Bakrie’s Tax Troubles: the Kaltim Prima Coal Case

Director General of Tax v. PT. Kaltim Prima Coal, Supreme Court Case Review Decision No. 141 B/PK/PJK/2010 (24 May 2010).

The disputes between the Bakrie Group and the Ministry of Finance over a range of tax issues have been well covered in the press recently. The political aspects of such disputes have also been alluded to, with some of the political attacks on former Minister of Finance Sri Mulyani arguably stemming from her ministry’s pursuit of Bakrie’s business interests over unpaid taxes. Such disputes are further complicated by Bakrie’s prominent position as the Chairman of the ruling Golkar party, changes at the Ministry of Finance that saw the departure of Sri Mulyani to take up a position as Managing Director at the World Bank in Washington, and the subsequent assumption of her former position as Minister of Finance by Agus Martowardojo.

Bakrie’s tax issues appear to have come to a fore with the PT Kaltim Prima Coal (KPC) case, which stems from a rather blatant transfer-pricing scheme that saw the shifting of profits from Indonesia to the Cayman Islands. Such schemes involve the pricing and sale of a good or service - at below market price - by an Indonesian company to an affiliated tax-haven company, with the subsequent resale - typically at market price - to the ultimate buyer. This type of sale ensures that profits are obtained within a low tax jurisdiction, in order to evade the full taxation of profits in Indonesia.

Indonesian legislation attempts to address such practices via Article 18 (3) of Law No. 36 of 2008 on Income Tax and Article 2 (1) of Law No. 8 of 1983, as amended by Law No. 18 of 2000, on Value Added Tax.These provisions allow the Director General of Tax to reallocate income and to adjust prices, respectively, when transactions between companies with a special relationship are conducted below the market price.

Judicial History

The KPC saga began with an attempt by KPC to claim back a portion of the taxes that it paid in 2007. Upon KPC’s submission of its annual tax return (Surat Pemberitahuan) in March 2008 with a request to receive a tax refund for a portion of its payment of IDR 30 million, the Director General of Tax conducted an assessment (Statement Letter on Assessment No. PRIN-069/WPJ.19/KP.01/2008, dated 9 May 2008), as is routine, to evaluate the basis of KPC’s claims. Based on the assessment the Director General of Tax concluded that, rather than an excess payment, there was a shortfall in 2007. Following this the Director General of Tax requested that KPC revise its annual tax return for 2007, KPC, however, failed to fulfil this request. This led the Director General of Tax to conduct a second assessment (Statement Letter on Assessment of Initiation Evidence No. PRIN-001/WPJ.19/BD.03/2009, dated 4 March 2009), on the lack of payment by KPC.

The Director General’s second assessment concluded that there was indication of criminal activity in the form of the sale price of coal being manipulated by KPC in 2007. The price manipulation took the form of a scheme where coal, instead of being sold directly to the intended buyers, was sold by KPC to PT. Indocoal Resource Limited, both being subsidiaries of PT. Bumi Resources Tbk (and ultimately owned by the Bakrie Group). The crux of the scheme being that the coal was sold to PT. Indocoal Resource Limited, a Cayman Islands based company, at half the price that was then charged by Indocoal to the ultimate buyers. This allowed KPC to evade paying a substantial amount of tax, by shifting its profits to the Cayman Islands tax haven.

Further strengthening the indication of criminal activity was the fact that Indocoal’s invoices were produced by KPC, and that both companys’ coal revenues were held in a single bank account. It was predicted that the estimated tax payment shortfall would reach IDR 1.5 trillion.

Following the commencement of the second assessment, KPC sought to challenge the validity of the assessment based on a claim that two assessments could not be conducted simultaneously. KPC brought the challenge by means of a lawsuit at the Tax Court, in accordance with Article 23 (2) of Law No. 6 of 1983, as amended by Law No. 16 of 2000, on General Provisions and Tax Procedures.

In its 8 December 2009 Decision (Tax Court Decision No. Put. 20966/ PP/M.IX/99/2009), the Tax Court stated that pursuant to Minister of Finance Regulation No. 199/PMK.03/2007 and Director General of Tax Circular Letter No. SE-01/PJ.7/2003, as amended by Circular Letter No. SE-04/PJ.07/2005, if an Assessment of Initiation Evidence (the second assessment) is to be carried out, the first assessment has to be stopped by means of a report being issued. Accordingly, the Tax Court felt that the existence of two Statement Letters on Assessment regarding the same taxation period and issue, without an adequate explanation from the Director General of Tax, created a negative public image. Based on this, the Tax Court ordered the Director General of Tax to annul the Statement Letter on Assessment of Initiation Evidence, due to its procedural non-compliance.

The Supreme Court Decision

The Director General of Tax appealed to the Supreme Court, bringing a case review (PK) petition to challenge the decision of the Tax Court. In summary, the Director General of Tax claimed that:

1. The Tax Court did not have jurisdiction to review the second assessment, since it was not a final decision, and as such was not subject to review by the Tax Court;
2. The Tax Court made a procedural error in commencing the adjudication of the case prior to KPC submitting its statement of claim;
3. That the Statement Letter on Assessment of Initiation Evidence is not a type of document that can be subject to a lawsuit at the Tax Court;
4. That KPC have made an error in citing the number of the Statement Letter on Assessment being opposed (using ‘Print-’ instead of ‘PRIN-’); and
5. That prior to the commencement of the second assessment (6 March 2009), based on the issuance of the Statement Letter on Assessment of Initiation Evidence (dated 4 March 2009), the first assessment was in fact terminated (5 March 2009). And that, therefore, KPC was not subject to two assessments at the same time.

While the Supreme Court rejected all of the claims, the following reasons for the rejection of claims 3 and 5 are of particular interest:

3. Concerning the type of Statement Letter on Assessment that can be challenged through a lawsuit at the Tax Court: this was rejected based on Article 31 (1) of Law No. 14 of 2002 on the Tax Court, which states that a lawsuit can be brought to challenge “... other Statement Letter[s] as stipulated under Article 23 (2) of Law No. 6 of 1983, as amended by Law No. 28 of 2007, on General Provisions and Tax Procedures.” With Article 23 (2) (c) including “Statement Letters in relation to taxation decrees, other than what is stipulated under Articles 25 (1) and 25,” and the Statement Letter on Assessment of Initiation Evidence being one of such Statement Letters.

5. Regarding the procedure of the issuance of the Statement Letter on Assessment of Initiation Evidence: this was rejected based on the consideration of: i) Director General of Tax Circular Letter No. SE-01/PJ.7/2003, dated 1 April 2003, on Tax Assessment Policy, as amended by Director General of Tax Circular Letter No. SE-04/PJ.07/2005, dated 29 April 2005, on Initiation Evidence Assessment Policy; and ii) Minister of Finance Regulation No. 199/PMK.03/2007 dated 28 December 2007, on Tax Assessment Procedure.

The Director General of Tax Circular Letters, in Section VII (2), state that if an initial assessment is expanded into a secondary Initiation Evidence assessment then the initial assessment has to be stopped via the issuance of a Report on Tax Assessment (Laporan Pemeriksaan Pajak Sumir or LPPS). And the Minister of Finance Regulation, in Article 27 (3), requires a Report on the Results of an Assessment (Laporan Hasil Pemeriksaan Sumir) to be issued to stop the initial assessment.

The rejection was based on the Statement Letter on Assessment of Initiation Evidence being issued (4 March 2009) prior to the initial assessment being terminated (5 March 2009) by means of LPPS No. LAP-036/WPJ.19/KP.01/2009. As such, since its issuance was not conducted in accordance with the prevailing procedures, the Statement Letter on Assessment of Initiation Evidence was annulled by the Supreme Court.

Consequentially, the Supreme Court rejected the case review petition. However, the Supreme Court did state that the Director General of Tax can continue the assessment by re-issuing the Statement Letter on Assessment of Initiation Evidence that is in accordance with the prevailing procedures.

Finally, the Supreme Court ordered the Director General of Tax to pay KPC’s legal costs in the nominal amount of IDR 2.5 million.

Given the extensive indications of criminal tax evasion by PT. Kaltim Prima Coal, the expectation of many prior to the court decisions was that the Director General of Tax would prevail in the KPC case. Nonetheless, both the Tax Court and the Supreme Court sided with PT. Kaltim Prima Coal. The Director General of Tax indeed has a poor record of litigating tax cases. This is a pertinent problem that calls for urgent action, especially considering the substantial amount of public funds that are lost to private interests.

Worse still, if the recent claims of Gayus Tambunan, a former junior tax official who amassed over USD 10 million through bribes, are to be taken at face value, it appears that the effectiveness of the Indonesian tax authorities is being severely undermined from within.

There is certainly merit, at least in the context of separation of powers, in the objective and non-preferential treatment of the Director General of Tax by the courts, who, as a representative of the State, nonetheless has a far from perfect litigation record. On the other hand the courts’ decisions seem to provide tacit acceptance of the criminal actions of individuals like former tax official Gayus Tambunan.

Essentially, the KPC case review only deals with the procedural error of issuing the Statement Letter on Assessment of Initiation Evidence. Such errors could be corrected, in accordance with the procedures, as set out in the relevant regulations, and the assessment could be resumed. The ultimate outcome of the KPC case, and others like it, will ultimately turn on the effectiveness of the Director General of Tax in pursuing tax evasion schemes.

Filipp Levin