Refusal to Pay Article 23 Income Tax: Tax Court Cancels Port Services Correction Due to Absence of Direct Transaction with Freight Forwarder

Disputes regarding Article 23 Income Tax (Withholding Tax) often arise from differing interpretations between tax authorities and Taxpayers regarding the object and substance of a transaction. In Decision Number PUT-004900.12/2021/PP/M.XVIIIA Year 2025, the Tax Court partially granted the appeal of BLG concerning the correction of the Article 23 Income Tax Base (DPP) for the May 2017 tax period amounting to IDR 384,357,487.00. The primary focus was on service transactions involving a third party (Port Service Provider) through a Freight Forwarding company. This ruling serves as an important reference in affirming the principle of legal relationship (privity of contract) and material truth as the basis for Article 23 Income Tax withholding in Indonesia.

Core Conflict: VAT Invoices vs. Article 23 Income Tax Transactions

The Directorate General of Taxes (DGT), as the Respondent, corrected the Article 23 Tax Base using an equalization technique between the reported Article 23 objects and the recorded costs and VAT invoice data issued by the seller/service provider. Based on this data matching, the Auditor found a VAT invoice worth IDR 378,363,700.00 issued by a Port Service Provider (PT Mustika Alam Lestari), indicating a service transaction that had not been withheld for Article 23 Income Tax by the Petitioner. The Respondent argued that the VAT invoice is evidence of a transaction and that the Petitioner is obligated to prove that Article 23 withholding was performed.

The Petitioner, BLG, refuted the correction by arguing that the VAT invoice of IDR 378,363,700.00 was not a direct transaction with them. The port services were rendered to the Freight Forwarding Company contracted by the Petitioner to handle commodity import handling. The Petitioner emphasized that they had already withheld Article 23 Income Tax on payments made to the freight forwarding company (the directly contracted party). Consequently, there was no agreement or payment process between the Port Service Provider and the Petitioner; thus, the Tax Base should not be charged to BLG.

Judicial Resolution: The Principle of Direct Relationship

In its analysis, the Panel of Judges of the Tax Court accepted most of the Petitioner's arguments regarding the non-direct transaction. The Court held that the Respondent’s correction of the Tax Base amounting to IDR 378,363,700.00 could not be maintained. This decision was based on Article 8 paragraph (3) of Government Regulation (PP) Number 94 Year 2010, which states that a work or service relationship between a provider and a recipient occurs when there is a direct or indirect relationship. In this context, the Panel concluded that if the issuer of the VAT invoice (port services) has no contractual relationship or direct payment flow with the Petitioner, then the Tax Base cannot legally serve as the basis for Article 23 Income Tax withholding by the Petitioner.

However, the Panel of Judges maintained the correction for the remaining dispute of IDR 5,993,787.00. Although the Petitioner claimed they never received this specific VAT invoice, the Court prioritized the principle of material truth, as the invoice had been reported by the Petitioner’s counterparty as Output Tax in the DGT system. Therefore, the transaction was considered valid, and the Article 23 Income Tax object was upheld.

Analysis and Impact of the Ruling

This ruling provides two key lessons. First, it limits the obligation to withhold Article 23 Income Tax only to parties who have a direct legal relationship or at least where a clear payment flow can be proven in accordance with Article 8 paragraph (3) of PP 94/2010. If an invoice is issued by a subcontractor but the contract and payment are only with the main contractor (freight forwarder), then the subcontractor must claim Article 23 Income Tax from the main contractor, not the cargo owner.

Second, the decision reinforces the importance of facts recorded in the tax administration system (e.g., the reporting of Output VAT by a counterparty) as evidence of material truth in the Tax Court. For the Petitioner, despite successfully canceling the majority of the correction, this case highlights the need for meticulous documentation, including complete Article 23 Withholding Slips, to justify every payment and avoid unilateral equalization by auditors.