Dispute over Foreign Workers’ Income Not Subject to Art. 26 WHT

The Civil Review decision resume now summarises a tax dispute concerning the income of foreign workers not subject to Article 26 Income Tax collection by a taxpayer. In this case, the taxpayer recruited four foreign workers to provide consulting services within a certain period.

The tax authorities assess that four foreign workers employed by the taxpayer are of non-resident taxpayer (Non-Resident Taxpayers) status, thereby, the income received by these foreign workers should be subject to Article 26 Income Tax. However, the taxpayer does not withhold Article 26 Income Tax on income received by these foreign workers.

Conversely, the taxpayer declares that the employed foreign workers are qualified as resident taxpayers (Resident Taxpayers) and have a Taxpayer Identification Number, thereby, the income received by the foreign workers is not the object of Article 26 Income Tax, but Article 21 Income Tax.

On appeal, the Judicial Panel of the Tax Court decided to partially grant the appeal filed by the taxpayer. Further, at the Civil Review level, the Supreme Court stated its rejection of the application for the Civil Review submitted by the taxpayer.

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Chronology

The taxpayer objected to the assessment by the tax authorities and filed an appeal to the Tax Court. The Judicial Panel of the Tax Court argued that three foreign workers employed by the taxpayer qualify as Resident Taxpayers and have a Taxpayer Identification Number.

The income received by the three workers has been subject to Article 21 Income Tax withholding by the taxpayer. However, one worker does not qualify as a Resident Taxpayer and his income is subject to Article 26 Income Tax.

On the appeal, the Judicial Panel of the Tax Court decided to partially grant the appeal filed by the taxpayer. With the issuance of the Tax Court Decision Number Put. 41587/PP/M.VI/13/2012 dated 22 November 2012, the tax authorities submitted a legal measure in the form of a Civil Review in writing to the Registry of the Tax Court on 11 March 2013.

The subject of dispute, in this case, is the correction of the Article 26 Income Tax object amounting to IDR256,368,320 which was not sustained by the Judicial Panel of the Tax Court.

Opinion of Parties to the Dispute

The Civil Review applicant objected to the legal consideration of the Judicial Panel of the Tax Court. Based on audits, it was found that the Civil Review Respondent had hired four foreign workers who provided consulting services to the Respondent. According to the Civil Review Applicant, the four foreign workers are Non-Resident Taxpayers instead of Resident Taxpayers.

This is because there are no evidence in the form of limited stay permit (KITAS) or permanent stay permit (KITAP) documents stating that the four employees intend to reside in Indonesia for more than 183 days in one year. In addition, the four workers were not in Indonesia at the time of the field audit.

Thus, if the four workers receive income from the Civil Review Respondent, they should be subject to Article 26 Income Tax. This is as stipulated under Article 26 paragraph (1) of Law No. 7 of 1983 as amended by Law No. 36 of 2008 (the Income Tax Law) which states that income in connection with work received by foreign workers constituting Non-Resident Taxpayers is subject to Article 26 Income Tax payable. The employer is required to withhold the income received by the foreign workers by 20%.

However, in this case, the Civil Review Respondent has not withheld Article 26 Income Tax on the income received by the foreign workers he employs.

Further, upon the audit, the Civil Review Respondent did not provide any supporting evidence that had been requested by the Civil Review Applicant. The evidence requested by the Civil Review Applicant was not provided until the objection process.

However, evidence provided during the objection process cannot be considered in dispute resolution in the Tax Court. Referring to the above description, the Civil Review Applicant corrected the Article 26 Income Tax object.

The Civil Review Respondent disagrees with the correction by the Civil Review Applicant. According to the Civil Review Respondent, the foreign workers he employs already qualify as Resident Taxpayers and have a Taxpayer Identification Number.

The income received by the workers is not an Article 26 Income Tax object, but an Article 21 Income Tax object. The non-withholding of Article 21 Income Tax by the Civil Review Respondent is correct. Corrections by the Civil Review Applicant cannot be sustained.

Supreme Court Considerations

The Supreme Court held that the reasons for the Civil Review were unjustified. The Tax Court decision granting part of the appeal is appropriate. There are two legal considerations of the Tax Court Judges.

First, the correction of the Article 26 Income Tax object amounting to IDR256,368,320 cannot be justified. After verifying and re-assessing the arguments put forward by the parties, the opinion of the Civil Review Applicant cannot invalidate the facts and weaken the evidence revealed in the trial proceeding and the legal considerations of the Judicial Panel of the Tax Court.

Second, in the case a quo, it has been proven that the three foreign workers employed by the Civil Review Respondent have qualified as Resident Taxpayers and have a Taxpayer Identification Number. The income received by the three workers is not an Article 26 Income Tax object, but an Article 21 Income Tax object.

On the other hand, one of the workers is a Non-Resident Taxpayer and his income is subject to Article 26 Income Tax. The correction by the Civil Review Applicant cannot be sustained because it does not comply with applicable regulations.

Based on the above considerations, the Civil Review application is considered unreasonable, thereby, must be rejected. Thus, the Civil Review Applicant was declared the losing party and sentenced to pay the costs of the case.