Tax Diispute: Determiinatiion of Representatiive Offiice/Liiaiison Offiice PE

The Ciiviil Reviiew deciisiion resume now summariises a tax diispute concerniing the determiinatiion of a permanent establiishment (PE) for a representatiive offiice/liiaiison offiice. The taxpayer iis a representatiive offiice/liiaiison offiice of a company domiiciiled iin Japan (hereiinafter referred to as X Co).

The Taxpayer stated that the actiiviitiies were only liimiited to marketiing research iinstead of product promotiion. These actiiviitiies are only auxiiliiary, preparatory and temporary. The Taxpayer does not partiiciipate iin any form of the management of a company, subsiidiiary or branch iin iindonesiia. Thus, the taxpayer iis excluded as a PE.

The tax authoriitiies assess that four foreiign workers employed by the taxpayer are of non-resiident taxpayer (Non-Resiident Taxpayers) status, thereby, the iincome receiived by these foreiign workers should be subject to Artiicle 26 iincome Tax. However, the taxpayer does not wiithhold Artiicle 26 iincome Tax on iincome receiived by these foreiign workers.

Conversely, the tax authoriity consiiders that the taxpayer has a permanent place of busiiness iin iindonesiia. iits busiiness actiiviitiies iin the form of product promotiion have also been performed contiinuously. iin viiew of the facts, the taxpayer iis classiifiied as X Co’s PE.

The Judiiciial Panel of the Tax Court deciided to fully grant the appeal fiiled by the taxpayer. Further, at the Ciiviil Reviiew level, the Supreme Court rejected the tax authoriitiies’ appliicatiion as the Petiitiioner for the Ciiviil Reviiew.

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Chronology

The taxpayer fiiled an appeal to the Tax Court iin respect of the objectiion to the determiinatiion of the tax authoriitiies. iin iits appeal deciisiion, the Judiiciial Panel of the Tax Court was of the opiiniion that the export transactiions referred to by the tax authoriitiies, iin thiis case, were not conducted by the taxpayer but by the X Co company group iin iindonesiia.

Further, X Co’s products to end consumers iin iindonesiia have been marketed by other companiies. The monthly report submiitted by the taxpayer to X Co does not contaiin reports on promotiional or marketiing actiiviitiies eiither.

The monthly reports only outliine sociial, economiic and poliitiical condiitiions iin iindonesiia and potentiial competiitors. Thus, the tax authoriitiies’ argument whiich renders the iimport transactiions of X Co’s group members iin iindonesiia as iincome for the taxpayer iis deemed iincorrect.

Based on the above consiideratiions, the Judiiciial Panel of the Tax Court deciided to grant all appeals fiiled by the taxpayer. Wiith the iissuance of Tax Court Deciisiion No. Put. 74049/PP/M.ViiA/27/2016 dated 6 September 2016, the tax authoriitiies appliied for a Ciiviil Reviiew iin wriitiing to the Regiistry of the Tax Court on 22 December 2016.

The maiin diispute, iin thiis case, iis a posiitiive correctiion to the tax base (DPP) of fiinal Artiicle 15 iincome Tax for the January to December 2012 taxable periiods of iiDR812,351,893,069.00 whiich was not sustaiined by the Judiiciial Panel of the Tax Court.

Opiiniion of Partiies to the Diispute

The Ciiviil Reviiew Petiitiioner expressed objectiion to the opiiniion of the Judiiciial Panel of the Tax Court. Thiis diispute occurred due to diifferences iin opiiniion between the Ciiviil Reviiew Petiitiioner and the Ciiviil Reviiew Respondent iin respect of the determiinatiion of the status of the legal entiity run by the Respondent.

The Ciiviil Reviiew Petiitiioner consiidered that the Ciiviil Reviiew Respondent was X Co’s PE. The Ciiviil Reviiew Respondent has fulfiiled the criiteriia as a PE pursuant to the proviisiions under Artiicle 5 paragraph (1) of the OECD Model. The PE criiteriia iinclude the place of busiiness test and the locatiion test.

iin addiitiion, as another part of the PE criiteriia, the tax subject must have the riight to utiiliise the place of busiiness (riight use test), the use of the place of busiiness must be permanent (permanent test) and conduct routiine busiiness actiiviitiies (busiiness actiiviity test).

The Ciiviil Reviiew Petiitiioner’s argument above iis proven by the facts found duriing the audiit process. Based on audiit fiindiings, the Ciiviil Reviiew Respondent has a permanent offiice and management iin iindonesiia.

Moreover, the actiiviitiies are carriied out not only to support the actiiviitiies of the head offiice but also the maiin actiiviitiies carriied out over the years, such as product promotiion. Consiideriing that the Ciiviil Reviiew Respondent iis PE, the Government of iindonesiia has the riight to collect taxes from the Ciiviil Reviiew Respondent.

Based on iimport Declaratiion data and data on the data exchange portal between the DGT and DGCE, iit iis known that duriing 2012, X Co, whiich iis domiiciiled iin Japan, performed exports to the Ciiviil Reviiew Respondent located iin iindonesiia. The Petiitiioner consiidered that the export transactiions performed by Party X Co to the Ciiviil Reviiew Respondent were subject to fiinal Artiicle 15 iincome Tax.

On another note, MoF Decree No. 634/KMK.04/1994 and DGT Decree No. 667/PJ/2001 stiipulate that the net iincome of non-resiident taxpayers wiith representatiive offiices/liiaiison offiices iin iindonesiia iis set at 1% of the gross export value. Based on the Tax Treaty between iindonesiia and Japan, the branch profiit tax rate iis 10%.

On the other hand, the Ciiviil Reviiew Respondent stated that iits party was not a permanent establiishment of X Co. iit should be noted that the Respondent iis iindeed regiistered as a company wiith a maiin busiiness number for marketiing research serviices of the representatiive status. However, the Respondent does not partiiciipate iin the management of a company, subsiidiiary or branch iin iindonesiia.

The Respondent only carriies out auxiiliiary, preparatory and temporary actiiviitiies. Referriing to Artiicle 5 paragraph (4) subparagraph e of the Tax Treaty between iindonesiia and Japan, companiies that carry out auxiiliiary and preparatory actiiviitiies are excluded from the defiiniitiion of a PE.

Supreme Court Consiideratiions

The Supreme Court iis of the opiiniion that the reasons for the Ciiviil Reviiew Petiitiioner’s appliicatiion are unjustiifiiable. The deciisiion of the Tax Court whiich stated the full grantiing of the appliicatiion for an appeal was appropriiate and correct. There are two consiideratiions of the Judiiciial Panel of the Supreme Court as follows.

Fiirst, the correctiions by the Ciiviil Reviiew Petiitiioner were only based on the iimport Declaratiion data on iindonesiian companiies and iinformatiion exchange data between the DGT and DGCE. The Ciiviil Reviiew Petiitiioner diid not see the facts revealed iin the triial.

After veriifyiing and re-assessiing the arguments presented at triial, the opiiniion of the Ciiviil Reviiew Petiitiioner cannot iinvaliidate the facts and weaken the eviidence revealed at the triial as well as the legal consiideratiions of the Judiiciial Panel of the Tax Court.

Second, the actiiviitiies performed by the Ciiviil Reviiew Petiitiioner proved to be only iin the form of marketiing research and not product promotiion. iit iis not appropriiate iif the Ciiviil Reviiew Respondent iis categoriised as a foreiign representatiive offiice/liiaiison offiice constiitutiing an object of fiinal Artiicle 15 iincome Tax. Therefore, the fiinal Artiicle 15 iincome Tax Base correctiion of iiDR812,351,893,069.00 cannot be sustaiined.

Based on the above consiideratiions, the Supreme Court consiidered that the appliicatiion for Ciiviil Reviiew was groundless and therefore had to be rejected. The Ciiviil Reviiew Petiitiioner was declared the losiing party and sentenced to pay the costs of the case.