Time for Indonesia to Adopt Legally Binding Advance Rulings

A TAXPAYER recounted that in Japan, differences in interpretation between the tax authority and taxpayers rarely occur. According to his Japanese superior, taxpayers may request clarification on a particular transaction and receive a definitive, binding response from the tax authority.

That experience, he noted, differs from the ruling letter mechanism of the Directorate General of Taxes (DGT) in Indonesia, which is deemed to offer insufficient legal certainty.

The concept in question is, in fact, known as an advance ruling. In a number of countries, taxpayers may request an official decision from the tax authority regarding the tax treatment of a transaction that is not clearly regulated or that could give rise to multiple interpretations.

The purpose is straightforward: to provide legal certainty before a transaction is conducted, preventing disputes from the outset.

Where such a decision is binding only on the applicant, the mechanism is known as an Advance Private Ruling (APR). Conversely, where it applies generally to all taxpayers, the mechanism is referred to as an Advance Public Ruling.

In simple terms, an APR may be understood as a combination of a ruling and legally binding force, as is the case with an Advance Pricing Agreement (APA). In Indonesia, the advance ruling regime is, as yet, recognised only in the context of APAs.

Based on data from the International Survey on Revenue Administration (ISORA) published by the International Monetary Fund (IMF), a considerable number of countries have implemented advance ruling regimes, including Japan.

However, implementation varies greatly. Austria, for instance, charges a fee for advance ruling applications, whereas Australia provides them free of charge.

In India, the authority to issue advance rulings rests with the Authority for Advance Ruling (AAR), which is separate from the tax collection authority, whereas in Malaysia, they are issued directly by the Inland Revenue Board (LHDN).

In Vietnam, a similar mechanism is even applied to the assessment of classification and import duty rates to reduce customs disputes. Meanwhile, Indonesia and Armenia include APAs as part of their advance ruling regimes.

The existence of advance rulings is becoming increasingly relevant because business developments shift far more rapidly than the regulatory process. New business models continue to emerge in line with technological progress and innovation.

Unfortunately, tax regulations often require considerably more time to adapt. As a result, a significant number of transactions fall into grey areas, creating uncertainty for taxpayers.

One notable example is the conduct of bullion business activities (bullion banking). This business model obtained a legal basis through Law 4/2023 concerning the Development and Strengthening of the Financial Sector (Pengembangan dan Penguatan Sektor Keuangan/P2SK in Indonesian) and was further regulated through Financial Services Authority (OJK) Regulation 17/2024.

One of the covered business activities is gold trading, namely purchasing gold from suppliers as well as through a buyback mechanism. In practice, however, tax issues subsequently arose that had not been clearly addressed.

Sellers of gold bars to bullion companies are, in principle, required to collect Article 22 Income Tax from the buyer. On the other hand, bullion companies of state-owned enterprise (SOE) status are also designated as Article 22 Income Tax collection agents on purchases of goods. This situation gives rise to a mutual-collection scenario: both the seller and the buyer hold the status of Article 22 Income Tax collection agents.

This matter only gained certainty after the government issued the Minister of Finance Regulation (MoF Reg.) 52/2025 on 25 July 2025, approximately 5 months after the launch of bullion banking. The regulation clarifies that sales of gold to companies licensed by the OJK to conduct bullion business activities are not subject to that collection mechanism.

MoF Reg. 52/2025 may also be viewed as an example of an Advance Public Ruling, as it provides certainty for a specific group of taxpayers. However, bullion banking is a government priority programme dominated by SOEs.

Yet there is every possibility that similar issues could also be experienced by many other taxpayers developing new business models who do not have the same access to regulators.

Under such circumstances, the advance ruling mechanism becomes important due to its capability of bridging the gap between business innovation and the development of tax regulations.

Uncertainty is by no means a trivial matter. The statutory corporate income tax rate is indeed 22% of taxable income, but the actual tax burden can be considerably higher where fiscal adjustments, administrative penalties or disputes arising from differences in interpretation emerge.

Errors in tax withholding or collection, which in reality stem from unclear rules, may ultimately increase compliance costs and business risk.

For businesses, tax is indeed a consequence of carrying out economic activities. However, what is more concerning is the uncertainty regarding how much tax must be paid and how a particular transaction will be treated by the tax authority.

This kind of uncertainty will ultimately constitute an additional cost for businesses and may influence investment decisions.

At present, the solutions available to taxpayers in Indonesia remain limited to applications for rulings. Nevertheless, that mechanism does not yet carry legally binding force in the manner of advance rulings in various other countries.

Indonesia must not be left behind. Neighbouring countries have already implemented such mechanisms ahead of it. For example, Singapore has applied a legally binding advance ruling under the Income Tax Act 1947.

Malaysia has had one in place since 2007, Timor-Leste since 2000 and even Myanmar has regulated it through its Tax Administration Law in 2019.

It is therefore high time that Indonesia considered the broader adoption of a legally binding advance ruling, whether in the form of an Advance Private Ruling or an Advance Public Ruling.

Greater legal certainty will not only reduce potential disputes but will also strengthen business confidence in Indonesia's tax system. In turn, this will also enhance the country's attractiveness as an investment destination. (rig)

* This opinion article represents the personal views of the author and does not reflect the position of the institution where the author is employed.