Oil and Gas PE Profit Tax Rate: DTA Utterly Defeated in the Tax Court! Analysis of the Decision that Prioritizes the PSC for State Revenue Assurance

The tax dispute concerning the determination of the Income Tax (PPh) Article 26 paragraph (4) rate, or the Branch Profit Tax (BPT), for Production Sharing Contract (PSC) Contractors in the oil and gas sector, has once again become a central highlight in Tax Court Decision Number PUT-007610.36/2023/PP/M.XIA Tahun 2025. The core of this dispute lies in the conflict of legal norms between the domestic provision of lex specialis, namely Article 33A paragraph (4) of the Income Tax Law (UU PPh), and the right to a reduced rate guaranteed by the Double Taxation Agreement (DTA) between Indonesia and the United Kingdom. In this case, BUT NUL, a BUT (Indonesian for Permanent Establishment/PE) from UK, claimed its right to a BPT rate of 10% under the DTA, but the Directorate General of Taxes (DJP) insisted on applying the domestic rate of 20%, arguing that it was necessary to secure state revenue from the oil and gas profit split.

The DJP maintained its correction on the PE's net after-tax profit using the BPT rate of 20%. The DJP argued that the Production Sharing Contract (PSC) constitutes a Government to Business agreement that functions as a lex specialis in the oil and gas sector, and therefore, must take precedence over the DTA, which is a Government to Government agreement. The DJP referred to Article 33A paragraph (4) of the UU PPh, which specifically regulates the tax treatment for PSC Contractors. According to the DJP, applying the 20% rate is a strategic move to ensure that the distribution of oil and gas revenue (profit split) between the Government and the contractor proceeds as stipulated in the PSC, and that the application of varying DTA rates would prejudice the Government's share.

Conversely, BUT NUL strongly refuted this, claiming that the Indonesia-UK DTA (ratified by Presidential Decree No. 118 of 1993) was already effective and binding on Indonesia. Article 10 paragraph (7) of the DTA explicitly limits the BPT rate to not exceed 10%. BUT NUL also contested the application of Article 33A paragraph (4) of the UU PPh, as their PSC was signed in 1999, well after the January 1, 1995, deadline often associated with that Article. Furthermore, they argued that the PSC itself references the UU PPh and its implementing regulations in effect at the time of contract signing, which included the DTA.

In its decision, the Tax Court Panel unanimously chose to reject the appeal, thus affirming the DJP's correction. The Panel's legal consideration prioritized the principle of "lex consumen derogat legi consumte" (the specific law derogates the general law). The Panel explicitly stated that Article 33A paragraph (4) of the UU PPh constitutes lex specialis which applies absolutely to taxpayers in the mining sector under a PSC, and this provision overrides the DTA authority regulated in Article 32A of the UU PPh. The Panel emphasized that the commitments of the PSC, which acts as a Law for the parties (Pacta Sunt Servanda), must not be undermined by varying PPh rates based on DTAs, as this would reduce the Indonesian Government's share of the profit split.

This decision carries serious implications for all PSC oil and gas contractors in Indonesia. Although DTAs are generally considered to hold a strong position in Indonesian law, this ruling demonstrates that in the context of strategic sectors with specific contracts (ring-fencing), the existence of a specialized domestic provision (Article 33A of the UU PPh) can defeat an international provision (DTA). This implication could create uncertainty for foreign investors in the oil and gas sector who rely on the stability and legal certainty offered by DTAs. PSC Contractors are urged to immediately evaluate their BPT tax risk and consider further legal remedies, such as a Judicial Review, to re-examine this conflict of norms at the Supreme Court level. This decision serves as a crucial reminder of the complexity of oil and gas taxation in Indonesia, which involves three layers of law: the Income Tax Law, the DTA, and the PSC clauses.

A Comprehensive Analysis and the Tax Court Decision on This Dispute Are Available Here