Dispute over Article 26 Income Tax on Bandwidth Rent as Royalty

THIS civil review (peninjauan kembali/PK in Indonesian) decision summary covers a tax dispute concerning a correction to the Article 26 Income Tax on object satellite rent and line rent payments made to overseas parties, which were categorised as royalties.

The tax authority made a correction to the Article 26 Income Tax object of IDR2,390,415,499 paid by the taxpayer to several overseas parties for satellite rents and line rents in the form of bandwidth. The tax authority took the view that such payments constituted royalties for the use of tools or equipment, and were therefore liable to Article 26 Income Tax at the rate provided under the applicable tax treaty (persetujuan penghindaran pajak berganda/P3B in Indonesian).

The taxpayer, as an internet and telecommunications service provider, held a contrary view. According to the taxpayer, the payments to the overseas parties were for the bandwidth rent, not the rent of tangible tools or equipment. The taxpayer, therefore, considered that bandwidth did not fall within the category of royalties.

The judicial panel of the tax court decided to fully grant the taxpayer's appeal. Subsequently, at the civil review stage, the Supreme Court rejected the civil review application filed by the tax authority as the applicant.

If you are interested in reading this decision in full, please visit the Supreme Court Decision Directory webpage or access it directly at Perpajakan.id.

Chronology

The taxpayer filed an appeal to the tax court against their objection to the tax authority's assessment. The judicial panel of the tax court concluded that the tax authority's correction of IDR2,390,415,499 could not be upheld. Accordingly, the judicial panel was also of the opinion that no Article 26 Income Tax was payable on the taxable object.

Based on the foregoing, the judicial panel of the tax court granted the appeal in its entirety and cancelled the notice of tax underpayment assessment (surat keberatan pajak kurang bayar/SKPKB in Indonesian) dated 28 March 2008. Subsequently, following the issuance of Tax Court Decision No. PUT.3909/PP/M.XIVA/13/2015 dated 12 October 2015, the tax authority filed a civil review in writing with the registrar of the tax court on 25 January 2016.

The subject matter of the dispute, in this case, is the correction to the Article 26 Income Tax object of IDR2,390,415,499 in respect of satellite rent and line rent payments for the January to December 2006 taxable periods, which the judicial panel of the tax court was unable to uphold.

Views of the Disputing Parties

The civil review applicant, as the tax authority, expressed their objection to the legal reasoning of the judicial panel of the tax court. The applicant disagreed with the judicial panel's failure to uphold the correction to the Article 26 Income Tax object for the January to December 2006 taxable periods, amounting to IDR2,390,415,499.

In this case, the respondent conducts business in the field of internet and telecommunications services, and in the course of their operations, makes payments for bandwidth rents to several parties domiciled overseas, namely in Hong Kong, Japan and Singapore. A dispute subsequently arose owing to differing interpretations of the taxable object in relation to satellite rents and line rents.

The applicant was of the view that the substance of the rental transactions constituted a royalty object. The transactions in question were deemed royalties because payments were made for satellite rents and line rents in the form of bandwidth paid outside Indonesia's customs territory, and were therefore subject to the rate prescribed under the applicable tax treaty.

In fact, the transactions included in Article 26 Income Tax objects had not been included in the tax return, resulting in a detected tax underpayment. More specifically, the applicant corrected the Article 26 Income Tax object in relation to payments for satellite rents to CABTN in Hong Kong and SingTel in Singapore as well as payments for line rents to KDDI and Japan Internet Exchange in Japan and Equinix, SingTel and PCCW in Singapore.

In this regard, there was a difference in the interpretation of the definition of "bandwidth" between the applicant and the respondent. The applicant considered that the respondent's use of the term bandwidth in its objection letter and appeal letter actually obscured the true substance of the transaction, which was the equipment rent.

Based on the above considerations, the applicant stated that the correction they had performed was correct and consistent with the applicable tax provisions. The applicant also took the view that the tax court's judicial panel decision was inconsistent with the applicable regulations and had disregarded the facts and findings of the audit that had been conducted.

Conversely, the respondent disagreed with the applicant's position. The respondent considered that the goods leased by the respondent from several of its counterparties were bandwidth. Bandwidth is a measure of data transmission capacity used in the fields of telephony, computer networks and radio frequency signals.

Bandwidth constitutes an intangible asset that cannot be categorised as a royalty. This is governed by Article 4 letter h of the Income Tax Law, which restricts royalties on intangible assets to copyrights, patents, trade marks, formulas or trade secrets.

Further, pursuant to Article 12 of the Indonesia–Japan and Indonesia–Singapore tax treaties, the definition of "royalties" does not encompass bandwidth rents. This is because those provisions only govern royalties in respect of copyrights, patents, trade marks, industrial/commercial/scientific equipment and industrial know-how.

Accordingly, the respondent was of the view that the applicant's correction of satellite rents and line rents in the form of bandwidth categorised as royalties had no strong legal basis. This statement refers to both national tax law and international tax law (tax treaty). The respondent therefore maintained that no Article 26 Income Tax underpayment existed, and that the correction made by the applicant could not be justified and must be cancelled.

Supreme Court Considerations

The Supreme Court was of the opinion that the grounds of the civil review application could not be justified. This was because Tax Court Decision No. PUT.3909/PP/M.XIVA/13/2015, which granted the appeal in its entirety such that the outstanding tax became nil, was correct and proper. There were at least several legal considerations of the Supreme Court as follows.

First, the grounds of the civil review application concerning the correction to the Article 26 Income Tax object of IDR2,390,415,499 for the January to December 2006 taxable periods, which the judicial panel of the tax court did not uphold, could not be justified. This is because, after examining and re-assessing the arguments of the disputing parties, the applicant's position was unable to rebut the facts or undermine the evidence disclosed at trial, nor the legal reasoning of the judicial panel of the tax court.

Second, the case at hand is bound by the legal principles of lex specialis derogat lex generalis and lex superior derogat legi inferiori. The Supreme Court considered that the correction classifying satellite rents and line rents in the form of bandwidth as royalties was incorrect. The correction made by the applicant was also inconsistent with the applicable statutory provisions.

Based on the foregoing, the civil review application filed by the applicant was without merit and must therefore be dismissed. Accordingly, the applicant was declared the losing party and ordered to pay the case fees. (dik/*this summary article was prepared by Fiscal Outreach Specialist, Yana Yosiyana)