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A REVIEW OF THE TAX COURT’s DECISIONS RELATED TO THE ELIMINATION OF UNCOLLECTIBLE DEBT

Background There are several definitions of debt under Indonesian Law.

The definition of debt in Article 1 Number 6 of Act Number 37 of 2004 concerning Bankruptcy and Postponement of Obligation to Pay Debt is an obligation that is stated, or can be stated, in an amount in Indonesian currency or foreign currency, either directly or may be a contingent debt arising from an agreement or law.It must be satisfied by the debtor and if not paid, gives the creditor the right to obtain satisfaction from the debtor’s assets.

The definition of debt in the Minister of Finance Regulation Number: 201 / PMK.06 / 2010 concerning the Quality of Receivables of State Ministries / Institutions and Establishment of Allowance for Uncollectible Debt has the meaning of the amount of money that must be paid to the state ministries / institutions and / or the rights of state ministries / institutions which can be assessed with money as a result of an agreement or other consequences based on the prevailing laws or other legal consequences. In essence, this can be understood that debt is a sum of money that must be paid to creditors by the debtor as a result of an agreement or other legitimate consequences. The Indonesian Language Dictionary defines debt as money which can be borrowed (which can be billed from someone).

Based on the two legal definitions above, there is a reciprocal transactional relationship between the debtor who is the party that owes and has the obligation to pay the creditor. Correspondinly, the creditor has an account receivable and is the party that receives payment for the amount paid by debtor or that can be billed by the creditor to the debtor.

In practice, not all receivables can be billed by creditors to the debtor. This can happen for example because the debtor is bankrupt, and cannot pay or pay off his debts, or is deceased, or because of some other event. When this happens, the receivables changes in status from the assets or income of the creditor into losses and expenses that must be borne by the creditor.

In such event, the creditor must make reasonable efforts to recover the debt. If unsuccesful, the creditor will inevitably need to initiate an Elimination of debt. Elimination of debt means that the loss must be borne by the creditor because the debt cannot be collected. The elimination of uncollectible debt will thus affect the tax liability of the Parties.

Decision

A legal review came before the Court involving such a situation. The Minutes of Tax Court Decisions Number: Put-60174 / PP / M.XIIB / 15/2015, March 16, 2015 concerned the Director General of Taxes ( Respondent Appeals) against PT. Carsurin or PT. Geoservices (Appellant), with the subject matter of the dispute being an appeal against the correction of Overseas Income of IDR 10,863,903,456 – (Ten Billion Eight Hundred Sixty- Three Million Nine Hundred Three Thousand Four Hundred and Fifty-Six Rupiah).

The Appellants transacted a sale of coal based on the Contract for Sale and Purchase of Coal Number: RICOH-IN / 0 / COAL / 2004, dated April 6, 2004, The purchasers were is Ricoh Union Co., Ltd., a company domiciled overseas with address 46 Alley 8, Lane 63, wu-Fong Rd, Hsin Tien City, Taipeh, Taiwan.

In 2004, the Appellant exported coal to Ricoh Union Co., Ltd., and issued a commercial invoice and Export Goods Notification. The Appellants reported the income in their Annual Income Tax Form for year 2004. However, Ricoh Union Co., Ltd., did not pay for the transaction. The Appellants made every possible effort to obtain payment for the transaction from the Buyer, but the Buyer failed to make payment for the transaction.

In 2008, the Appellant acknowledged the loss on the transaction at the Annual Corporate Income Tax Year 2008 by removing the debt. However, the tax department did not recognise the Elimination and treated at as income from outside the Applicant’s business. It was argued that the Appellant did not fulfill two cumulative reqirements as stipulated in Article 6 paragraph (1) letter h point 2 and point 3 of Regulation Number 36 of 2008 concerning Income Tax, which states:

“… (h). the Debt that are obviously uncollectible with the following conditions:

(2) Taxpayers must submit a list of the Debt that can be billed to the Directorate General of Taxes; and

(3) the case has been submitted to the District Court or government agency that handles statesdebt; or there is a written agreement concerning the elimination of accounts receivable / debt relief between the creditor and debtor; or has been published in public or special publications; or an acknowledgment from the debtor that the debt has been remove for a certain amount;

“ The Panel of Judges argued that the formal condition for the elimination of uncollectible debt as stipulated in Article 6 paragraph (1) letter h of the Income Tax Regulation in conjunction with Regulation of the Minister of Finance Number: 105 / PMK.03 / 2009 and Regulation of the Minister of Finance Number: 105 / PMK.03 / 2009 has been fulfilled by the Appellant, namely by having uncollectible debts charged as expenses in the commercial income statement in 2008. The debt had also been submitted to the Courts in Taipeo, Taipei and the Appellant has also submitted the list of debts that cannot be recovered from the Buyer.

However, even though the Appellant has met the formal requirements for an uncollectible debt, there were 2 (two) formal requirements that were not in accordance with the terms in the Coal Sale and Purchase Agreement Number: RICOH-IN / 0 / COAL / 2004 dated April 6, 2004. The Agreementprovided in Article 17 and Article 21, that Parties had agreed that in the event of a dispute to resolve disputes through SIAC (Singapore Institute of Arbitration Center). The agreement also provided that the Agreement was subject to the laws of the State of Singapore; ANALYSIS

The Judge found that the Appellant has proven that the Appellant had made billing efforts to recover the export debt from Ricoh Union, Co., Ltd., a company domiciled in Taiwan. However, the Court found that the Appellant has not made any steps to settle the disputes through the SIAC (Singapore Institute of Arbitration Center) as agreed in the contract for sale and purchase of coal No. RICOH-IN / 0 / COAL / 2004 dated April 6, 2004.

Despite this anamoly, the panel of Judges in The Tax Court concluded that the positive correction made by appellee on the loss of uncollectible debt amounting to IDR 10,863,903,456.00 in the 2008 was appropriate and is maintained.

In Indonesian law, the elimination of debt requires that there is clearly no further claims relating to uncollectible debt. This is regulated by Article 6 paragraph 1 letter h Regulation Number 36 of 2008 concerning Income Tax that states: “the debt that are clearly uncollectible (and fulfilling certain conditions) can be charged as deduction of gross income in calculating taxable income (as deductable expenses)”. The elimination of debt can thus be calculated as a deduction from gross income as follows:

1. has been charged as a cost in the commercial income statement;

2. Taxpayers must submit a list of receivables that cannot be billed to the Directorate General of Taxes; and

3. the case has been submitted to the District Court or government agency that handles state debts; or

4. there is a written agreement concerning the elimination of accounts receivable / debt relief between the creditor and debtor in question; or has been published in public or special publications; or an acknowledgment from the debtor that the debt has been written off for a certain amount of debt;

In the explanation of Article 6 paragraph (1) letter h of the PPh Regulation, it is explained: “the Debts that are clearly uncollectible can be charged as costs as long as the Taxpayer (in this case the Creditors) has recognized it as a cost in the commercial income report and has tried maximum or final billing effort. “ The impact of the provisions of Article 6 paragraph (1) letter h point 4 of the Income Tax Regulation above is:

1. When the Debt of the Debtor has been paid off, the provisions of Article 1439 of the Civil Code apply that, “Debt exemption is an agreement stating that the creditor voluntarily frees the debtor from all debt obligations.”

2. The debt exemption has the effect that the debtor gets a profit because the debt is paid off so that it requires the debtor to pay his tax obligations (Article 4 paragraph (1) letter k of the Income Tax Regulation; (This requirement does not apply to the elimination of debt for small debtors)

3. The debt of uncollectible debt of the Creditors are shifted into Costs in the income statement Creditor which becomes a deduction factor for taxable income for Creditors.

From the analysis of the Judgement and regulations, a conclusion can be drawn that to carry out the elimination of uncollectible debt, a Creditor must meet the requirements as stipulated in Article 6 paragraph (1) letter h of the Income Tax Regulation.

EDN/DGM/HE