Tax disputes in Indonesia involve local government administration by the revenue authority of the province, regency and central government taxes administered by the Ministry of Finance through the Directorate General of Taxes (DGT) and the Directorate General of Customs and Excise (DGCE). Procedures for dispute resolution are governed by the Local Tax Law at the administrative level for local government taxes; by the Customs Law and the Excises Law for taxes administered by the DGCE; and by the General Rules of Taxation Law (GRT Law) for taxes administered by the DGT.

Dispute procedures involve settlement of tax disputes at the administrative level and in court. From the issuance of a tax assessment, the maximum time frame for the settlement of a tax dispute at the administrative level is 15 months. Subsequently, taxpayers who disagree with the DGT decision have to pass the 15-month appeal proceeding. There is no set time limit within which the Tax Court must issue a verdict. Practically speaking, however, the verdict is very likely be issued within three to 18 months from the last proceeding. There are no cost burdens on the taxpayer to resolve the dispute either at the objection or appeal stage.

All tax disputes fall under the jurisdiction of the Tax Court with the exception of criminal tax offences and third-party claims with respect to seized goods. In 2017, 65 per cent of the Tax Court verdicts were in favour of the taxpayer, with 55 per cent of decisions being fully approved and the rest partially approved.2 Once the Tax Court verdict is issued, the taxpayer or the DGT may challenge the Tax Court verdict by filing a reconsideration application to the Supreme Court within three months of the copy of the Tax Court verdict being received by either party. The Supreme Court is required to issue a decision within six months of the date the reconsideration application files have been completely received. The party that lodges a civil review case to the Supreme Court must pay the cost of registration, and the losing party must bear the cost of the civil review proceeding. In 2017, 87 per cent of Supreme Court decisions rejected the reconsideration application.3

The Tax Court is not bound by previous court decisions. This often makes the Tax Court's judgments inconsistent. The taxpayer is also likely to be dealing with similar cases that for the previous tax year have been settled with the court. It is also worth mentioning that most tax objection filings are rejected by the DGT. The DGT itself is pressured by the 'targeting system' of the government, which requires the DGT to collect a certain amount of tax revenue as determined by the government and failure to do so may affect the DGT tax officials' key performance indicator.

It is not surprising that the Indonesian Chamber of Commerce and Industry recently received complaints about tax audits where there were 700 taxpayers being examined in the preliminary evidence audit (pre-investigation) process, including some large taxpayers and multinational enterprises.4 Tax officials' 'overly aggressive and scary' actions5 may likely be an impact of overzealous tax collection, which may affect business confidence and have negative effects on the business climate. The 'overly aggressive and scary' actions may be traced back to the quality of the tax audit, which is determined by its key indicators: high-tax revenue contribution and refund discrepancy. Official assessments by the DGT are required whenever a taxpayer requests a refund. The pressure of a high-tax revenue target will have an impact on the tax officials' interpretation of the law, which causes the aggressive tax audit approach.

Although the aggressive approach of tax audits is most likely linked to the high-tax revenue pressure, the government and the house of representatives increased the revenue target in the 2019 state budget by 15 per cent from the 2018 budget at 1,548 trillion rupiah. The tax revenue target in the 2019 state budget amounting to 1,780 trillion rupiah consists of 1,572 trillion rupiah in taxes revenue and 208 trillion rupiah in excise and customs duties. In order to reach the target, the government of Indonesia plans to strengthen tax services in order to encourage voluntary disclosure, monitor the implementation of automatic exchange of information and access to financial information for tax purposes, monitor the post-amnesty programme, increase the effectiveness of business development services to small and medium-sized sectors, law enforcement, and continue comprehensive tax reform with respect to tax legislation and the infrastructure of tax administration. Law enforcement seems to be a high priority, and information technology will be key with respect to the future of tax compliance and monitoring self-assessed tax payments in Indonesia. However, the implementation of these policies in 2019 will be challenging owing to the political election process currently under way in Indonesia.

With regard to law enforcement policies, in August 2018 the DGT issued Circular Letter No. SE-15/PJ/2018 (CR-15) regarding a tax audit policy which in particular sets out the DGT's aim to revitalise the audit process through determination of a list of priority targets for tax audit. The list of priority targets for tax audit was compiled as a result of the relevant tax office determining which taxpayers should be included based on the list of priority targets for potential investigation. The list of priority targets for potential investigation is a list of target taxpayers alleged as non-compliant taxpayers. The indicators of non-compliance for corporate taxpayers are the intra-group transaction value, the tax invoices issued, the audit result in previous years, and the results of analysis of other information, data, reports ot complaints, including results of data analysis from the Center for Tax Analysis.

The DGT is also focused on the possibility of collecting tax revenue on specific kinds of income in certain sectors, for example, by introducing withholding tax applicability to parties involved in buy–sell transactions under certain conditions. Taxpayers involved in distribution, agent and retailer schemes may be implied by DGT Circular Letter No. SE-24/PJ/2018 (CR-24) regarding tax implications on income received by the buyer related to certain conditions under buy–sell transactions. CR-24 extends the definition of bonus and prizes that was set out in the Income Tax Act by including conditional rebates arising from active business afforded in the distribution of goods and retail business sectors as a kind of bonus or prize income, and stipulates that the seller withhold tax at a rate of 15 per cent of the conditional rebate paid to the buyer, which is basically similar to withholding tax rate for passive income. Therefore, the CR-24 would apparently be regarded as ultra vires by regulating beyond the scope of the Circular Letter.

Applicable from 1 January 2019, the DGT has simplified the mechanism of the tax treaty application by changing the regulation as regards the reporting of the certificate of domicile (CoD) of a foreign taxpayer in cross-border transactions. This will significantly reduce tax disputes arising from administrative matters of tax treaty application. Further, Indonesia's participation in the Multilateral Instrument to implement tax treaty related measures sponsored by the OECD and G20 has also affected the anti-tax treaty abuse measures in domestic regulation. In 2018, the DGT issued DGT Regulation No. 25/PJ/2018 (DGT Reg 25/2018) revoking DGT Reg 10/2017. Pursuant to DGT Reg 25/2018, treaty abuse is deemed to have occurred if there are transaction arrangements, directly or indirectly, with the aim of obtaining the tax treaty benefits, which is contrary to the object and purpose of tax treaty. The form of tax treaty benefits stipulated in the domestic measures are a reduction of the tax burden or no tax imposed in any jurisdiction (double non-taxation). In practice, however, the domestic anti-tax treaty abuse regulation is adopting the economic substance doctrine by highlighting the conditional circumstances of the foreign taxpayer, such as tax payment in its domicile, assets and employees as indicators of sufficient economic substance in order to access the tax treaty benefits. Having no detailed guidance in determining the reasonable 'sufficient economic substance', the implementation of the anti-tax treaty abuse measure is likely to become uncertain.

Below, we provide a summary of tax dispute resolution procedures under the Indonesian tax system, focusing on the central government taxes administered by the DGT and customs duties administered by the DGCE. Since the tax dispute statistics for excise and local government taxes are relatively small, we do not provide explanations for them.


i Taxes administered by the DGCE

Generally, tax disputes administered by the DGCE begin with an assessment of import and export declarations, customs facilities requests or renewals, and unloading activities declared in a certain area. The DGCE assesses these, and can issue:

  1. a customs official assessment resulting in an import duties tariff or value assessment, and other items;
  2. a customs audit resulting in an assessment other than that of a customs tariff or value, and penalties; or
  3. a customs audit resulting in a customs tariff and duties assessment.

Assessments resulting from (a) and (b) could be opposed by filing an objection letter to the DGCE within 60 days of the assessment date. This generally requires bonds equivalent to the amount of taxes or duties assessed to be provided. The DGCE will make a decision regarding a taxpayer's objection within 60 days after receipt of the objection letter. If the DGCE has not made a decision regarding the objection within 60 days, the taxpayer's objection will be deemed granted, and the bonds will be released back. A customs tariff and duties reassessment and objection decision can only be appealed to the Tax Court within 60 days of the date of the assessment or objection decision. When filing an appeal to the Tax Court regarding a DGCE objection or customs tariff and duties assessment (resulting from an audit), the taxpayer is required to pay the full amount of assessed taxes.

With respect to excises disputes, the taxpayer is entitled to file an objection letter against the DGCE notice of excises collection within 30 days of being notified. The DGCE must issue an objection decision within 60 days of the receipt of the objection letter. Prior to filing an objection, the taxpayer is required to provide a cash or bank guarantee or excise bond from the insurance company equivalent to the amounts of excises assessed. Taxpayers who disagree with the DGCE objection decision may file an appeal to the Tax Court within 60 days from the date of the objection decision. The taxpayer must pay at least 50 per cent of the total underpaid excises before filing an appeal to the Tax Court.

ii Taxes administered by the DGT

Taxes administered by the DGT include income tax (corporate income tax and individual income tax), VAT and sales tax on luxury goods. Pursuant to Article 3, Paragraph 1 of the GRT Law, the self-assessment system must be completed by taxpayers filing tax returns and paying taxes due without reliance on DGT assessments. DGT assessments subject to dispute with taxpayers can be classified as follows: a tax collection notification letter; a tax assessment letter (and withholding tax receipt); and other tax letters (i.e., private letters).

Generally, tax collection notification letters and tax assessment letters are the result of tax audits and verification. Other tax letters issued by the DGT could be subject to dispute depending on the content of such letters. A tax audit is generally initiated by a taxpayer's request for a refund. Almost every tax refund request is followed by a tax audit. The tax refund audit timeline is 12 months from the date the tax return requesting a refund is filed. A taxpayer's refund request is deemed granted if the DGT fails to issue a tax assessment letter within 12 months. In a non-tax refund audit, while there is a procedural timeline, an audit exceeding such timeline cannot be invalidated. A taxpayer who meets certain criteria can receive an advance tax refund, but the DGT still has the authority to audit and issue an assessment. In the case of a tax assessment letter issued in relation to the previously administered advance tax refund, if the tax assessment letter issued shows that the taxpayer has been underpaid, the unpaid tax is added with a penalty of 100 per cent.

According to the DGT audit policy, the DGT can also audit a taxpayer based on selective criteria. The DGT has recently stated to focus on a list of priority targets for potential investigation, which is a list of target taxpayers alleged to be non-compliant taxpayers. As mentioned above, CR-15 uses various factors to determine whether a taxpayer is included in the list of priority targets or not, including indication of a high level of non-compliance by a taxpayer. The indicators of non-compliance are determined based on the type of taxpayer (corporate or individual) and the type of tax office the taxpayer is registered with. In general, the indicators for corporate taxpayers include:

  1. the existence of an intra-group transaction with a value of more than 50 per cent of the total transaction value;
  2. the issuance of more than 25 per cent of tax invoices to taxpayers whose taxation registration numbers begin with 000 in a tax period;
  3. no audit on all taxes for the past three years; and
  4. as a result of analysis of other information, data, reports ot complaints, including results of data analysis from the Center for Tax Analysis.

For individual taxpayers, the indicators include:

  1. non-compliance with tax payment and submission of annual tax returns;
  2. no audit on all taxes for the past three years; and
  3. as a result of analysis of other information, data, reports ot complaints, including results of data analysis from the Center for Tax Analysis.

During an audit, a tax audit officer will perform direct and indirect tests as governed by DGT audit procedures. In some cases, a tax audit officer will perform indirect testing such as reconciliation of tax accounts with financial accounts on a tax adjustment basis. However, tax laws require that tax adjustments by the tax officer be based on valid and competent evidence, which in our view does not include the results of indirect testing. Tax Court judges, confirmed by Supreme Court judges, also hold this view. Thus, reconciliation of tax accounts with financial accounts would not qualify as evidence.6

In addition, the CR-15 stipulates the tax audit criteria based on concrete data. While the GRT Law is silent on the definition of concrete data and only states the confirmation result of tax invoices and withholding slip as examples of concrete data, the CR-15/2018 extends the classification of concrete data by including any data or information that could directly prove the non-compliant behaviour of taxpayers. The audit timeline for special tax audits based on concrete data is in total one month and 10 days from the issuance of the audit instruction letter. Considering the time frame of the special audit based on concrete data, taxpayers should be aware and prepare to face a special audit based on concrete data especially in relation to the tax year in which the issuance of assessment will expire.

Pursuant to Article 12, Paragraph 3 of the GRT Law, the DGT can only issue a tax assessment letter if it has evidence that the tax disclosed in the tax return is incorrect. This sets the foundation that the burden of proof under the Indonesian tax system lies with the tax authority. The notion that the burden of proof lies with the DGT has been confirmed in a civil review decision by Supreme Court judges.7 However, this would not be the case for a taxpayer who does not maintain proper accounts and records. In such case, the DGT can issue a tax assessment letter with an underpaid amount, and add a 50 per cent penalty in the case of income tax, and a 100 per cent penalty in the case of withholding tax, VAT and sales tax on luxury goods.

During a tax audit or tax objection, data and document submission should be managed with great caution. The DGT could deny a taxpayer's objection if the data or documents requested are not submitted during the tax audit pursuant to Article 26A, Paragraph 4 of the GRT Law. The DGT could also request the Tax Court to omit the data or documents submitted in the Tax Court that were not submitted previously during a tax audit and tax objection (other than those in the possession of a third party), and this has been confirmed by Supreme Court judges.8 In another Supreme Court decision, this would not be the case if the data or documents, although not submitted during a tax audit, are submitted during a tax objection. In such case, they would still qualify as evidence.9

Prior to a tax audit, the taxpayer can amend his or her tax return resulting in overpaid tax or tax loss within three years of the end of the tax period. An amendment resulting in underpaid tax has no time limit, but is subject to a 2 per cent penalty for each month. During a tax audit, taxpayers can voluntarily disclose errors in their tax returns by applying Article 8, Paragraph 4 of the GRT Law, and pay the resulting unpaid tax and a 50 per cent penalty of the unpaid tax prior to submission of a disclosure. However, the DGT would review such disclosure before deciding to accept or deny it.

Prior to the final findings of a tax audit, taxpayers can request a quality assurance review at the higher level of the DGT. The basis for requesting a quality assurance review is if there is a violation of the law and its application by a tax audit officer. The quality assurance team will issue a legally binding decision as a basis for the final findings of a tax audit and its tax assessment letter.

Following a DGT tax collection notification letter, a taxpayer can file for administrative remedies pursuant to Article 36 of the GRT Law as follows: a penalty reduction or write-off (Article 36, Paragraph 1a of the GRT Law); a reduction or cancellation of the tax collection notification letter (Article 36, Paragraph 1c of the GRT Law); and a cancellation of a tax collection notification letter resulting from a tax audit that was completed without the taxpayer receiving temporary audit findings and a final audit closing conference letter (Article 36, Paragraph 1d of the GRT Law).

Following a DGT tax assessment letter, the taxpayer can file administrative remedies pursuant to Article 36 of the GRT Law as follows: a penalty reduction or write-off (Article 36, Paragraph 1a of the GRT Law); a reduction or cancellation of a tax collection notification letter (Article 36, Paragraph 1b of the GRT Law); and a cancellation of a tax assessment letter resulting from a tax audit that was completed without the taxpayer receiving temporary audit findings and a final audit closing conference letter (Article 36, Paragraph 1d of the GRT Law).

Administrative remedies set out in Article 36, Paragraph 1 of the GRT Law are generally resolved within the following timelines:

  1. an indefinite timeline if filing an application for the first time;
  2. a DGT decision is made within six months of receipt of the first application;
  3. a second application is filed within three months of the DGT decision on the first application; and
  4. a DGT decision is made within six months of receipt of the second application.

A taxpayer's first or second application is deemed granted if the DGT fails to issue a decision letter within six months of the application being received.

Upon a DGT decision on the first or second taxpayer application of Article 36, Paragraph 1 of the GRT Law, the taxpayer can file a lawsuit to the Tax Court appealing the decision. The lawsuit should be made within 30 days of the decision.

Further to the above, following a DGT tax assessment letter and withholding tax receipt, a taxpayer can request administrative remedies pursuant to Article 25 of the GRT Law by filing an objection to the DGT within three months of the tax assessment letter being sent or the date of the withholding tax receipt. The three-month timeline is not applicable when the taxpayer is able to demonstrate a force majeure situation. Upon filing a tax objection, the administrative remedies set out in Article 36, Paragraph 1 of the GRT Law will be denied as long as the two remedies are closely related. Pursuant to Article 26, Paragraph 4 of the GRT Law, the burden of proof still lies with the DGT, unless the tax assessment was issued based on the grounds of insufficient accounts or records.

The taxpayer's objection will be deemed granted if the DGT fails to issue an objection decision letter within 12 months of the objection letter being received. Upon the DGT objection decision, the taxpayer can file an appeal to the Tax Court. The DGT objection decision could be fully accepted, partially accepted or denied, or could increase the amount of taxes.

Regarding other letters issued by the DGT, such as tax audit instruction letters or private letters, such letters can be resolved by filing a lawsuit with the Tax Court. Generally, the Tax Court will consider the case and decide whether such letter is subject to resolution in the Tax Court provided that certain criteria are met, especially if such letter has resulted in specific tax consequences for the taxpayer.10 The lawsuit for such letter should be filed within 30 days of the date the letter was sent.

Law No. 30 Year 2014 regarding Governmental Administration (GA Law) provides rules and guidance for governmental bodies when performing their duties. The GA Law is also to be applied by the administrative courts, which system the Tax Court is part of. Administrative products of governmental bodies are defined broadly under the GA Law, which provides more criteria for administrative products. The grounds to challenge administrative products under the GA Law include abuse of power, procedural error and principles of good governance (i.e., the principle of legitimate expectation). However, such grounds have not been applied significantly by Tax Court judges in precedent cases. Nonetheless, the GA Law still arguably provides grounds for the Tax Court in deciding tax disputes both under appeal or lawsuit.

In 2015, the Supreme Court issued Supreme Court Regulation No. 5 of 2015, which allows persons to file a 'request for decision' to the administrative court with regard to their rights to receive an administrative decision from a government body. The ground to file such 'request for decision' is generally when a person's prior request to a government body is deemed granted, but the government body has not issued an executorial decision. With regards to taxation, it has happened that a taxpayer's request for interest has been granted ultimately by the Tax Court, but the DGT has not issued any executorial decision allowing the interest to be paid to the taxpayer.

A seizure letter as a result of tax collection forces a taxpayer to surrender an amount of money or assets to settle the taxes owed. The taxpayer can file a lawsuit on such seizure letter within 14 days of the date of the letter in the following situations: where the taxpayer has filed for dispute resolution on the taxes due and is in financial distress, and thus requests that any tax collection, including seizure, be halted until the relevant dispute resolution has been issued; or where the process of seizure is procedurally flawed, which could result in the reprocessing of the seizure.

Unpaid taxes or penalties set out in a tax collection notification letter should be followed by active tax collection efforts, including those that end in a seizure letter. On the other hand, the collection of unpaid taxes and penalties set out in a tax assessment letter should be postponed pursuant to the taxpayer's objection to the DGT. However, such unpaid taxes and penalties are subject to a 50 per cent penalty of the unpaid amount if the DGT issues a decision partially granting or denying the taxpayer's objection. The 50 per cent penalty is not imposed if the taxpayer paid the unpaid taxes and penalties prior to objection, or if the taxpayer has filed a tax appeal to the Tax Court. The 2 per cent interest each month imposed on an unpaid tax assessment letter will not be imposed if the taxpayer files an objection to the DGT.

Legitimate businesses should declare their taxes properly according to the law and should not be afraid of tax audits if everything is in order. The operations of tax audits are to verify what has been reported in the tax return and by doing so it is intended to ensure that those who should be paying taxes are actually doing so and those who have reported their taxes have done so correctly. The DGT shall ensure that any past practice agreed to is respected, and if that practice is overturned, then it should be done prospectively and not retrospectively. When there is a tax audit, the taxpayers have to recollect claims made years ago and if they do not have the details and documents to support the transactions then they face the consequences of the expenses being disallowed. The taxpayer is, therefore, recommended to have a proper tax risk control, especially documentation and the rationale to justify any specific transactions.


Tax dispute resolution at the judicial level is first settled in the Tax Court. If the taxpayer or tax authority wants to challenge the Tax Court decision, either or both can file a civil review to the Supreme Court. The Tax Court will only be able to accept an application for a lawsuit or an appeal from the taxpayer.

The Tax Court is part of the administrative court system under the judicial power of the Supreme Court, pursuant to Article 27, Paragraph 1 of the Judicial Authority Law. It is located in Jakarta, and uses several cities as its place of trials or hearings, including Jakarta, Yogyakarta and Surabaya. For the purpose of developing its judiciary techniques, the Tax Court is managed by the Supreme Court, while for the purpose of developing its organisation, administration and finance, it is managed by the Ministry of Finance. Although it is managed by two different institutions, Tax Court judges are independent in resolving tax disputes (Article 5 of the Tax Court Law).

Full Tax Court decisions are not provided by the Tax Court. Instead, the Tax Court provides a summary of a Court decision, which is available on its website11 and on the Supreme Court website.12 The Secretary of the Tax Court has said that full tax court decisions were not allowed due to the instruction of the Tax Court Chief.13 Contrary to that, a full Supreme Court decision, even one concerning a tax dispute, is provided by the Supreme Court on its website.14

Pursuant to Article 81 of the Tax Court Law, the Tax Court is required to issue a decision on an appeal within 15 months (12 months plus a three-month extension) and on a lawsuit within nine months (six months plus a three-month extension). Tax Court decisions that exceed such timeline will not cause the decision to be invalidated by the Supreme Court.15

In a lawsuit, a taxpayer is not required to pay unpaid taxes as a procedural requirement, while in an appeal, a taxpayer is required to pay at least 50 per cent of unpaid taxes (Article 36, Paragraph 4 of the Tax Court Law). When an appeal is made on decisions or assessments by the DGCE, by law the unpaid taxes must be paid in full. However, the Supreme Court has issued two decisions ruling that the requirement to pay unpaid taxes for appeals on DGCE decisions or assessments is omitted and not required based on jurisprudence or precedent.16 For appeals made on objection decisions by the DGT, the unpaid taxes in dispute are not required to be paid, as the unpaid taxes are deemed postponed until one month after the Tax Court decision is made (Article 27, Paragraph 5a of the GRT Law). Prior to an appeal on the DGT objection decision, a taxpayer is only required to pay the amount of unpaid taxes agreed during the tax audit.

If the Tax Court decision is considered unfavourable to either taxpayer or tax authority, either or both could file a civil review application to the Supreme Court. The grounds for such application are (under Article 91 of the Tax Court Law):

  1. the tax court decision was made based on deception by the counterparty, which was only known after the case was decided, or the Tax Court decision was made based on unauthentic evidence adjudicated by a civil court;
  2. there is new written evidence that is decisive and that, if known during the court proceedings, will result in a different decision;
  3. an ultra petita decision;
  4. part of the requisition has been decided without consideration; and
  5. the Tax Court decision clearly violated the applicable laws.

A civil review application is required to be filed within three months of:

  1. the discovery of a deception or a civil court decision adjudicating that there is an unauthentic evidence (Article 91a of the Tax Court Law);
  2. the discovery of new evidence of which the date of discovery must be made under oath and authorised by a competent authority (Article 91b of the Tax Court Law); or
  3. the Tax Court decision being sent (Article 91c–e of the Tax Court Law).

Currently, there are 63 judges associated with the Tax Court, with a small minority having a law education background, and the majority with an accounting background and general tax knowledge. Most members of the Tax Court are retired tax or customs officials. It is therefore not surprising that there has been criticism regarding the independence of the Tax Court.17 The number of tax disputes filed with the Tax Court in 2017 amounted to 9,580 applications, with an average of 9,806 cases annually during the period 2012–2017. In 2017, 65 per cent of the Tax Court verdicts were in favour of the taxpayer, with 55 per cent decisions, among others, fully approved and the rest partially approved. The Supreme Court received 2,187 applications for reconsideration of the Tax Court verdict in 2017, up 18 per cent from reconsideration application in 2016. Lastly, the percentage of winning at the Supreme Court was 13 per cent in 2017,18 as the majority of Supreme Court decisions uphold the Tax Court verdict.


In addition to the use of tax audits for official assessment, tax audits can be used to collect preliminary evidence where a tax crime is suspected. Where a tax audit has been completed, provided that a tax crime investigation has not commenced, a taxpayer could voluntarily disclose an inaccuracy and pay any underpaid tax along with a penalty of 150 per cent of the underpaid tax. Thus, a tax crime investigation will not commence provided that the DGT accepts such voluntary disclosure.

The punishments for a tax crime would be imprisonment and a financial penalty. Generally, the individual taxpayer or the director of a company and his or her accomplices will be held accountable for the tax crime, and only the person or company charged with the tax crime will bear the punishment. Not reporting a tax return or reporting an incorrect or incomplete tax return, or attaching incorrect information in the tax return, are generally considered as tax crimes. There is a difference between 'intention' and 'gross neglect': in the latter, if conducted by a taxpayer for the first time, the taxpayer may avoid imprisonment if he or she pays the monetary penalties. There are further, although not significant, differences between intention and gross neglect.

In the case of a Tax Court decision that denies or partially grants an appeal, the taxpayer is subject to a penalty of 100 per cent of the amount of unpaid tax less the tax paid prior to filing an objection to the DGT. Payments made after filing an objection to the DGT will not be considered in the penalty computation. On the other hand, if a Tax Court decision partially or fully grants an appeal on an underpaid objection decision, the taxpayer cannot request interest on the taxes paid prior to the objection or appeal. Interest of 2 per cent for a 24-month maximum period for taxpayers from the DGT could be available if an overpaid tax in a tax return was not granted for refund during a tax audit, yet was granted for refund during a tax objection or appeal. If the DGT is late in issuing a tax refund instruction letter, the taxpayer could also request interest of 2 per cent from the time limit of the issuance of the tax refund instruction letter to the actual date of issuance of the tax refund instruction letter.


i Recovering overpaid tax

As explained in Section II, a taxpayer can request a tax refund by stating such request in his or her tax return.

Where a foreign company's income tax exceeding its tax limitation in a tax treaty is being withheld, such overpayment could be recovered through the application by an Indonesian taxpayer to the DGT.

ii Challenging administrative decisions

The principle of equal treatment is applicable as a ground in resolving tax disputes, as explained in Article 31a of the Income Tax Law, Article 16b of the Law on VAT and Sales Tax on Luxury Goods, and Article 28d Paragraph 1 of the Indonesian Constitution. To confirm this, a Supreme Court decision upheld a Tax Court decision allowing a taxpayer's appeal against the DGT objection decision on the ground of the principle of equal treatment.19


The Tax Court does not have the power to adjudicate costs related to legal proceedings to a taxpayer or the tax authorities. However, the Supreme Court can adjudicate the cost of a civil review application in an amount of 2.5 million rupiah, to be borne by the losing party.


Indonesian tax laws do not provide for arbitration or mediation for tax disputes between taxpayers and the tax authorities in Indonesia. The same applies regarding advance rulings. However, a taxpayer could request a letter to confirm certain tax rules or the tax treatment of a transaction. The DGT is not bound to respond to such a confirmation letter. If the DGT responds, a private letter will be issued and would be legally binding under the principles of legitimate expectation. In many cases, the DGT can also arrange a consultative hearing with the taxpayer, and provide a non-written explanation that is not legally binding.

During a tax dispute resolution at the administrative or court level, both the taxpayer and the tax authority can agree on something previously disputed without mediation.


Indonesian tax laws do not have a general anti-avoidance rule with a straightforward meaning. Rather, the doctrine of substance over form implicitly embodied in Article 4, Paragraph 1 of the Income Tax Law and in the Indonesian Accounting Standards is generally considered as the Indonesian general anti-avoidance rule. In many cases, the Tax Court implemented the substance over form doctrine to interpret the term 'beneficial owner' in Indonesian double tax treaties.20 Recently, however, the Supreme Court held that the decision of the Tax Court to implement the substance over form principle to recharacterise an interest payment transaction under the scope of interest clause in the Indonesia–Netherlands double tax treaty was incorrect.21

The Indonesian Income Tax Law also embodies specific anti-avoidance rules:

  1. thin capitalisation rules (Article 18, Paragraph 1 and Article 18, Paragraph 3): in September 2015, the Ministry of Finance again issued a debt-to equity ratio for denying interest deductions by companies. According to Ministry of Finance Decree No. PMK-169/PMK.101/2015, in effect since January 2016, the applicable debt-to-equity ratio is 4:1;
  2. transfer pricing rules (Article 18, Paragraph 3) states that related-party transactions should be based on an arm's-length principle by applying transfer pricing methods, namely comparable uncontrolled price, cost-plus, resale price, profit split and the transactional net margin methods. Indonesia's first transfer pricing guideline was DGT Decree No. KEP-01/PJ.7/1993, which was an audit guideline for tax officers and which was subsequently replaced by DGT Regulation No. PER-43/PJ/2010 on 6 September 2010 and further amended by DGT Regulation PER-32/PJ/2011, which adopts most of the OECD Transfer Pricing Guidelines 2010;
  3. controlled foreign corporation (CFC) rules (Article 18, Paragraph 2 and Ministry of Finance Regulation No. PMK-107/PMK.03/2017): 'Controlled' is defined as directly or indirectly owning 50 per cent of shares in a foreign corporation. The Indonesia CFC rules operate a deemed dividends approach, whereby the undistributed profits net-after-tax income of the CFC is deemed to be distributed as dividends in accordance with shareholdings in the CFC. Further, the CFC regulation will also be applied to a CFC domiciled in a jurisdiction with a tax rate higher than Indonesia;
  4. indirect transfer of shares (Article 18, Paragraph 3c and Ministry of Finance Decree No. PMK-258/PMK.03/2008); and
  5. the beneficial owner test: this was modified from limitations on benefits rules (DGT Regulation No. 25/PJ/2018). The rules specify criteria and forms to be filed by foreign taxpayers to be entitled to a treaty benefit. One questionnaire form includes a checklist concerning beneficial ownership that adopts the limitation on benefits test.

Even though Indonesia is not a member of the OECD, Indonesia expressed its support on the OECD views that BEPS presents a high risk to state revenue. Indonesia has responded to the BEPS Action Plan outcome by implementing some regulations as follows:

No. BEPS Outcome Response


Taxation of the Digital Economy

No response


Hybrid Instruments

Response via MLI, but no implementing regulation issued yet


Controlled Foreign Corporations (CFC)

Ministry of Finance Regulation No. PMK-107/PMK.03/2017


Limitation of Interest Deduction

Ministry of Finance Decree No. PMK-169/PMK.101/2015


Harmful Tax Practices (HTP)

No HTP regime based on the OECD peer review report


Treaty Abuse

Response via MLI and the issuance of the DGT Regulation No. 25/PJ/2018. Under MLI, Indonesia chose to adopt both the principal purpose test and the simplified limitation on benefits


Permanent Establishment Arrangement

Response via MLI


Transfer Pricing and Value Creation

No response


BEPS Data Analytics

No response


Mandatory Disclosure Rule

No response


Transfer Pricing Documentation

Minister of Finance Regulation No. PMK-213/PMK.03/2016


Dispute Settlement

Response via MLI


Multilateral Instrument

MLI signatories, but not ratified yet

Apparently, the BEPS effects in Indonesia will significantly affect transfer pricing and the entitlement to treaty benefits rules. These topics have been the major issues in the international tax disputes arena in Indonesia.

The DGT has issued a regulation on tax treaty application to strengthen the anti-tax treaty abuse rule (DGT Regulation No. 25/PJ/2018). Prior to the issuance of DGT Reg 25/2018, the DGT issued DGT Regulation No. 10/PJ/2017, which contains the principal purpose test where treaty abuse is considered to have occurred where one of the purposes or the sole purpose of the transaction arrangement is to obtain the treaty benefit, which is contrary to the object and the purpose of tax treaties. Under DGT Reg 25/2018, the treaty abuse may be considered to have occurred if there are transaction arrangements either directly or indirectly with the aim of obtaining the tax treaty benefits, which is contrary to the object and purpose of tax treaty. The form of tax treaty benefits stipulated in the domestic measures is a reduction of the tax burden or no tax imposed in any jurisdiction (double non-taxation). In addition to the transaction purpose test, DGT Reg 25/2018 also sets out the criteria that must be fulfilled to obtain the tax treaty benefits based on the economic substance doctrine. The criteria to obtain tax treaty benefits are as follows:

  1. there is economic substance in the establishment of the entity and carry out of transaction;
  2. the legal form is same as the economic substance in the establishment of the entity or carry out of transaction;
  3. the business activities are managed by a company's own management that has sufficient authority to carry out the transactions;
  4. there are fixed assets and non-fixed assets (other than the assets generating income from Indonesia) that are adequate and sufficient in the carrying out of business activities in that treaty partner jurisdiction;
  5. it has sufficient employees with the expertise and certain skills in accordance with its line of business; and
  6. it has activities or an active business other than receiving income in the form of dividend, interest, royalty from Indonesia. The definition of active business is the actual circumstances of business activity that is indicated by the cost incurred, efforts made or sacrifices that relate directly to its business activity in order to earn, collect and maintain income, including significant activities undertaken to maintain operation as a going concern.

The DGT regulation on treaty abuse could bring a wave of disputes related to the entitlement of treaty benefits owing to no valid measures or definition concerning economic substance. It seems that the wording of the anti-treaty abuse rules makes it easy for the DGT to assume treaty abuse and, as such, will be tempted to presume intention simply because of the presence of benefits. In the author's view, it is important to undertake an objective analysis of the aim and objects of all persons involved in putting that arrangement or transaction in place. The authors agree with Dennis Weber's opinion that an assessment based solely on the effects of an arrangement is not sufficient and merely reviewing the effects of an arrangement will not usually enable a conclusion to be drawn about its purposes.22 Therefore, all relevant facts and circumstances should be weighed to determine whether it is reasonable to conclude that an arrangement or transactions were undertaken or arranged for such purpose.


Indonesia has concluded and ratified tax treaties with 68 countries, the legal status of which prevails over Indonesian domestic tax laws according to Article 32A of the Income Tax Law. Although Indonesia is not a party to the Vienna Convention on the Law of Treaties (VCLT), it has a law concerning international treaties which establises that international treaties shall be applied in good faith. This is similar to what is directed in the VCLT. As demonstrated in the non-tax case of Pulau Ligitan and Pulau Sipadan (Indonesia/Malaysia) at the International Court of Justice, Indonesia considers the provision of the VCLT by virtue of customary international law and therefore considers itself bound by its provision.23

With regard to tax cases, the Tax Court has unanimously held that the domestic rules of limitation on the benefits of tax treaties shall not be applied in excess of that which has been agreed in such tax treaties by considering application of Article 27 of the VCLT.24 The VCLT was also considered by the Supreme Court in its decision concerning the branch profits tax (BPT) rate, where the Supreme Court held that the BPT rate in tax treaties prevails over the clause in production sharing contracts in the oil and gas sector.25

The use of the OECD works on tax treaty interpretation and application are also considered by the Court. The Tax Court quoted the revised Discussion Draft of the OECD Commentary (2012) as an aid in the interpretation of tax treaties concerning the term 'beneficial ownership'.26 In another case, the OECD Report on the Attribution of Profits to Permanent Establishment was cited as a primary reference with regard to the deductible expenses of permanent establishments.27

Some Indonesian scholars observed that the Tax Court does not take into account the legal status of interpretation materials, but rather whether such materials have a persuasive value for the judges to decide a case.28 The use of the OECD Commentaries in interpreting uncertain or unclear meaning in a tax treaty is considered widely accepted by most judges in the Tax Court and Supreme Court. In some cases, the judge prefers to use the latest version of the OECD Commentaries, even if the tax treaty in question was signed and came into force a long ago. We also observed that the Tax Court is willing to apply a dynamic interpretation when the interpretation materials considered are not domestic laws or regulations, but on the other hand, tends to apply a static interpretation when it comes to domestic legislation.


As previously mentioned, tax disputes mostly arise from audits of tax returns with refund requests. A refund discrepancy is the primary key performance indicator in a tax audit; thus, the tax refund will most likely be reduced. Transfer pricing is still the main focus of tax audits, followed by the mining and agricultural industry, which contributes significantly to the tax revenue. Corporate restructurings involving transfer of intangible properties and workforce, both domestic and international, are also targeted. As mentioned above, the withholding tax applicability to the conditional rebate in the distribution of goods and retail sectors is also highly targeted.

For individual taxpayers, the post-amnesty programme will be enforced by targeting taxpayers who are potentially non-compliant from a list of targeted taxpayers for tax audit purposes. The increasing impact of the benefit of tax amnesty attracts the DGT to focus on the access to wealth information, such as banking information and land ownership of wealthy individuals. The use of data and information from the automatic exchange of information and data exchange with other institutions will potentially be challenging in the future. In particular, the effort of the DGT to meet the optimal inspection coverage of 2 per cent of individual taxpayers, especially sole proprietors, might be based on the use of data or information provided by third parties.


The government is planning to amend the Law on General Rules of Taxation and to include in the national legislation a programme to promote lower compliance costs, and to encourage efficient and effective tax administration through, inter alia, electronic self-assessment mechanisms and the payment of taxes in currencies other than the Indonesian rupiah.29 In addition, the government plans to implement technical measures to increase the taxation database with data from other regulatory and governmental bodies. In addition, following the arrest of a senior tax officer by the Corruption Eradication Commission, the Ministry of Finance has established two teams that will oversee and direct the reform of Indonesia's taxation and customs system.30

The tax revenue collection policy will be focused on intensified law enforcement and the continued implementation of the exchange of information.


1 David Hamzah Damian is a partner and Ganda Christian Tobing is a senior manager at DDTC Consulting.

6 See Supreme Court Decision No. 492/B/PK/PJK/2010.

7 See Supreme Court Decision No. 161/B//PK/PJK/2010 and 79/B/PK/PJK/2005.

8 See Supreme Court Decision No. 1026/B/PK/PJK/2014.

9 See Supreme Court Decision No. 877/B/PK/PJK/2013.

10 See Supreme Court Decision No. 110/B/PK/PJK/2008 and Supreme Court Decision No. 141/B/PK/PJK/2010.

12 putusan.mahkamahagung.go.id/pengadilan/pengadilan-pajak.

14 putusan.mahkamahagung.go.id.

15 See Supreme Court Decision No. 274/B/PK/PJK/2011.

16 See Supreme Court Decision Nos. 1015/B/PK/PJK/2014 and 300/C/PK/PJK/2009.

17 B Ispriyarso, 'Weakness of the Tax Court in Indonesia from the Aspect of Legal Certainty and Justice', International Journal of Business, Economics, and Law, 6 (4) (2015): 116–123.

19 See Supreme Court Decision No. 566/B/PJK/2013.

20 See, among others, Tax Court Decision Nos. 13602/PP/M.I/13/2008 and 23288/PP/M.II/13/2010.

21 See Supreme Court Decision No. 135/B/PK/PJK/2017.

22 Dennis Weber, 'The Reasonable Test of the Principal Purpose Test Rule in OECD BEPS Action Plan 6 (Tax Treaty Abuse) versus the EU Principle of Legal Certainty and the EU Abuse of Law Case Law', Erasmus Law Review, August 2017.

23 Dumoli Agusman, 'Treaties under Indonesia Law: A Comprehensive Study', PT Remaja Rosdakarya Offset (2014).

24 See Tax Court Decision No. 45925/PP/M.XIII/13/2013.

25 See Supreme Court decision No. 1542/B/PK/PJK/2018.

26 See Tax Court Decision No. 61550/PP/M.XA/13/2015.

27 See Supreme Court Decision No. 2974/B/PK/PJK/2018.

28 Fredy Karyadi and Darussalam, 'Tax Treaty Disputes in Indonesia', in Eduardo Baistrocchi (ed), A Global Analysis of Tax Treaty Dispute, Cambridge University Press, August 2017.

29 Financial Note and State Budget 2016 – II.3-2.

30 One of the team advisers is our firm's managing partner, Darussalam: jakartaglobe.id/economy/finance-ministry-sets-two-teams-reform-tax-office.