Indonesia’s DGT attempts to stay balanced amid economic recovery
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Indonesia’s DGT attempts to stay balanced amid economic recovery

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David Hamzah Damian and Romi Irawan of DDTC discuss how Indonesia’s Directorate General of Taxes (DGT) find themselves in a precarious position of needing to commission extra audits, while trying to avoid the threat of predicament following the COVID-19 pandemic.

Since the President of Indonesia declared the COVID-19 pandemic as a national, non-natural disaster on April 13 2020, tax enforcement by the DGT has changed drastically. As forecasted, it is expected that tax enforcement post-pandemic, or at least in 2021, could change across Indonesia in a remarkable way.

The government has issued a set of delicate policies which are intended to balance pandemic-relief measures for impacted business, and the need to finance relief and other government expenditure. The budgeted tax incentives for business sustainability is IDR 120.61 trillion ($8.1 billion) and has realised only IDR 18.5 trillion as of August 2020. On the other hand, tax revenue target (excluding customs and excises) has been adjusted from IDR 1,642 trillion to IDR 1,198 trillion. From that target, as of July 2020, tax revenue has reached IDR 601.9 trillion or around 50.2% of target based on revised budget.

Furthermore, the government has also expanded the budget deficit to 6.34% of GDP from the rate previously maintained under 3%. On paper, the government most likely will choose budget financing in amount of IDR 1,039 trillion, increased from IDR 307 trillion to close the budget deficit. Despite the budget financing plan, the DGT has given a statement calling for the securing of tax revenue, and for activities such as monitoring, auditing, collection, and tax crime investigation to be enforced. For further details on Indonesia’s macro-fiscal perspective during the pandemic era, please see DDTC’s Indonesia Taxation Quarterly Report (Q2-2020).

Tax enforcement operations during the pandemic

During the early period of the pandemic, the DGT instructed authorities on the postponement of tax enforcement operations with certain exceptions, which would prioritise the use of letters, telephone, emails, chat applications, video conferencing and other online means of communication in tax enforcement activity. The DGT also stopped issuing tax audit instructions, and postponed the commencement of issued tax audit instructions, barring that of audits on tax refunds.

Starting from June 2020, the DGT implemented ‘new normal’ operations combining ‘work from home’ and ‘work from office’ schemes for its employees. The previously postponed tax enforcement operations from tax audits to tax crime investigations, started to recommence with certain health protocols in place, and with the flexibility by means of communication, careful field operations and the allowance of digital signatures.

Policy on monitoring, valuation and audit

The DGT also has plans to overhaul its tax audit practices, so that ‘weak’ cases are not brought into the objection process by the taxpayer in the first place. It is hoped that instead such findings should be resolved at tax audit level. In 2019, through Circular No. SE-24/PJ/2019, the DGT announced the implementation of the compliance risk management (CRM) system. The main goal was to systematically identify high risk taxpayers, the quantification of that risk, rank taxpayers based on level of risk and treating taxpayers depending on the level of risk differently. In the end, the CRM is anticipated to realise a more optimal and sustainable compliance programme, rather than prolonged disputes with taxpayers.

In February 2020, just before Indonesia entered the pandemic period, the DGT issued a policy on monitoring and the audit of taxpayers. The policy set out the segment of taxpayers into strategic taxpayers and others. For a strategic taxpayer, monitoring and audits were announced to be performed through comprehensive research. While for other taxpayers, it was expected to be generally performed based on area of domicile.

For strategic taxpayers, after comprehensive research on taxpayer is carried out, the DGT will determine whether to issue a clarification request letter or a tax audit instruction letter. A clarification request letter would generally be a ‘tax questionnaire’, requiring the taxpayer to respond with answers on questions from the DGT. It is the DGT’s expectation that the taxpayer would voluntarily amend its tax return and pay the tax payable (if any). However, if the DGT’s view is that the taxpayer should undergo a full tax audit, it will be proposed to and determined at another level within the DGT.

The DGT also introduced enhanced valuation operation in tax enforcement. Since February 2020, the valuation for tax purpose could also be done prior to the tax audit related to certain potential valuation objects and by request from other DGT functions as well, including the tax audit. The scope of valuation for tax purpose would generally be applicable to valuation objects that requires market value as its transaction value. Related party transactions or business combinations which involve asset transfer (including business transfer) and supply of goods or services, could be subject to valuation for tax purpose.

The huge increase of tax audits and disputes

Businesses impacted by the pandemic have been given a number of tax incentives by the DGT, including the reduction of income tax advance payments of 50%. With regard to such reductions, the DGT seems to want to ease the cash flow of taxpayers and also anticipate the significant increase of overpayment tax return, resulting from the overpayment of income tax advance payments against annual income tax payable. If there is overpayment declared in the income tax return, it will generally be subject to tax audit.

Arguably, an Indonesia-wide economic slowdown and the high probability of the Indonesian state of recession would make most taxpayers in the country suffer huge losses and does not account for the income tax payable or even declared overpayment income tax return. In the event of a significant increase of overpayment tax return, a huge number of tax audits could occur. The DGT’s tax audit capacity of 5,824 tax auditors (as of 2018), will be faced with such a significant increase of tax audits on refund tax returns, that is to be finalised within 12 months since the submission of tax returns. In 2019 alone, as per the DGT’s performance report, the number of tax audit reports finalised by the DGT’s tax auditors reached 58,967 which comprises of 39,737 timely reports and 19,230 untimely reports.

Furthermore, a tax auditor may be highly influenced by the tax audit’s key performance indicator which is measured by tax revenue contribution and refund discrepancy, and that could end up with a challenge on the tax assessment issued. The tax assessment issued from tax audits may be requested for a tax objection. Assuming that there would be a significant increase of tax assessments filed for objection, then the DGT tax objection officers (783 persons as of 2018), will face a huge workload. Interestingly, with limited tax objection officers, a high number of cases of tax objection have been processed (9,335 cases in 2017 and 12,418 cases in 2018).

Middling success rate

The legal maxim ‘justice delayed is justice denied’ seems very apt in this context. As also confirmed by the annual joint publication by the IMF and the OECD, titled Tax Certainty, the waiting time for a court decision is among the top ten sources of tax uncertainty. However, the court is not the only one responsible considering that courts are overloaded with case files.

In 2019, there were 12,882 DGT tax cases filed to the tax court, with an average of 7,661 cases filed annually during the period between 2013 and 2019. As a result, a great amount of backlog cases have accumulated over the years. Even in the current implementation of social restrictions by the government to limit the spread of the COVID-19 virus, the tax court continues to seem crowded. The waiting rooms are full and there is even a tent set up outside to limit overcrowding in the building.

The backlog of case files arguably may be connected to the fact that most all objections filed by the taxpayer are rejected by the DGT. In 2018, the DGT announced plans to overhaul its objection institution. The idea is for the objection process to be more selective, so that only cases with sufficient merit will be brought before the tax court, while other ‘weak’ cases should be granted in favour of the taxpayer at the objection level.

It is worth mentioning that in the 2019 DGT performance report, it is said that the DGT managed to ‘win’ 40.54% of tax court disputes. Surprisingly, the DGT’s target was to win only 41% from the tax court disputes. In the same report, the DGT identified several reasons on the result of the tax court decisions. Two reasons that are noteworthy is due to the below par tax audit quality, and the tax court judges paradigm, which prioritised substantive justice rather than to uphold the compliance to the tax administration.

Transfer pricing compliance enforcement

As with previous years, one of tax enforcement policy focus is related party transactions. Almost every tax audit on taxpayers with significant related party transactions would have undergone a transfer pricing (TP) audit. The pandemic and subsequent economic downturn has caused a significant effect in operational TP. When applying the transactional net margin method (TNMM) during the ex-post testing for example, the publicly available database of comparables most likely has not been included as a part of 2020’s financial information, and thus this could vary significantly from the tested year of 2020. Furthermore, based on practical experience, the DGT, taxpayers and tax advisors only choose profit-making companies as comparables, and exclude loss-making companies.

The time to shift to TP pandemic paradigm must take place immediately. Both the DGT and taxpayer should prepare in advance to face potential TP issues and consult each other before making any policy or taking a position. Based on the consultation, the DGT could identify and address issues surrounding TP during the pandemic and provide more guidelines internally for both the DGT and the taxpayer, with the objective to minimise disputes and increase certainty.

Post-pandemic outlook

Before the pandemic, based on practical experience, the conventional tax dispute resolution process in Indonesia could take approximately seven years. To be more specific, this timeline generally encompasses the objection process, the appeal to the tax court, and ends with a civil review process at the supreme court. The waiting time during the judicial process arguably is significant, i.e. a tax court decision could be issued up to three years since the last hearing at the tax court. Moreover, a supreme court decision, which process only consists of the submission of one memorial letter from the petitioner and one counter memorial letter from the respondent, and without trial hearings, could take another one or two years.

After the pandemic, the tax administration and judicial system may be faced by a ‘significant increase of tax audits and disputes’ that could overwhelm them. In one side, the government may choose to finance the budget with tax revenues, therefore requiring ‘extra effort’ involving tax auditors among others, and on the other side, the existing routine of refund tax audits has already cornered tax auditors.

Unless the government foresees and mitigates the risk of the upcoming waves of refund tax audits and the related tax dispute resolutions, the tax system on both an administrative and judicial level, may face a period of predicament. Although the issue of a prolonged dispute resolution process and tax uncertainty has been recognised by the government, the pandemic factor has not been considered.

Since 2016, the government has initiated action plans for a tax reform which was primarily focused on tax certainty and increasing voluntary tax compliance. It remains to be seen how these initiatives could reduce the amount of tax disputes in the future.

The authors would like to thank DDTC partners Darussalam and Danny Septriadi for the valuable inputs and discussion.

Click here to read the entire 2020 Indonesia Special Focus guide

David Hamzah Damian




T: +62 21 29382700


David Hamzah Damian is a partner working on tax compliance and litigation services at DDTC. He is an experienced tax practitioner with more than 18 years of experience.

David is well known for his advocacy skills. In 2019, all the cases that he handled during dispute resolution processes with the Indonesian tax authority have been closed or are settled with agreements from both the taxpayer and the tax authority. In 2020, he was named as a tax controversy leader in World Tax’s dedicated leaders guides.

David is an expert contributor of DDTC News and a co-author of two chapters in ‘Transfer Pricing: Idea, Strategy, and Practical Guidance in International Tax Perspective’ published by DDTC.

Romi Irawan




T: +62 21 29382700


Romi Irawan is a partner of TP services at DDTC. He is an experienced practitioner in disputes and has vast experience in handling TP issues for clients involved in various industries.

Romi is a regular speaker at various seminars and training programmes on TP-related topics organised by DDTC, and he frequently participates as a trainer and speaker in forums and group discussions held by private institutions and government agencies. In 2020, he was named as a TP leader in World Tax’s dedicated leaders guide.

Romi received his bachelor’s degree in financial management from the University of Indonesia, his master’s degree in corporate financial management from Gadjah Mada University and his subsequent master’s degree in international taxation law from the Vienna University of Economics and Business in Austria, under a full scholarship from DDTC.

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