Tax Without Borders? Why Project Payments in Saudi Arabia are Exempt from Article 26 Income Tax Withholding in Indonesia 

Article 26 Income Tax Dispute of PT. RBP: Fiscal Correction on Foreign Construction Service Fees

Fiscal corrections on the Article 26 Income Tax base regarding foreign construction service fees demand rigid proof concerning source jurisdiction and the definition of income sourced from Indonesia. This dispute focuses on the interpretation of Article 26 of the Income Tax Law regarding whether payments to foreign entities for work entirely performed outside Indonesia's customs territory remain subject to domestic withholding tax simply because they are paid by a domestic taxpayer.

The Core Conflict: Saudi Arabia Housing Project, Al-Yousif Flag-Borrowing Scheme, and Source Jurisdiction

The core conflict began when the tax authority (Respondent) issued a positive correction on the costs of a housing construction project in Saudi Arabia recorded by PT. RBP. The Respondent argued that since payments were made by a domestic tax subject to a foreign party, a 20% Article 26 Income Tax was automatically owed. Conversely, PT. RBP asserted that the transactions were payments for subcontractors and local worker wages in Saudi Arabia through a flag-borrowing scheme with a local company, Al-Yousif. In substance, PT. RBP argued that the income was not sourced from Indonesia as all economic activities occurred abroad.

Legal Consideration of the Judges: Criteria of Article 26 Paragraph (1) and Service Performance Location

The Tax Court Judges, in their legal consideration, dissected the criteria of Article 26 paragraph (1) of the Income Tax Law, which requires income to be "sourced in Indonesia." The Assembly found that although the funds originated from PT. RBP's account in Indonesia, they were used to finance project operations in Saudi Arabia involving non-resident workers and vendors. The Assembly emphasized that the location of service performance and utilization, being entirely outside Indonesia, annulled the tax withholding obligation in Indonesia.

Resolution and Precedent: Capital Outflows, Economic Nexus, and Sovereignty of Income Source

This legal resolution provides certainty that capital outflows do not automatically create an Article 26 Income Tax object if the economic nexus is outside Indonesian jurisdiction. This decision serves as an important precedent for Indonesian international contractors in managing global project costs. In conclusion, taxation of non-resident taxpayers must respect the sovereignty of the income source in accordance with international taxation principles adopted in domestic law.

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