The economic development of a nation is inextricably linked to its capacity to attract foreign investment and foster international cooperation. Among the various instruments aimed to stimulate such investment, tax treaties play a pivotal role. These treaties are fundamentally designed to eliminate the burden of double taxation without facilitating opportunities for tax avoidance or evasion. Beyond their primary objective, tax treaties are also widely regarded as a significant factor in enhancing the attractiveness of a jurisdiction to foreign investors.
Pursuant to Article 32A of the Law No. 7 of 2021 on the Income Tax as lastly amended by Law No. 7 of 2021 on the Harmonization of Taxation Regulation, the Indonesian Government is authorized to establish and/or implement tax treaties or agreements with the government of a partner country or jurisdiction, either on a bilateral or multilateral basis, for the purpose of avoiding double taxation and preventing tax evasion. However, there are several provisions that must be considered with respect to the implementation of tax avoidance measures. This publication will elaborate the implementation of tax treaty in a case law concerning formality in the tax treaty application in Indonesia.
In the Court Decision No. PUT-000339.13/2024/PP/M.XIVA 2025 dated 5 March 2025, which addresses an objection over the Tax Assessment Letter for Underpayment of Article 26 Income Tax (Surat Ketetapan Kurang Bayar Pajak Penghasilan) for the March 2020 Tax Term (“Court Decision No. 13/2025”), the taxpayer relates to tax treaties as a defensive measure to defend their tax calculations, while the Directorate General of Tax (Tax Authority) has different idea.
Court Decision No. 13/2025 involves a tax dispute concerning the income tax between the taxpayer, and Tax Authority. In this case, Taxpayer was involved in a transaction of international shipping services with Third party Shipping company (“Third party”), who is classified as a party eligible to avoid double taxation due to Agreement between the Government of Indonesia and the Government of Singapore for the Elimination of Double Taxation With Respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance (“P3B Indonesia – Singapore”). The main issues of the disputes concern (i) the Tax Basis Calculation and (ii) the Outstanding Income Tax of Taxpayer.
In the Tax Basis Calculation, Taxpayer contends that there was an error in the input of the tax basis, in which the tax base calculated by Taxpayer is 50% (fifty percent) of the factual tax base. The Tax Authority asserts that the error in the input of the tax basis could potentially result in adverse consequences for the State. However, Taxpayer further argues in their defence that this error does not adversely affect the State’s (Indonesian government) interests as the ultimate amount of income tax paid by Taxpayer is still consistent with P3B Indonesia – Singapore. The P3B Indonesia – Singapore prescribed that the income tax rate for international shipping operation shall be 50% (fifty percent) lower. In this regard, Taxpayer determined the tax income base by directly reducing it by 50% (fifty percent). Pursuant to the Indonesia – Singapore Tax Treaty (P3B), the appropriate adjustment should have been made to the applicable income tax rate, not the tax base. Consequently, the income tax liability remains unaffected, given that the counterparty is a tax resident of Singapore, notwithstanding the computational error made by Taxpayer.
In contrast, the Tax Authority contends that Taxpayer could not apply tax treaty Indonesia-Singapore because they failed to meet the requisite formal requirements as they were late in submitting the Certificate of Residence in the Periodic Tax Return of March 2020. Consequently, the normal 20% withholding tax should be applied in this instance. Pursuant to Tax Authority Regulation No. PER-25/PJ/2018, a foreign taxpayer may claim treaty application only upon satisfying the following conditions: (a) The income recipient is a foreign tax subject; (b) The recipient is a resident of the treaty partner jurisdiction; (c) The transaction does not constitute treaty abuse; (d) The recipient is the beneficial owner of the income. The fulfilment of these conditions must be substantiated through the submission of a valid Foreign Tax Subject Certificate of Domicile (Surat Keterangan Domisili Wajib Pajak Luar Negeri / “CoD”). Taxpayer maintained that it had submitted both the CoD and Certificate of Residence (CoR) during the objection process. In support of this position, Taxpayer cited Tax Authority Circular Letter No. SE-35/PJ/2021, which permits consideration of CoD documents submitted during the objection phase, provided they meet formal requirements.
Conclusion
The Court Decision No. 13/2025 illustrates the nuanced interplay between substantive treaty entitlements and procedural compliance in the application of tax treaty. While tax treaties are designed to eliminate double taxation and prevent evasion, their implementation often depends on both formal documentation and the material facts of the transaction.
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MetaLAW, Legal Consultant, Jakarta, Indonesia
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