DGT Loses in Transfer Pricing Dispute - IDR 5.53 Billion Adjustment Canceled
The Tax Court Panel of Judges Finds CPKO Pricing Arm’s Length

PT IUPD is a palm kernel processing company producing Crude Palm Kernel Oil (CPKO), a key raw material in the edible oil industry. The company sells its products to both independent domestic customers and affiliated entities. Such related-party transactions are often subject to close scrutiny by the tax authority, given the potential for transfer prices that may not reflect fair market values. This scrutiny ultimately led to a dispute between PT IUPD and the Directorate General of Taxes (DGT).

During the 2019 fiscal year audit, the DGT raised two transfer pricing adjustments. The first was a positive fiscal adjustment of IDR 260,531,250 on sales revenue, asserting that the CPKO sales price to an affiliate was below fair market value. The second was a positive adjustment of IDR 5,270,216,842 related to interest income, as the DGT believed the applied loan interest rate did not reflect the arm’s length principle.

In the first adjustment, the DGT argued that PT IUPD’s CPKO sales price to its affiliate was too low compared to international market prices. According to the DGT, this discrepancy arose because PT IUPD reduced the international benchmark price by deducting certain components such as freight, export levy, and export tax. The DGT contended that these adjustments were inappropriate since the transaction in question was domestic, not export-based, and therefore export-related costs should not affect pricing. From the DGT’s perspective, these deductions reduced the taxable income that should have been reported in Indonesia.

PT IUPD rejected this view, asserting that its CPKO sales were conducted on an arm’s length basis using the Comparable Uncontrolled Price (CUP) method, referencing reliable international market prices from Reuters — a widely accepted benchmark in the palm oil industry.

The Reuters price is quoted on a CIF Rotterdam basis, which includes freight and insurance to Europe. In contrast, PT IUPD’s transactions were carried out on an FOB Padang basis, where goods are delivered at the Indonesian port without overseas shipping costs. To align these differing conditions, PT IUPD made adjustments by excluding freight, export levy, and export tax components that were not applicable to domestic sales.

After these adjustments, PT IUPD applied a uniform net price of USD 575 per metric ton for both export and domestic transactions. The company maintained that this pricing reflected fair market value and provided comprehensive documentation and working papers to support the position.

PT IUPD also emphasized that all pricing policies were jointly determined by its two shareholders, PT STNI (part of the WLM Group) and PT ICR each holding 50% ownership. With this balanced structure, pricing decisions were made jointly and commercially, consistent with the Arm’s Length Principle (ALP) under PER-32/PJ/2011 and PER-22/PJ/2013.

The Tax Court Panel of Judges concluded that the central issue was whether PT IUPD’s CPKO sales price reflected an arm’s length value. After examining the evidence and arguments, The Tax Court Panel of Judges found that PT IUPD’s pricing approach complied with the ALP as stipulated under Article 18(3) of the Income Tax Law. The use of the CUP method, supported by Reuters’ international price data, was deemed appropriate and commonly used within the industry.

The Tax Court Panel of Judges agreed that PT IUPD’s adjustments to deduct freight, export levy, and export tax were reasonable to achieve comparability between CIF Rotterdam and FOB Padang terms. The DGT’s rejection of these adjustments was considered unfounded, especially since the DGT failed to provide a more reliable comparable for similar transactions. Consequently, The Tax Court Panel of Judges ruled that PT IUPD’s methodology and pricing were appropriate and that the IDR 260,531,250 adjustment could not be sustained.

In the second adjustment, the DGT challenged the interest rate applied by PT IUPD on intercompany loans, arguing that the rate, based on the weighted average of loans provided by independent banks to other entities within the WLM Group — was not a valid internal comparable. The DGT further claimed that PT IUPD failed to submit sufficient supporting documentation for the interest rate data and methodology. Instead, the DGT used external comparables in the form of Bank Indonesia’s Statistik Ekonomi dan Keuangan Indonesia (SEKI) data on working capital loan rates in rupiah to determine what it deemed a fair market interest rate.

PT IUPD disagreed, explaining that its applied interest rate was derived from the average lending rates of independent banks, such as Bank Mandiri, BCA, and Standard Chartered, that extended credit facilities to other entities within the WLM Group. The company argued that this approach satisfied the ALP since it relied on market-based data from independent financial institutions and was applied consistently across the group. Supporting documents, including bank confirmations and correspondence, were also provided to substantiate the analysis.

After evaluating both sides’ evidence, the Tax Court Panel of Judges emphasized that this was a factual dispute concerning whether the intercompany loan interest rate was at arm’s length. The Tax Court Panel of Judges observed that internal comparables generally provide more reliable benchmarks than external ones, as they better reflect the actual conditions and risks of the controlled transaction. In this case, SEKI data was deemed overly aggregated and not comparable because it did not account for key credit characteristics such as collateral, tenor, or borrower risk profile.

Conversely, PT IUPD’s internal comparable, the average interest rates of independent banks lending to entities within the same group, was considered more relevant and reflective of real-world independent transactions. Based on these findings, the Tax Court Panel of Judges held that PT IUPD’s loan interest rate met the Arm’s Length Principle, rendering the DGT’s adjustment of IDR 5,270,216,842 unsustainable.

From a broader perspective, The Tax Court Panel of Judges underscored that arm’s length analyses must always rely on concrete evidence and genuinely comparable economic conditions. The PT IUPD case serves as a reminder for taxpayers to maintain thorough documentation and robust technical justifications from the outset, both for pricing and intercompany financing arrangements.

For the DGT, the decision highlights the importance of using comparables that are economically aligned with the tested transaction. Evidence-based analysis rather than assumption-driven adjustments will strengthen both the accuracy of transfer pricing reviews and legal certainty for taxpayers and the tax authority alike.