Tax Collection Enforcement in Indonesia during Objection and Appeal Stage

1. INTRODUCTION
Formal tax assessment notice issued by Directorate General of Taxes as a result of
examination should be paid at the latest 1 month from the date of notice. The submitted of the
objection notice do not postpone the collection of the deficiency tax liability inclusive penalties
by Directorate General of Taxes. The reason behind the presumption of innocence is based on
commentary in General Tax Law Provisions which is mentioned that to prevent frivolous disputes
by taxpayers. Additionally, the tax tribunal requires the taxpayers to pay 50% of the tax
assessment.Failure to do so, will result the appeal will automatically been rejected. Finally, the
worst situation for the taxpayers not paid the tax that is still under dispute is that they may have
hostage taking in jail.
2. JUSTICE, PRESUMPTION OF INNOCENCE, AND CHEAP TRIAL PROCESS
Considering Number c of Tax Tribunal Law No. 14/ 2002 specifically mentioned that the
increase in the number of taxpayers and better understanding of taxpayers about their rights and
obligations in implementing taxation laws cannot avoid the occurrence of tax disputes that need
fair settlement through fast, cheap and simple procedures and processes. Unfortunately, the fair
settlement through cheap process that is the objective of the tax tribunal is difficult to be
achieved, if the case involved with substantial amount. Hence, the requirement payment 50% of
tax assessment notice for the case to be heard by the tax tribunal may restrict taxpayers to have
fair trial. Moreover, the commentary mentioned that this rules to prevent the taxpayers to do
frivolous dispute is in the author opinion contrary to the presumption of innocence.

3. INDONESIA TAX TRIBUNAL DECISIONS

From year 1993-1997, Indonesia Tax Tribunal (Majelis Pertimbangan Pajak) issued
decisions that only 17% of the tax assessment noticed declared by the tax authorities is valid.
Moreover, the fact that in the last seven years tax tribunal decision is more favorable to the
taxpayers, the rules about the requirement to pay the disputing assessed tax remain unchanged.

Table 1
Tax Tribunal DDecisions
Neutral
Taxpayers Win
Decisions
Tax Authorities
Year
(%)
(%)
Win (%)
1998
375 (20,6)
941 (51,7)
503 (27,7)
1999
905 (36,9)
928 (37,9)
616 (25,2)
2000
549 (36,6)
510 (34,0)
440 (29,4)
2001
232 (43,8)
215 (40,6)
82 (15,6)
2002
263 (41,7)
249 (39,6)
118 (18,7)
2003
267 (41,6)
216 (36,6)
159 (24,8)
2004
426 (43,6)
403 (41,2)
148 (15,2)
Source: Indonesia Tax Tribunal
Note:
1. The above data is not included appeal noticed submitted by taxpayers that is not processed
further by tax tribunal because of formality matters (for example because of not paid the
requirement 50% from the total assessment still under disputed or the appeal notice is
submitted more than 3 months as requires by the law-author)
2. Data 1999 and 1998, Included municipal and custom/excise tax case law.

4. CRITICS AGAINST THE MANDATORY PAYMENT FOR TAX ASSESSMENT

IS STILL UNDER DISPUTED
Secretary General to Indonesia Business Entrepreneur (Apindo) critics the mandatory
payment 50% for case to be heard in the tax tribunal, he suggested that the requirement should be
eliminated in the future tax law reform. The requirement to paid the 50% tax assessment will
make the entrepreneurs do not want to bring the case to the tax tribunal. In addition, this will
make serious cash flow problems for entrepreneur.
Moreover, Indonesia Business Chambers already propose to reduce the requirement from
50% to 5%. Finally, Indonesia Member of Parliament who is Leader in Tax Committee also
mentioned that the requirement to pay 50% tax is still under disputed is a burden to taxpayers if
Directorate General of Taxes issued serious erroneously tax notice assessment with substantial
amount.

5. TAX COLLECTION ENFORCEMENT IN THE OTHER COUNTRIES AND

ACADEMICS POINT OF VIEW
According to Leif Muten, the requirement that the tax be paid for appeals to be heard may in
some cases mean a denial of basic rights, namely, when the taxpayers does not have the means to
pay an erroneously assessed tax. He is also noted that it is important to see the distinction
between on the one hand the obligation to pay tax even on the basis of a decision that is not final,
and on the other hand the obligation to pay tax for appeals to be heard. The obligation to pay
before the tax is final may likewise implies a hardship, and most countries do, indeed, offer some
remedy. A taxpayer may be allowed to postpone payment while appeals are being heard, provided
that interest is payable once the decision is final. A deferral of payment may be granted when the
outcome of the appeals procedure is difficult to predict.

An important aspect of litigation is whether tas has to be paid pending appeal. It does not in
OECD countries. Countries differ on whether taxpayers are required to pay any tax subject to
dispute in order to pursue a dispute. Some consider it unfair to impose such a requirement. Other
impose it to discourage frivolous disputes. An intermediate position would be to allow tax
authorities or the court to require payment on case-by-case basis. Another possibility is require
payment a portion of the tax.
Spain provide alternative for the suspension of collection enforcement during the appeal
process to tax tribunal by way of bank guarantee based on Article 74-77 EconomicAdministrative Complaints Procedure Regulations. If the final decision more favorable to
taxpayers, then the taxpayers may claim the cost incurred related to bank guarantee and any other
guarantee to suspense the enforcement collection from the tax assessment notice.
In Belgium, Philippines, Bangladesh, taxpayers are only required to pay the tax that is not
disputed or already agreed by taxpayers and tax authorities.
Taxpayers in Brazil should provide cash deposit 30% from the tax still under disputed to tax
authorities. If taxpayers provide real properties guarantee, then 100% value of the properties
should be provided as a guarantee.
Iran only requires taxpayers to provide 5% cash deposits from the tax assessment still under
disputed as a requirement the appeal will be processed by First Board of Settlement of Tax
Disputes (FBSTD).
If the litigation takes place in the U.S ta court, based on Internal Revenue Code (IRC No
6213), the taxpayers does not need to pay until the case is resolved.
In Sweden, the taxpayers will get an extension of time to pay additional tax depends upon:
1. Whether the outcome of the case is uncertain; or
2. If the payment of the tax would lead to substantial damage for the taxpayer or would
otherwise be unreasonable.
In Germany, if taxpayer has filed an appeal against an assessment, the assessed tax payment
may be postponed provided there is substantial doubt on the correctness of assessment. If the
assessment proves to be correct, interest at the rate of 6% per year is levied for the time of
postponement.
In Canada, except for certain large corporation, the amount of tax dispute does not have to be
paid until the dispute is finally resolved.
In Hong-Kong, tax that has been assessed must be paid up-front even if the taxpayer has
engaged an appeal against an assessment. There is possibility of obtaining a holdover of the tax
payable (i.e. a suspension of payment) but such holdover are at the discretion of the tax
authorities and are rarely granted. There is also the possibility of purchasing so-called tax
liability, are bond-like instruments kept by the tax authorities until resolution of a matter. If the
taxpayer ends up being successful in its appeal, the tax reserve certificates will be redeemed with
interest. If it loses, the tax reserve certificates will be appropriated by thje tax authorities but the
taxpayer will not be liable for further interest in respect of the outstanding tax liability to the
extent of the amount of the tax reserve certificates.
In Australia, the commencement of an appeal does not suspend the obligation to pay the tax
in dispute but generally the Australian Taxation Office will suspend recovery proceedings while
an appeal is under way (often on condition of payment of a proportion of the tax in dispute).

In Japan, taxpayers must pay the deficiency amount due, regardless of the filing of
administrative grievances or suits. If tax authorities attach their property, however, the property
cannot be converted into money until the case is settled, unless the value of property may
decrease or the taxpayers prefer the conversion. Moreover, the tax office reviewing the taxpayers
objections or the National Tax Tribunal reviewing the appeals can defer or suspend collection of
all or part of a tax deficiency in dispute if the deferral or suspension is necessary. See General
Law of National Tax, article 105, in that regard. The court can suspend the execution of a tax
deficiency notice according to ataxpayers request if such suspension is urgently needed so that
the taxpayer wont suffer unrecoverable damage resulting from the execution of the notice. See
Administrative Lawsuit Law, article 27, for more on that point.
If a taxpayer loses a case, the taxpayer must pay a delinquency tax, equal to 7.3 percent per
annum, for two months from the due date of the notice, and 14.6 percent per annum thereafter
until the deficiency is paid full. To avoid the risk of paying the enormous delinquency tax, most
taxpayers pay the deficiency amount by the due date of the notice, which is one month after the
issuance of the notice. If a taxpayer wins a case, partially or totally, any overpaid tax is refunded,
with interest at 7.3 percent per annum.

6. THE QUESTION ABOUT THE CONSTITUTIONALITY OF THE PROVISIONS

TO PAY 50% OF DISPUTING TAX ASSESSED
There is one leading case challengge the constitutionality of tax tribunal law article 36(4)
regarding the mandatory requirment to paid 50% of the assessed tax notice issued by Directorate
General of Taxes. According to the advocate of taxpayer this was considered as burdensome as it
could disrupt a companys cash flow and contrary to presumption of innocence.
The taxpayer argued that article 36(4) Tax Tribunal Law is contrary to:
1. Article 27 (1) Indonesia Constitutional Law 1945:
Without any exception, all citizens shall have equal positions in Law and Government and
shall be obliged to uphold that Law and Government
2. Human Right that ruled in Article 28 D (1) Indonesia Constitutional Law 1945:
Everyone shall reserve the right for recognition, guarantee, protection and fair legal certainty
as well as equal treatment before the law
3. Article 28 I (5):
To uphold and protect human rights in accordance with the principle of a democratic lawbased state, the exercise of human rights shall be guaranteed, regulated and expressed in the
laws
4. Article 28 J (1) and (2):
Everyone shall be obligated to respect the human rights of the other people in the orderliness
of the lives of the community, the nation and the state
In exercising their right and freedom, everyone shall be obligated to be subject to the
limitation stipulated in the law with a view solely to guaranteeing the recognition of and
respect for rights and freedom of other people and to fulfill a just demand in accordance with
the consideration of morality, religious values, security and public order in a democratic
society
On the other hand, in view of the Ministry of Finance the tax tribunal law No. 14/2002 is
better than previous one. In the previous law, the mandatory requirement is to pay 100% the tax

assessment under dispute. If there is no restriction, then the tax tribunal will be overwhelmed to
handle the case and to ensure the inflow of state revenue from taxes. Moreover, Directorate
General of Taxes mentioned that if the taxpayers win the case, then the 50% of the disputing tax
assessed already paid will be fully return plus additional interest 2% /month.
Based on teh above provisions the taxpayer argued that article 36(4) Tax Ttibunal Law is
contrary to presumption of innocence and human rights, undemocratic, and do not give certainty
and protection by law to taxpayers. Moreover, the mandatory requirement 50% payment of
disputing tax assessed is without considering any evidence provided by taxpayers.
Expert witness gives his opinion in the court that Article 36(4) Tax Tribunal Law is contrary
to the presumption of innocence and protection of human rights because the mandatory payment
50% of disputing tax assessed should be done before final judgment provided by the court.
The Constitutional Court decides that requirement to pay 50% of the disputing tax assessed
is not contrary to Indonesia Constitutional Law 1945. The consideration as follows:
Article 36(4) is not contrary to the presumption of innocence. Tax Tribunal is not Criminal
Tribunal made a decision that a person is guilty or not guilty that is ruled by Criminal Law,
however, to determine the implementation of tax law is already correct. Hence, the
presumption of innocence is not relevant to the tax tribunal. The requirement to pay 50% is
not based on penalty or criminal punishment, but as a partial payment of the taxpayer
liabilities and as a formal requirement rights to appeal. If the decisions are fully favorable
to the taxpayers, then the government will return the 50% that already paid and provide
additional interest 2%/month as compensation.
In the author opinion that is in contrast to Indonesian Constitutional Court decision, if the
taxpayers have an option by the law, they would not to pay 50% of disputing tax assessment
rather than receive the interest compensation. The reason is simple, because if the disputing tax
assessed involved substantial amount, then the taxpayers who do not have enough money to bring
the case to the court will be in unfavorable position. What they need is not the interest as
compensation, but, the justice and certainty.
Three of seven judges said in their dissenting opinion that the obligation for taxpayers to pay 50%
of arrears before going to the tax tribunal has denied them the right of getting court justice and
defending themselves against possible mistakes made by the tax officials.

7. CONCLUSION AND SUGGESTION

Based on the facts above, we conclude those countries differ on whether taxpayers are
required to pay any tax subject to dispute, in order to pursue a dispute. Some consider it is unfair
to impose such requirement. Others impose it to discourage frivolous disputes. On the other hand,
if the administrations is mistaken, such a rule can unfairly enforce to the taxpayer to borrow
substantial amounts, perhaps at high interest rates, and put the taxpayer in financial jeopardy even
if the administration must eventually pay interest to the taxpayer on overpayment. In exteme
cases, the taxpayer may be unable to contest the assessment at all.
An intermediate position would be to allow tax authorities or the court to require payment on
a case-by-case basis. Another possibilityis to require payment a portion of the tax (e.g., 50%).

Considering the result of Tax Tribunal decisions, Indonesia Member of Parliament in the
future tax reform should reconsider the requirement to pay the 50% of disputing tax assessed in
the tax court. If this rule is unchanged in the future, there might be another effort by taxpayers or
academics to bring again the requirement to pay the disputing tax assessed to Constitutional Court
with other arguments and evidences.