Tax Dispute: Determination of Representative Office/Liaison Office PE

The Civil Review decision resume now summarises a tax dispute concerning the determination of a permanent establishment (PE) for a representative office/liaison office. The taxpayer is a representative office/liaison office of a company domiciled in Japan (hereinafter referred to as X Co).

The Taxpayer stated that the activities were only limited to marketing research instead of product promotion. These activities are only auxiliary, preparatory and temporary. The Taxpayer does not participate in any form of the management of a company, subsidiary or branch in Indonesia. Thus, the taxpayer is excluded as a PE.

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 tax authority considers that the taxpayer has a permanent place of business in Indonesia. Its business activities in the form of product promotion have also been performed continuously. In view of the facts, the taxpayer is classified as X Co’s PE.

The Judicial Panel of the Tax Court decided to fully grant the appeal filed by the taxpayer. Further, at the Civil Review level, the Supreme Court rejected the tax authorities’ application as the Petitioner for the Civil Review.

If you are interested in reading this decision in full, visit the Supreme Court Decision Directory webpage or here.

Chronology

The taxpayer filed an appeal to the Tax Court in respect of the objection to the determination of the tax authorities. In its appeal decision, the Judicial Panel of the Tax Court was of the opinion that the export transactions referred to by the tax authorities, in this case, were not conducted by the taxpayer but by the X Co company group in Indonesia.

Further, X Co’s products to end consumers in Indonesia have been marketed by other companies. The monthly report submitted by the taxpayer to X Co does not contain reports on promotional or marketing activities either.

The monthly reports only outline social, economic and political conditions in Indonesia and potential competitors. Thus, the tax authorities’ argument which renders the import transactions of X Co’s group members in Indonesia as income for the taxpayer is deemed incorrect.

Based on the above considerations, the Judicial Panel of the Tax Court decided to grant all appeals filed by the taxpayer. With the issuance of Tax Court Decision No. Put. 74049/PP/M.VIA/27/2016 dated 6 September 2016, the tax authorities applied for a Civil Review in writing to the Registry of the Tax Court on 22 December 2016.

The main dispute, in this case, is a positive correction to the tax base (DPP) of final Article 15 Income Tax for the January to December 2012 taxable periods of IDR812,351,893,069.00 which was not sustained by the Judicial Panel of the Tax Court.

Opinion of Parties to the Dispute

The Civil Review Petitioner expressed objection to the opinion of the Judicial Panel of the Tax Court. This dispute occurred due to differences in opinion between the Civil Review Petitioner and the Civil Review Respondent in respect of the determination of the status of the legal entity run by the Respondent.

The Civil Review Petitioner considered that the Civil Review Respondent was X Co’s PE. The Civil Review Respondent has fulfiled the criteria as a PE pursuant to the provisions under Article 5 paragraph (1) of the OECD Model. The PE criteria include the place of business test and the location test.

In addition, as another part of the PE criteria, the tax subject must have the right to utilise the place of business (right use test), the use of the place of business must be permanent (permanent test) and conduct routine business activities (business activity test).

The Civil Review Petitioner’s argument above is proven by the facts found during the audit process. Based on audit findings, the Civil Review Respondent has a permanent office and management in Indonesia.

Moreover, the activities are carried out not only to support the activities of the head office but also the main activities carried out over the years, such as product promotion. Considering that the Civil Review Respondent is PE, the Government of Indonesia has the right to collect taxes from the Civil Review Respondent.

Based on Import Declaration data and data on the data exchange portal between the DGT and DGCE, it is known that during 2012, X Co, which is domiciled in Japan, performed exports to the Civil Review Respondent located in Indonesia. The Petitioner considered that the export transactions performed by Party X Co to the Civil Review Respondent were subject to final Article 15 Income Tax.

On another note, MoF Decree No. 634/KMK.04/1994 and DGT Decree No. 667/PJ/2001 stipulate that the net income of non-resident taxpayers with representative offices/liaison offices in Indonesia is set at 1% of the gross export value. Based on the Tax Treaty between Indonesia and Japan, the branch profit tax rate is 10%.

On the other hand, the Civil Review Respondent stated that its party was not a permanent establishment of X Co. It should be noted that the Respondent is indeed registered as a company with a main business number for marketing research services of the representative status. However, the Respondent does not participate in the management of a company, subsidiary or branch in Indonesia.

The Respondent only carries out auxiliary, preparatory and temporary activities. Referring to Article 5 paragraph (4) subparagraph e of the Tax Treaty between Indonesia and Japan, companies that carry out auxiliary and preparatory activities are excluded from the definition of a PE.

Supreme Court Considerations

The Supreme Court is of the opinion that the reasons for the Civil Review Petitioner’s application are unjustifiable. The decision of the Tax Court which stated the full granting of the application for an appeal was appropriate and correct. There are two considerations of the Judicial Panel of the Supreme Court as follows.

First, the corrections by the Civil Review Petitioner were only based on the Import Declaration data on Indonesian companies and information exchange data between the DGT and DGCE. The Civil Review Petitioner did not see the facts revealed in the trial.

After verifying and re-assessing the arguments presented at trial, the opinion of the Civil Review Petitioner cannot invalidate the facts and weaken the evidence revealed at the trial as well as the legal considerations of the Judicial Panel of the Tax Court.

Second, the activities performed by the Civil Review Petitioner proved to be only in the form of marketing research and not product promotion. It is not appropriate if the Civil Review Respondent is categorised as a foreign representative office/liaison office constituting an object of final Article 15 Income Tax. Therefore, the final Article 15 Income Tax Base correction of IDR812,351,893,069.00 cannot be sustained.

Based on the above considerations, the Supreme Court considered that the application for Civil Review was groundless and therefore had to be rejected. The Civil Review Petitioner was declared the losing party and sentenced to pay the costs of the case.