Promotional Costs Rejected by the DGT: The Strategy to Win in Tax Court Using the Principle of Substance Over Form

The conflict regarding the deductibility of promotional expenses in calculating Corporate Income Tax (CIT) has once again become a central issue in Indonesian tax litigation, as evidenced in Tax Court Decision Number PUT-005261.15/2023/PP/M.XIIA Tahun 2025. The dispute involving PT JI clarifies the tension between adherence to administrative formalities and the substance of the expenditure, particularly as regulated by Minister of Finance Regulation Number 02/PMK.03/2010 concerning the Nominative List for Promotional Expenses. Compliance with Article 6 section (1) of the CIT Law, which requires deductible expenses to have a 3M connection (to Obtain, to Collect, and to Maintain income), is often challenged by strict administrative reporting obligations.

The core conflict in this dispute revolves around the correction of Promotional Expenses by the Directorate General of Taxes (DGT). The DGT argued that these expenses were non-deductible because the Taxpayer, as the Appellant, failed to meet the formal requirement of attaching a complete and detailed Nominative List of Promotional Expenses to the Annual CIT Return. The legal basis for this correction is Article 9 section (1) letter a of the CIT Law in conjunction with Article 6 of PMK 02/2010, which explicitly states that failure to attach the detailed Nominative List will nullify the Taxpayer's right to deduct the promotional expenses. The Appellant, conversely, fought to retain the deduction by emphasizing that the expenses were genuinely and reasonably incurred for promotional activities, which were commercially proven to generate income. The Appellant requested the Tax Court Panel to override the formal defect by applying the principle of substance over form, given the undeniable material evidence of the expenditure that had been presented.

The resolution of this dispute in the Tax Court resulted in a Partial Grant of the appeal. The Tax Court Panel judiciously adopted a dual approach. On one hand, the Panel affirmed and emphasized the importance of the Taxpayer’s formal obligations. On the other hand, the Panel also conducted a substantive test. Through this process, the Panel granted the deduction for the portion of Promotional Expenses that were materially proven (supported by irrefutable evidence such as contracts and payment receipts) to have a 3M connection, despite the shortcomings in the Nominative List format. However, the portion of expenses with weak material evidence, or those deemed not directly related to promotion (e.g., disguised entertainment), remained non-deductible.

The implications of this Decision are significant for Taxpayers, especially those in promotion-intensive industries. The ruling underscores that while the principle of substance over form can be a critical tool in litigation, formal compliance remains the primary defense mechanism to avoid disputes. The Taxpayer's strategy must shift from merely proving the existence of the expense to proving the expense was documented and reported perfectly in accordance with regulations. A failure in formality can provide the DGT with a strong legal basis for correction, forcing the Taxpayer into costly litigation to defend the substance of their expenses.

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