Out-of-Court Tax Dispute Resolution

The Directorate General of Taxes (DGT) has reported a steady increase in the number of tax disputes over the past few years. In 2020, disputes filed by both taxpayers and the DGT reached 187,435 cases. This figure rose to 212,434 cases in 2021.

In 2022, the number of disputes declined slightly to 202,156 cases. However, the trend surged again in 2023, reaching 325,185 cases, and continued to increase in 2024 to 390,822 cases.

This rising number of disputes signifies the growing pressure on the tax dispute resolution system.

Number of Tax Disputes (2020-2024)

Common Causes of Tax Dispute

The increasing volume of disputes entering the tax system can reduce the effectiveness of the resolution process. Over time, this situation may also affect the tax revenue ratio.

Several factors contribute to the high number of tax disputes. These include tax officials’ incompetence, pressure to meet state revenue targets, and taxpayers’ lack of trust in the DGT’s dispute-resolution process, particularly during the objection stage.

These conditions suggest the need for alternative approaches to resolve tax disputes more efficiently.

Tax Alternative Dispute Resolution

One approach to reducing tax disputes is alternative dispute resolution (ADR). ADR refers to mechanisms for resolving disputes outside the court system, without resorting to litigation.

Under this approach, when a taxpayer disagrees with a tax assessment letter, the dispute does not necessarily have to proceed through the formal objection process. Instead, it may be resolved through mediation or negotiation.

ADR aims to improve legal certainty, accelerate dispute resolution, and reduce the burden on courts. At the international level, organizations such as the Organisation for Economic Co-operation and Development (OECD) also promote more efficient and cooperative approaches to resolving tax disputes.

Tax Dispute Resolution at the International Level

International data shows that tax disputes are becoming increasingly common in the era of economic globalization. Statistics on the mutual agreement procedure (MAP) published by the OECD indicate that in 2024, there were approximately 2,731 new international tax dispute cases, bringing the global case inventory to 6,147.

On average, MAP-disputed cases take about 27.4 months to resolve. Approximately 75% to 76% of cases are resolved either fully or partially in favor of the taxpayer. These figures demonstrate that non-litigation mechanisms can achieve relatively high success rates in resolving international tax disputes.

Tax Dispute Mediation Across Countries

In addition to MAP, several countries have introduced mediation or administrative mechanisms for resolving tax disputes. In Australia, for example, the tax authority uses an internal facilitation process involving an independent mediator within the organization. This approach has proven highly effective, achieving success rates of nearly 90% for internal facilitation and around 70% for external mediation.

Such collaborative approaches can reduce conflict and accelerate dispute resolution. Several European countries have also begun adopting mediation in tax disputes. In the Netherlands and Luxembourg, mediation can take place before a case reaches the courts. In Luxembourg, for instance, one report recorded 120 mediation requests, of which approximately 30 resulted in full agreements and 15 in partial agreements.

Advance Pricing Agreements as Dispute Prevention

Other than mediation, advance pricing agreements (APAs) are widely used as a preventive mechanism, particularly in transfer pricing cases. OECD statistics show that in 2024, there were 1,169 new APA requests, while 826 APAs were successfully concluded.

Through this mechanism, taxpayers and tax authorities can agree in advance on the transfer pricing method to apply to certain transactions, thereby minimizing the risk of future disputes.

Tax Dispute Resolution System in Indonesia

In Indonesia, the tax dispute resolution system remains largely litigation-based and centered on the tax court. Taxpayers who disagree with a tax assessment letter must generally go through several stages of dispute resolution:

• filing an objection with the tax authority;
• submitting an appeal to the tax court; and
• filing a judicial review with the Supreme Court.

This structure reflects that Indonesia’s tax dispute resolution framework remains heavily oriented toward court proceedings.

Available data also emphasizes the significant workload faced by tax courts. In 2022 alone, tax courts resolved over 15,000 tax disputes, and the number has continued to increase in recent years.

Challenges in Regulating Tax ADR

Discussions on introducing ADR mechanisms in tax disputes have begun to emerge in Indonesia. However, the current legal framework remains an obstacle. Law of the Republic of Indonesia Number 30 of 1999 concerning Arbitration and Dispute Resolution primarily governs civil disputes and does not explicitly address tax disputes.

As a result, arbitration or mediation in tax disputes currently lacks a clear legal foundation.

Opportunities for ADR Development in Indonesia

Despite these challenges, several non-litigation mechanisms already exist within Indonesia’s tax administration. These include the objection process within the DGT, which serves as an administrative resolution stage before litigation, and the MAP mechanism for international tax disputes under tax treaties.

In the future, the development of ADR mechanisms for tax disputes in Indonesia can provide several strategic benefits, including:

• accelerating dispute resolution and enhancing legal certainty;
• reducing the caseload in tax courts; and
• improving cooperative relationships between tax authorities and taxpayers.

Nevertheless, the implementation of ADR must carefully consider disputes that involve broader public interests and state revenue.

Out-of-court settlement mechanisms can play a pivotal role in improving tax certainty and the overall quality of tax administration. By learning from international practices while considering domestic conditions, Indonesia can develop a more modern and efficient tax dispute resolution system.

Also Read:

https://ideatax.id/articles/article-26-withholding-tax-on-foreign-taxpayers

https://ideatax.id/articles/inheritance-tax-in-indonesia

https://ideatax.id/articles/arms-length-principle-a-cornerstone-of-tp-doc