The dispute regarding the recharacterization of interest-free loans into interest-bearing loans has surfaced again in the Tax Court's decision involving PT KAM. The Directorate General of Taxes (DJP) imposed a positive correction on the Article 23 Income Tax base (DPP PPh Pasal 23 in Indonesian) by assuming a 6.3 percent interest rate on loans from affiliates. The primary basis for this correction was the perceived non-compliance with cumulative criteria for interest-free loans from shareholders as stipulated in the implementing regulations of the Indonesian Income Tax Law (UU PPh).
The core of the conflict lies in the interpretation of the "accrual moment" for withholding tax. The DJP utilized the arm's length principle to create a hypothetical interest amount deemed as a taxable object. Conversely, PT KAM argued that without actual interest payments or the recognition of interest expenses in the financial statements, the obligation to withhold Income Tax Article 23 never arises. PT KAM emphasized that the funds were liquidity support to rescue the company's financial condition during a deficit.
The Panel of Judges, in their resolution, provided a crucial legal consideration that Income Tax Article 23 is a withholding tax based on the legal event of payment or maturity. The judges emphasized that Article 12 of Government Regulation Number 94 of 2010 (PP 94/2010) cannot be used automatically to mandate the borrower to withhold tax on interest that factually never existed. The DJP's correction was deemed to lack a strong evidentiary basis regarding the actual flow of interest income.
The implications of this decision provide legal certainty for Taxpayers that the DJP cannot unilaterally enforce tax withholding on transactions where no funds flowed or expenses were accounted for. This decision reinforces the position that the existence of interest in affiliated transactions must be factually proven before any withholding tax obligation is imposed.
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