The substance over form principle in Indonesia: Strengthening GAAR to combat tax avoidance

Abstrak

The substance over form principle has long served as the underlying spirit of Indonesia’s income tax framework. However, the absence of clear technical provisions governing its application has created significant challenges, including inconsistent enforcement and divergent interpretations among stakeholders. The amendment of Article 18 of the Income Tax Law through Law Number 7 of 2021 on the Harmonization of Tax Regulations explicitly incorporates this principle and positions it as an instrument to counter tax avoidance under the General Anti-Avoidance Rule (GAAR) framework. This study aims to analyze the scope and limitations of applying the substance over form principle as a GAAR mechanism in selected jurisdictions, namely Australia, the United States, and South Africa, in order to derive lessons for the development of implementing regulations in Indonesia. The research employs a qualitative approach, combining fieldwork through in-depth interviews with 8 key informants (tax authority, fiscal policy office, tax practitioners, tax judge, academics) and a comprehensive literature review. The findings demonstrate that each reference country adopts distinct approaches in operationalizing the principle as GAAR. Therefore, establishing clear economic substance parameters is essential to enhance legal certainty for taxpayers and ensure consistent enforcement by tax authorities. Such parameters include the existence of genuine cash flows, business rationality beyond tax motives, prevention of tax base erosion, avoidance of cross-border profit shifting, and consideration of transaction timing and contractual arrangements. Moreover, the complexity of GAAR implementation requires the normative role of judges in applying purposive and objective interpretation. Potential increases in tax disputes may be mitigated through the establishment of a GAAR oversight committee.