Integrated Supply Chain Not Enough: Beverage Producer's IDR 250 Billion Promotion Expense Rejected by Tax Court Based on the Matching Cost Against Revenue Principle.

The Tax Court has rejected PT CCI appeal against a fiscal correction on promotion expenses amounting to IDR 250.7 billion. This decision affirms that the charging of expenses must meet the direct connection criteria under Article 6(1) of the Income Tax Law and the matching cost against revenue principle, even within an integrated value chain business model.

In a dispute concerning the 2020 Tax Year, a leading multinational corporation operating in Indonesia, PT CCI, faced a significant correction from the Directorate General of Taxes (DGT). The correction focused on promotion expenses that PT CCI, which operates as a producer of raw materials or beverage base in the business structure, had claimed as deductions. The DGT deemed these promotion expenses non-deductible from PT CCI's gross income.

The core of this conflict lies in the fundamental difference in interpreting the eligibility of an expense. The DGT argued that the promotion expenses were used to market finished consumer-ready beverage products, which were sold by a different affiliated entity. According to the DGT, there was no direct relationship between the promotion of the final product and PT CCI's activities to obtain, collect, and maintain its income from the sale of raw materials. This argument was further strengthened by the fact that a portion of the promotion expenses was allocated to brands for which PT CCI did not even produce the raw materials in that year.

On the other hand, PT CCI built its case on the foundation of business reality and its integrated value chain model. The company contended that its sales of raw materials were entirely dependent on the successful sales of the finished products at the consumer level. Therefore, the promotion of finished products was an essential and inseparable strategy from the effort to secure and increase its own revenue. This business logic, according to PT CCI, was sufficient to meet the "direct relationship" criterion required by the law.

The Panel of Judges, in its resolution, chose to adopt a formal juridical approach and sided with the DGT's arguments. The main consideration for the Judges was the violation of a fundamental accounting principle: matching cost against revenue. The Panel opined that promotion expenses for a finished product should be borne by the entity that earns revenue from the sale of that finished product. Charging these costs to the raw material producer was deemed an improper practice that obscures the true profitability of each respective entity.

This ruling has significant implications for companies, especially multinational corporations with complex supply chain structures. The decision sends a clear signal that arguments of "substance over form" or "business reality" have their limits and cannot override the obligation to comply with strict legal and accounting principles. Companies with similar models are encouraged to restructure their intra-group transactions, for instance, through service agreements or cost contribution arrangements, to ensure that costs are allocated to the appropriate entity in line with its functions, assets, and risks.

In conclusion, the PT CCI case sets an important precedent that affirms the supremacy of the matching cost against revenue principle in disputes over expense deductibility in Indonesia. This decision underscores that being part of an integrated business ecosystem does not automatically justify the shifting of costs between entities. Every expense claimed must be directly attributable to the revenue generated by the same legal entity.

A Comprehensive Analysis and the Tax Court Decision on This Dispute Are Available Here.