Apple-to-Orange Comparable: The Tax Court Panel of Judges Annuls DJP’s Adjustment Due to an Improper Arm’s Length Analysis

The dispute between PT BCK and the Directorate General of Taxes (DJP) over the adjustment of remuneration paid to a related party once again highlights the importance of applying the Arm’s Length Principle in transactions involving affiliated entities. The disagreement began when the DJP issued a Positive Fiscal Adjustment amounting to IDR 1,041,305,162 on the salary expense paid to Ms. H.Y.C.M., the Managing Director of PT BCK, who also holds a 30.49% shareholding, thus establishing a special relationship under Indonesian tax law.

The DJP argued that the salary paid to Ms. H.Y.C.M. exceeded the arm’s length amount. It also questioned the company’s compliance for failing to complete Form 3A (Related-Party Transactions Disclosure) in its 2021 Corporate Income Tax Return. During the audit, PT BCK was also unable to explain the basis for determining the salary level or present evidence of payment, citing corporate confidentiality. According to the DJP, this indicated that PT BCK had failed to prove that the expense was genuinely incurred.

To test the arm’s length nature of the remuneration, the DJP adopted an internal comparable approach, comparing Ms. H.Y.C.M.’s salary of IDR 1,137,485,340 with that of the Finance & Accounting Director, Ms. N.W.E.A., whose salary amounted to only IDR 96,180,178. The DJP selected Ms. N.W.E.A. as the sole comparable because another executive of similar seniority, Ms. E.N.C.H. (President Director), did not receive any salary from PT BCK and therefore did not appear in the company’s payroll records.

Responding to the adjustment, PT BCK filed an appeal, arguing that the comparison used by the DJP was not comparable an “apple-to-orange” comparable. PT BCK emphasized the significant differences in functions, responsibilities, and decision-making roles between Ms. H.Y.C.M. (Managing Director) and Ms. N.W.E.A. (Finance & Accounting Director).

As Managing Director, Ms. H.Y.C.M. performs strategic functions, including leading and overseeing all operational, marketing, and financial activities; formulating corporate policies; preparing annual budgets and business plans; supervising budget implementation; setting pricing, marketing, and sales strategies; maintaining relationships with shareholders, regulators, and stakeholders; mitigating business risks; implementing the company’s vision and mission; and supervising senior executives to ensure optimal performance.

In contrast, Ms. N.W.E.A., as Finance & Accounting Director, carries out more specialized functions related to finance, accounting, bookkeeping, and tax compliance.

Given the substantial differences in scope of work, strategic responsibility, exposure to risk, and contribution to the company’s performance, PT BCK argued that Ms. N.W.E.A. could not serve as a reliable comparable for Ms. H.Y.C.M.

PT BCK further stated that the salary paid to Ms. H.Y.C.M. reflected her role as Managing Director and was not a shareholder-related benefit. Moreover, the company had withheld Article 21 Income Tax (PPh 21) on the salary payments, supporting the legitimacy of the remuneration.

After carefully reviewing the arguments, evidence, and statements presented during the hearing, The Tax Court Panel of Judges concluded that the DJP’s method for determining the arm’s length nature of the remuneration was incorrect and legally unsustainable. The DJP’s comparison of a Managing Director to a Finance & Accounting Director was deemed inappropriate.

Based on the job descriptions and the company’s Articles of Association submitted during the hearing, The Tax Court Panel of Judges determined that the two positions carried fundamentally different functions, responsibilities, levels of authority, and risks. The Managing Director bears strategic responsibility for the company’s overall continuity and growth, whereas the Finance & Accounting Director performs specialized functions confined to financial management and compliance.

Accordingly, The Tax Court Panel of Judges held that the DJP’s internal comparable was not valid, did not meet the criteria of a sound comparability analysis, and thus did not satisfy the Arm’s Length Principle.

The Tax Court Panel of Judges also found that PT BCK successfully demonstrated that the salary expense was directly connected to its business activities, supported by the Indefinite Employment Agreement and proof of Article 21 tax withholding.

PT BCK’s legal position was further reinforced by a prior Tax Court decision, Decision No. PUT-002349.15/2023/PP/M/IIIA of 2024 in which The Tax Court Panel of Judges annulled an identical (mirroring) adjustment for Fiscal Year 2018. In line with the principles of legal certainty and consistency, this precedent was considered relevant and applicable to the present case.

Based on all the facts and legal reasoning examined during the hearing, The Tax Court Panel of Judges concluded that the DJP failed to prove that the remuneration paid to Ms. H.Y.C.M. exceeded the arm’s length amount. The DJP’s comparability analysis was deemed invalid both methodologically and legally. As a result, the Positive Fiscal Adjustment of IDR 1,041,305,162 related to the salary expense was ruled to be unsupported and must be annulled.

This decision underscores that remuneration paid to related-party executives cannot be deemed non-arm’s length solely on the basis of nominal comparisons between positions. Proper evaluation must consider each role’s functions, risks, responsibilities, and contribution to the business. As long as a taxpayer can demonstrate a legitimate employment relationship, proper documentation, and proof of payment, remuneration to affiliated parties remains deductible.

The case also highlights the importance of robust transfer pricing documentation, including the completion of Form 3A, to strengthen the taxpayer’s position during audits. For companies with ownership structures involving directors or family-based shareholding, this decision serves as an important reference in ensuring that remuneration policies remain compliant and defensible before the tax authority.