Correction on VAT Overseas

Tax audit is one of the services we provide for clients. One of our client from coal mining background was being audited on its 2011 Fiscal Year by the Tax Office.

About The Company

Our client is engage in coal mining in Indonesia.

Project Overview

Tax audit is one of the services we provide for clients. One of our client from coal mining background was being audited on its 2011 Fiscal Year by the Tax Office. According to the tax officer, the Company’s VAT overseas amount is being subjected to correction as it is considered delivery of coal sales and purchase right. The Company has confirmed its disagreement of the correction. On the Company’s side, such amount was recorded as compensation of reimbursement on marketing service.

 

We conducted several research on tax regulation and other supporting materials to gather sufficient argument contradicted tax officer’s correction.

 

Below is the summary of Reply of the above case:

 

In reference to:

 

Article 2 Regulation of The Minister Of Finance Of The Republic Of Indonesia (Mof) 40/PMK.03/2010 regarding Procedures For Calculating, Collecting, Remitting, And Reporting Value Added Tax On The Utilization Of Intangible Taxable Goods And/Or Taxable Services From Outside Customs Area stipulates that “Value Added Tax shall be imposed on the utilization of Intangible Taxable Goods and/or Taxable Services from outside the Customs Area inside the Customs Area.”

 

In the Number 1 Letter a Circular Letter The Director General Of Taxation (Dirgentax) SE-147/PJ/2010 Regarding Explanation On The Regulation Of The Minister Of Finance Number 40/PMK.03/2010 Regarding Procedure For Calculation, Collection, Remittance, And Reporting Of Value Added Tax On The Utilization Of Intangible Taxable Goods And/Or Taxable Services From Outside The Customs Area, explained the “Article 1 sub-article 8, the utilization of Taxable Services from outside Customs Area shall be any activity of the utilization of Taxable Services from outside the Customs Area within the Customs Area”.

 

Article 1 Number 5 Law 42 Year 2009 Regarding The Third Amendment To Law Number 8 Year 1983 Regarding Value Added Tax On Goods And Services And Sales Tax On Luxury Goods stipulates that “Service shall be any activity of serving, based on a contract or legal act, which makes a goods, facility, or rights available for use, including services that are furnished to produce goods on purchase order or request with materials and direction of the order giver”.

 

In Kamus Besar Bahasa Indonesia, definition of service are:

 

  1. Act of good/beneficial and valuable towards others, country, instance, etc.
  2. Act of giving something that needed.
  3. Activity, easiness, benefit, etc which can be sold for others (purchaser/service recipient) to enjoy or utilize.

 

In economy, a service is an economic activity where an immaterial exchange of value occurs. When a service such as labor is performed the buyer does not take exclusive ownership of that which is purchased, unless agreed upon by buyer and seller.

 

According to Phillip Kotler, a service is any activity of benefit that one party can offer to another that is essentially intangible & doesn’t result in the ownership of anything. Its production may or may not be tied to a physical product. Thus services are those activities which satisfy wants.

 

From the above, it is clearly define that a service involving an activity, servicing, act, or process. In line with the terms of service, so if there is no activity, action or process that is done, then it is not included with the service. Aside from citating definition from various sources, we also citated statements from agreements relating to compensation of reimbursement on marketing service and preparing the original documents to support our statements.

 

In summary of the above definitions, we argue that the compensation payments on reimbursement agreement is not an object of VAT overseas. The above points were highlighted in written Reply as well as spoken in discussion.

There’s an argument at the time of discussion of whether our points are acceptable. Until the end of discussion phase, both tax officer and our side could not reach into agreement. Therefore, we apply a request of discussion with Quality Assurance Team.

 

In the process of discussion with Quality Assurance Team of Regional Tax Office, tax officer of client’s registered Tax Office and taxpayer represented by us. After hearing both party argumentation, Quality Assurance Team took time to study and make decision. The Quality Assurance Team decided to be in agreement with our opinion that the correction made on VAT overseas was canceled. (DN)