution by prioritizing the DTA as lex specialis. The Panel confirmed that the Indonesia-Malaysia DTA lacks a Service/FTS article, thus the income correctly falls under Article 7 (Business Profit). As there was no dispute or evidence that CLM had a PE in Indonesia, and the administrative requirements (Form DGT-1) were met, the Panel ruled that Indonesia had lost its taxing right.

This ruling has an important implication: the determination of Article 26 WHT taxing rights under a DTA (especially one lacking a Services article) does not depend on proving the substance of the service execution.

Instead, it relies purely on the analysis of the existence of a PE (Article 7) and the fulfillment of administrative requirements (PER-25/PJ/2018). The Respondent's argument regarding the substance of the service was deemed irrelevant for determining the taxing right in this DTA context.