PT MTAS is a company engaged in the management and development of oil palm plantations, located in Lubuk Linggau, Sumatera. For the 2018 Fiscal Year, the Directorate General of Taxes (DGT) made a positive fiscal adjustment of IDR 3,000,000,000.
The fiscal adjustment by the DGT focused on management service fees paid by PT MTAS to its affiliate, PT TBU. According to the DGT, there was no convincing evidence that the services were actually performed, nor did the payment reflect the application of the Arm's Length Principle.
The DGT emphasized that in transactions with related parties, expense recognition is only permissible if the services have truly been rendered (intra-group service has been rendered) and provide real economic benefit to the service recipient, with compensation proportionate to the value of the services received.
During its audit, the DGT assessed that the documents submitted by PT MTAS were insufficient to prove the actual provision of management services by PT TBU. The DGT noted the absence of a request for service or other standard documentation typical of transactions between independent parties. Moreover, there were no documents detailing the results of the activities claimed to have been performed.
The correspondence evidence submitted by PT MTAS consisted only of emails from PT TBU staff, such as an email from Mr. RDM dated September 7, 2018, which merely informed of a planned site visit for internal audit purposes. In addition, there was a Task Assignment Letter for Mr. IBK (staff of PT TBU) as Head of Administration at PT MTAS, which was stated as part of management assistance in administration, finance, and taxation.
Furthermore, there was a flight ticket expense paid by PT MTAS in the name of Mr. SNO. Based on Form 1721-I in the PPh Article 21 Monthly Tax Return, Mr. SNO is a permanent employee of PT MTAS, meaning his salary and travel expenses were already fully borne by PT MTAS. Nevertheless, the DGT found that PT MTAS also paid management fees to PT TBU for services allegedly performed by the same person. This created a clear duplication of expenses, which is deemed unreasonable, leading the DGT to conclude that the payments did not reflect normal business practices between independent parties.
The DGT assessed that these activities were administrative in nature and not substantive enough to demonstrate the actual provision of management services. The activities were essentially aimed at the interests of the shareholders or other entities within the taxpayer group (shareholder activity), such as group internal control and intercompany coordination, rather than improving PT MTAS’s operations, efficiency, or profits.
On the other hand, PT MTAS rejected the DGT’s adjustment and asserted that payments to PT TBU were for management services that were genuinely provided, including consultation and assistance in various areas, such as accounting and taxation, legal, finance, business development, and quality assurance, supporting the company’s daily operations. PT TBU also carried out site visits, internal controls, and coordination via phone and other communication media. According to PT MTAS, these services provided real benefits to the company, such as guidance for field operations, financial management, and maintaining business relationships with third parties, including projects from PT PPA.
PT MTAS further emphasized that all transactions were conducted under legally valid cooperation agreements and supported by complete documentation, including invoices, proof of transfer, task assignments, and email correspondence demonstrating the actual provision of services. Therefore, PT MTAS argued that the management service fees complied with the Arm's Length Principle.
After reviewing the evidence and facts presented at the hearing, the Tax Court Panel of Judges concluded that the core dispute centered on the existence of management services between PT MTAS and PT TBU whether the services were genuinely performed for PT MTAS’s business purposes or merely served shareholder interests.
The panel noted that while the management agreement covered various scopes of services, including work planning, HR support, finance, and legal compliance, the submitted evidence was insufficient to prove that the activities were genuinely carried out by PT TBU.
Moreover, the travel expense evidence in the name of Mr. SNO did not demonstrate activities related to the execution of management services, while the individual is a permanent employee of PT MTAS. Additionally, the Task Assignment Letter for Mr. IBK was general in nature and had no direct link to the management agreement, being more related to employee career development.
Regarding management fee payments for financial assistance services, the panel emphasized that PT TBU is an indirect shareholder with 88.20% ownership. Therefore, appointing Mr. ADR BJM, the President Director of PT TBU, as an authorized signatory for PT MTAS’s accounts in 2018 does not constitute the provision of management services that provide real economic benefit to PT MTAS but rather represents shareholder oversight functions.
Based on all available evidence, the Tax Court Panel of Judges concluded that PT MTAS failed to prove the existence of genuine management services. Accordingly, the panel upheld the DGT’s adjustment of positive fiscal corrections related to management fees, amounting to IDR 3,000,000,000.
This ruling underscores the importance of the economic substance principle in charging costs to affiliates. Even when agreements and payments are formally valid, the panel recognizes expenses only if there is concrete evidence of service execution and direct benefit to business operations. For taxpayers, this case serves as a reminder that management service documentation must include activity descriptions, work output reports, cost calculation basis, and proof of operational benefits for the expenses to be recognized.
A comprehensive analysis and the Tax Court Decision on This Dispute Are Available Here
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