Appeal Dispute on Forward Transaction Exchange Loss Corrections

THIS civil review (peninjauan kembali/PK in Indonesian) decision summary covers a tax dispute concerning the correction of deductible expenses for exchange loss arising from a forward contract transaction in the calculation of corporate income tax for the 2005 tax year. The correction was made by the tax authority on the grounds that the transaction was deemed not supported by clear evidence.

This dispute was decided through Civil Review Decision Number 372/B/PK/PJK/2014.

The tax authority contended that the exchange loss could not be deducted from gross income and should be upheld. This was because the taxpayer was deemed unable to prove the existence of the forward contract transaction. The documents submitted consisted only of copies of a transaction confirmation bearing the name of a different party and not signed by both parties, whilst the forward agreement was never provided.

Conversely, the taxpayer maintained that the exchange loss constituted an audit adjustment by an independent auditor, referring to the generally accepted accounting principles in Indonesia. The transaction was considered to have been evidenced by a transaction confirmation signed by both parties, such that the loss could be deducted from gross income pursuant to Article 6 paragraph (1) subparagraph e of the Income Tax Law (ITL).

At the appeal level, the Tax Court's judicial panel partially granted the appeal application submitted by the taxpayer. At the civil review level, the Supreme Court rejected the application submitted by the tax authority, such that the Tax Court Decision was upheld.

If you are interested in reading this decision in full, please visit the Supreme Court Decision Directory page or here.

Chronology

The taxpayer filed an appeal with the Tax Court against its objection to the tax authority's assessment. The Tax Court's judicial panel found that the forward contract between the taxpayer and X Co was genuine, based on the transaction confirmation document signed by both parties.

This finding was supported by the contents of the document, which set out the seller, buy amount, sell amount, forward rate, deal rate and value date as well as an invoice attachment from X Co stating the quantity and price. In addition, the Tax Court's judicial panel found that the taxpayer's exchange rate determination as of 31 December 2005 did not comply Article 6 paragraph (1) subparagraph e of the ITL, as the Bank Indonesia (BI) mid-market rate of IDR9,830 should have been used.

In respect of the appeal application, the Tax Court's judicial panel decided to partially grant the appeal application submitted by the taxpayer. Subsequently, following the issuance of Tax Court Decision No. PUT.36871/PP/M.XV/15/2012 dated 22 February 2012, the tax authority submitted a civil review legal remedy in writing to the Tax Court Registry on 19 June 2012.

The subject matter of the dispute, in this case, is the correction of the gross income deduction for exchange loss under the other expenses item, amounting to IDR1,955,605,147, due to foreign exchange differences arising from a forward contract transaction.

Opinion of the Disputing Parties

The Civil Review Applicant, acting as the tax authority, raised an objection to the legal reasoning of the Tax Court's judicial panel that partially granted the Civil Review Respondent's appeal application. The dispute originated from a forward contract transaction between the Civil Review Respondent and X Co, domiciled overseas.

On another note, a forward transaction is an agreement to buy or sell foreign currency against the rupiah or another foreign currency at an exchange rate agreed upon in advance. The Civil Review Respondent used this transaction to anticipate payment obligations for the purchase of raw materials denominated in United States Dollars to be made several months later.

In respect of that transaction, the Civil Review Respondent recorded an exchange loss, which the Civil Review Applicant corrected. The Civil Review Applicant considered that the transaction with X Co warranted further scrutiny, as X Co held 51% of the Civil Review Respondent's shares, giving rise to a potential irregularity.

In general, the Civil Review Applicant contended that the exchange loss from the forward contract transaction could not be deducted from gross income because the transaction could not be substantiated. This view was based on issues of evidencing the transaction and the calculation of the exchange loss by the Tax Court's judicial panel.

According to the Civil Review Applicant, the Civil Review Respondent was unable to prove the existence of the forward contract transaction, having submitted only a copy of the agreement without providing the original document. Furthermore, the authenticity of the copy of the transaction confirmation submitted was doubtful, as it bore the name of another party and was not signed by both parties.

The Civil Review Applicant further stated that additional data in the form of a general ledger of payables and profit/loss data was only submitted by the Civil Review Respondent at the sixth trial session on 9 December 2009. As a result, the data was never examined because the proceedings were concluded directly at the seventh trial session on 13 January 2010, such that the Tax Court's judicial panel decision was considered not to comply with Article 78 of the Tax Court Law.

Further, the Civil Review Applicant considered the calculation of the exchange loss to be incorrect, as the Tax Court's judicial panel did not disclose the details of its calculation. If the BI mid-market rate were applied pursuant to Article 6 paragraph (1) subparagraph e of the ITL, the exchange loss figure should have been limited to the amount recorded by the Civil Review Respondent prior to adjustment.

Based on the foregoing considerations, the Civil Review Applicant maintained that the correction of the exchange loss it had made was correct, and that the Tax Court Decision should therefore be annulled.

Conversely, the Civil Review Respondent raised an objection to the correction by the Civil Review Applicant. According to the Civil Review Respondent, the loss constituted an audit adjustment by a public accountant firm in respect of the 2005 financial statements.

The audit adjustment was made because the company had not yet recorded the adjustment for the exchange loss from the forward contract in the trial balance. This adjustment was in accordance with generally accepted accounting principles in Indonesia.

Regarding the substantiation of the transaction, the Civil Review Respondent stated that the transaction confirmation signed by both parties constituted evidence of the forward transaction with X Co. According to the Civil Review Respondent, the agreement with X Co remained valid pursuant to Article 1313 of the Civil Code, as evidenced by X Co's act of invoicing and the Civil Review Respondent's payment in respect of the transaction.

Accordingly, the Civil Review Respondent maintained that the exchange loss could be deducted from gross income. The Civil Review Respondent further stated that the correction of the exchange loss made by the Civil Review Applicant was incorrect and must therefore be annulled.

Supreme Court Considerations

The Supreme Court held that the grounds of the civil review application could not be justified. This was because the Tax Court Decision, which partially granted the appeal application such that the tax due became an overpayment, was correct and proper. The Supreme Court's legal considerations are set out in two points as follows.

First, the Supreme Court had examined and re-evaluated the grounds set out in the civil review memorandum and the counter civil review memorandum. Those grounds were unable to override the facts and evidence revealed at trial nor the legal reasoning of the Tax Court's judicial panel.

Accordingly, the correction of the exchange loss of IDR1,955,605,147 made by the Civil Review Applicant could not be upheld, as it did not comply with the applicable statutory provisions.

Second, there was no Tax Court Decision that was manifestly inconsistent with the applicable statutory provisions, as referred to in Article 91 subparagraph e of the Tax Court Law.

Based on the foregoing considerations, the civil review application submitted by the Civil Review Applicant was deemed to be without merit and must therefore be rejected. Consequently, the Civil Review Applicant was declared the losing party and ordered to pay the case fees. (dik/*this summary article was prepared by DDTC FRA intern Muhammad Daffa Faisya Putra)