Objection & Appeal: Know Your Battle Zone (異議申立て及び上訴:貴方の戦場を知って下さい)

The latest provision regarding objection and appeal contains a certain dilemma for taxpayers. Not knowing this provision, a taxpayer may be subject to sanction in a relatively material amount or may loose the right to obtain interest fee.

Objection and appeal have been the most common ways for taxpayers in seeking justice after the issuance of Tax Assessment. Objection is undertaken against a tax assessment notice whereas an appeal is chosen pursuant to an issuance of a decision on objection. As the time goes by, changes have been made in the regulations concerning the procedure of objection and appeal. Taxpayers have to carefully digest any latest regulation; otherwise they may face unfortunate conditions beyond their expectation.

The Latest about Objection

異議申立てに関する最新情報

The first noticeable difference in the new tax regulation regarding objection is related to settlement of tax amount subject to objection. For taxpayers who are planning to file an objection against a Tax Underpayment Assessment Notice, they now should firstly settle the underpaid tax, at least in the amount as agreed in the clossing conference with the tax auditor.This is clearly stipulated in the Article 25 paragraph (3a) of Law No.28 Year 2007 concerning General Tax Provisions and Procedure Law (the 2007 KUP Law). However, postponement on the settlement of underpaid tax at the time of objection filing is allowed up to 1 (one) month after the issuance date of the decision on objection as regulated in Article 25 paragraph (7) of the 2007 KUP Law.

Whats the Latest about Objection

異議申立てに関する最新情報

The first noticeable difference in the new tax regulation regarding objection is related to settlement of tax amount subject to objection. For taxpayers who are planning to file an objection against a Tax Underpayment Assessment Notice, they now should firstly settle the underpaid tax, at least in the amount as agreed in the clossing conference with the tax auditor.This is clearly stipulated in the Article 25 paragraph (3a) of Law No.28 Year 2007 concerning General Tax Provisions and Procedure Law (the 2007 KUP Law). However, postponement on the settlement of underpaid tax at the time of objection filing is allowed up to 1 (one) month after the issuance date of the decision on objection as regulated in Article 25 paragraph (7) of the 2007 KUP Law.

In the past, taxpayers would go straight to an objection process without initially paying the tax underpaid based on the preceding provisions (Law No.16 Year 2000). The Law No.16 Year 2000 only emphasized that filing of objection did not delay the obligation of tax payment and tax collection act. However, it did not regulate postponement of tax underpayment settlement at the filing of objection.

Another new matter stipulated is that if a taxpayers objection is partially rejected, the related taxpayer will be charged with 50% of total underpaid tax (tax due under the decision on objection deducted by tax already paid before the objection filing) under the Article 25 paragraph (9) of the 2007 KUP Law. As a comparison, the preceding provision (Law No. 9 Year 1994) did not specifically regulate sanction due to partial rejection on objection. A consequence of no postponement of tax payment obligation, the preceding law only regulated 2% penalty from tax underpaid based on the Tax Underpayment Assessment Notice.

What happens if the decision on objection against the Tax Underpayment Assessment Notice partially accepts the taxpayers objection and the tax due stipulated is smaller than the tax already paid? Upon the overpayment, shall the taxpayer receive an interest fee as regulated in the preceding provision? The answers are again different based on the prevailing provisions of the 2007 KUP Law. The taxpayer will not receive any interest fee on the overpayment. This is further regulated in the Article 24 paragraph (5) letter a and b of Government Regulation (PP) No. 80 Year 2007 as quoted below:

(5) Interest Fee as referred to in paragraph (1)shall not be granted upon:

a. Overpayment due to Decision on Objection, Decision on Appeal, or Decision on Judicial Review against Tax Underpayment Assessment Notice or Additional Tax Underpayment Assessment Notice which is fully accepted in the Closing Conference of Tax Audit Findings and has already been settled prior to filing of objection.

b. Overpayment due to Decision on Objection, Decision on Appeal, or Decision on Judicial Review upon partial amount of tax as stated in Tax Underpayment Assessment Notice or Additional Tax Underpayment Assessment Notice which is not accepted in the Closing Conference of Tax Audit Findings, but has already been settled prior to filing of objection, appeal, or judicial review, or prior to issuance of Decision on Objection, Decision on Appeal,or Decision on Judicial Review.

Dilemma of Objection

異議申立て及び上訴のジレンマ

It is a fact that majority taxpayers are potentially deemed to have tax underpayment against which they will later choose to file an objection. To avoid being imposed with charge and loosing interest fee based on PP No. 80 Year 2007, Article 24 paragraph (5) letter a and b, the taxpayers are enforced to really acknowledge the tax due amount to be agreed in the clossing conference. If the tax amount agreed is too small and the objection of the taxpayer is only accepted partially, the taxpayers shall potentially be subject to penalty of 50% from the underpaid tax (tax due under the decision on objection deducted by tax already paid before the objection filing).

The penalty mainly arises if the tax underpayment stated in a decision on objection is bigger than the tax amount agreed in the closing conference. In other words, the Article 25 paragraph (9) of the 2007 KUP Law implicitly regulates that the bigger tax amount not yet paid prior to an objection, the bigger penalty amount should be borne by the taxpayers failing in the objection. To have the chance to avoid the imposition of such penalty, taxpayers should bring their case to an appeal court as based on the paragraph (10) of the same Article of the 2007 KUP.

What if the tax amount agreed in the closing conference is too big? When the decision on objection accepts a taxpayers objection partially and stipulates tax due amount smaller than the tax amount already paid before filing the objection, the said taxpayer should be a big hearted. It is because based on the Article 24 paragraph (5) of PP No. 80 Year 2007, the taxpayer will not enjoy any interest fee on the overpayment made. Anyway, there is still something to be grateful, that is being free from the penalty charge.

Speaking of being big hearted, another case to compare is when a taxpayer agrees with the entire the tax due stipulated in the clossing conference, fully pay them but later file an objection and win the case. Again, no interest fee will be received. Logically, when a taxpayer agrees with the tax due stipulated by Tax Underpayment Assessment Notice, no objection is supposed to be filed. This practice often occurred in the past for any purpose. Thus, this new regulations seems to put a limit on it. Thus, it is not a surprise if no interest fee shall be given upon any overpayment due to a Decision on Objection against Tax Underpayment Assessment Notice which is entirely agreed in a closing conference and already settled before an objection is filed. This is regulated in the Article 24 paragraph (5) letter a of PP No. 80 Year 2007.

Not to agree partially with the tax due stipulated in the Tax Underpayment Assessment Notice but settle the tax due before filing an objection, is also a thing that should be considered by the taxpayers. This in fact should be made when the decision on objection stipulates smaller tax due amount than the tax already paid before filing the objection as referred to in the Article 24 paragraph (5) letter b of PP No. 80 Year 2007.

Whats the Latest about Appeal

上訴に関する最新情報

Regarding the formal requirements for an appeal, they still refer to the provisions prior to the validity of the 2007 KUP Law. Taxpayers should file the appeal in written and in Bahasa Indonesia by providing clear rationales and enclosing the copy of Decision on Objection against which the appeal is filed. The appeal is filed within 3 (three) months since the receipt of the Decision on Objection.

What is now different from the previous regulation is about the obligation to settle 50% of total tax due under the Decision on Objection against which the appeal is filed. The Article 27 paragraph 5c of the 2007 KUP Law states:

tax amount not yet paid at the filing of an appeal shall not be tax due until the Decision on the Appeal is issued.

Based on this provision, it is true that the taxpayers should no longer have the obligation of 50% payment on the tax due under the Decision on Objection. But please do remember that up to this writing is made, the Tax Court Law which regulates the formal requirements has not yet amended. As a consequence, the taxpayers should still make the 50% settlement before filing an appeal.

Another change regarding an appeal is that now the taxpayers have the right to request in writing for the basis of the Decision on Objection for the purpose of an appeal filing upon which the Director General of Taxes should provide a response in writing. What is the most significant change is that when an appeal is rejected partially, the related taxpayer is charged with 100% of total underpaid (tax due under the decision on objection deducted by tax already paid before the objection filing).

Dilemma of Appeal

上訴のジレンマ

As previously mentioned, to file an appeal is an ideal solution to avoid the 50% penalty due to partial rejection on an objection against a Tax Underpayment Assessment Notice. The question is what will guarantee that the taxpayers could win an appeal? Bigger penalty of 100% from total underpaid is waiting for those who do not win the appeal. This should be carefully considered before choosing to bring their case to the appeal court.

Even when a taxpayer finally wins an appeal and the decision on appeal stipulates an overpaid tax, the taxpayer should anticipate that no interest fee will be received as based on the Article 24 paragraph 5 letter a and b of PP No. 80 Year 2007.

Risk Minimization

リスクを最小限に

When the taxpayers face the 2 (two) risks for filing an objection-being imposed with big sanction or not being imposed with sanction but saving certain amount of money in the State Treasury with no interest fee-, what should they do to minimize the risks? The answer is that they basically can only try to avoid significant amount of underpaid tax prior to a tax audit. It sounds quite simple but there is another question about that. Can the taxpayers manage to do that? It is surely not something easily to arrange. In addition, it is often that different opinion between tax auditors and taxpayers occurs.

Next question will be what should be chosen by a taxpayer facing such a dilemma? Loosing an appeal means that 100% penalty from the underpaid tax will be charged, whereas winning an appeal means being free from the penalty but no interest fee will be gained. The choice is in the taxpayers hand.

Before taking further action into an appeal court, there are some things to be taken into account. Many taxpayers have succeeded to win their appeal, but they are not as many as those who have failed to do so. In addition, taxpayers should consider a set of strategies to provide the complete and strong evidence and to counter the opinion of the tax auditors, a long series of court sessions, etc, that should be carried out. In other words, there are things that make winning an appeal not as simple as flipping the hand palm.

Below are the actions that can be taken to minimize the above risks:

1. To measure the level of success in winning the case using self parameter. In this case, taxpayers should understand the perspective used by the authorized institutions handling objections and appeals. To understand the said perspective, a taxpayer should find jurisprudence over a similar case. If the jurisprudence available is only to weaken the position of a taxpayer, taking a risk by not paying the underpaid tax would not a wise choice.

2. To settle tax underpayment fully/partially. Considering the change of success in the objection phase is relatively small, it will be more beneficial when a taxpayer firstly settle the underpaid tax though no interest fee (max. 48%) will be gained than when the taxpayer is imposed with the 50% penalty charge. Even though the chance of success in the appeal process is relatively bigger than that of in the objection process, there is a potential risk of being charged under an appeal is 100%. For those who are not risk takers, to choose settling the underpaid tax would be a better idea.

3. To seek advise from a competent party in making analysis and finding strategy to win objection and/or appeal. By considering that a competent party has more experience in handling the case, it is more potential for a taxpayer supported with a reliable advice to win the case.

At the end, after knowing what kind of battle zone that the taxpayers are in, the most initial measure to do is to understand comprehensively about any prevailing tax regulations. This will make taxpayers aware of any tax implication related to every transaction made. By doing so, preparing arguments for an objection and/ or appeal will not be so difficult to do.

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