Internal Memo and the Distortion of Tax Legal Framework

The Tax Court hearing room serves as a venue and forum for testing legal certainty. In this forum, tax disputes should be resolved based on applicable laws and regulations. However, in practice, the dynamics of hearings often expose fundamental issues in the governance of tax law enforcement. 

In one case, a taxpayer based their defense on a circular of the Director General of Taxes (DGT). The taxpayer’s argument was rejected by the tax authority, citing that a circular is not a binding legal basis. Normatively, this rejection is reasonable because circulars are not part of the legislative hierarchy.    

An issue arises when, after rejecting the basis, the tax authority instead used an internal memo (nota dinas) as the basis for a tax correction. However, an internal memo is an internal communication instrument that is not designed to be legally binding for the public and has never been published as a legal norm. This situation highlights a serious problem in tax administrative practice. 

Internal Memo in Legal Perspective 

An internal memo is essentially an internal official memo used to communicate instructions, considerations, or technical requests among officials within the Directorate General of Taxes or the Ministry of Finance. The function of an internal memo is administrative and managerial (internal organization), not normative.     
In Indonesia’s legal system, an internal memo is not recognized as laws and regulations. Law Number 12 of 2011 does not include the memo in the hierarchy of legal norms. An internal memo also cannot be categorized as a regeling (general regulation) or beschikking (individual decision) that has external legal implications.     

In this case, an internal memo does not create rights or obligations for the taxpayer. The binding force of an internal memo is limited to the internal organization and only applies hierarchically. A functional shift due to the use of an internal memo as the basis for a tax correction cannot be legally justified. 

Rapid Responses that Sacrifice Certainty 

The use of an internal memo as the basis for a tax correction is generally driven by pragmatic needs. The tax authority is required to respond to various rapidly-developing tax issues, ranging from complex transactions to technical interpretations of certain taxable objects. Meanwhile, the process of issuing formal regulations requires lengthy time and procedures. 
 
In such conditions, an internal memo is often used as a tool to standardize the understanding of tax auditors. From an administrative perspective, this approach is efficient. From a legal perspective, however, the approach creates serious problems.     
 
A rapid administrative process cannot replace legal legitimacy. Every tax obligation imposed on a taxpayer must have valid, clear, and published legal bases. Internal documents cannot be used to fill regulatory gaps that should be addressed through formal regulations. 

Position of Internal Memo in the Tax Court 

In Tax Court proceedings, the legal standing of an internal memo is very weak. The Tax Court adheres to the principle of legality and resolves disputes based on applicable laws and regulations. An internal memo does not meet the criteria.     
 
From the perspective of procedural law, an internal memo can only be positioned as administrative evidence explaining the internal decision-making process. The memo is not a legal source and cannot justify the substance of a tax correction.     
 
Using an internal memo as the basis for correction demonstrates the weak legal foundation of such tax assessments. The taxpayer has no legal obligation to comply with interpretations derived from internal documents that are unpublished and inaccessible to the public. 

Implications for Business Climate 

This practice has broader implications for business certainty. When tax corrections rely on internal documents, taxpayers face difficulties in tax planning and risk management. Legal uncertainty increases because the norms applied are unclear and non-transparent.     
 
Moreover, reliance on weak legal bases risks increasing the number of tax disputes. Corrections based on an internal memo carry a high risk of being annulled in the Tax Court. Ultimately, this adds to administrative burdens and litigation costs for both the taxpayer and the state.     
 
In the long run, the credibility of tax audits may also be undermined. When tax assessments are frequently overturned in court, business confidence in the tax system declines. This impacts compliance and state revenue. 

Reaffirming the Principle of Legality 

To maintain legal certainty and a healthy business climate, the tax authority must consistently adhere to the principle of legality. Every affirmation or interpretation affecting the rights and obligations of taxpayers must be made official through valid regulations and officially published. 

Strengthening regulatory governance is also urgently needed. Codification of regulations and provisions of a single official reference will reduce reliance on non-binding internal guidelines. At the same time, accelerating the issuance of implementing regulations should be prioritized to avoid regulatory gaps.     
 
Ultimately, an internal memo must be restored to its original function as an internal administrative communication tool. Using the memo to serve as a legal basis for taxation is not only legally incorrect but also risks undermining legal certainty and the business climate.     
 
Sustained tax compliance can only be built on laws that are valid, transparent, and publicly verifiable. Tax law enforcement must not be distorted by internal rules that are not binding on all parties. (ASP/NAT) 

Disclaimer! This article is a personal opinion and does not reflect the policies of the institution where the author works.