Interest Correction Annulled, Does FX Loss Follow? Unpacking the Foreign Exchange Dispute Arising from Supplier Financing

Foreign Exchange Loss Disputes in Taxation

Foreign Exchange Loss disputes are often a by-product of main disputes, such as Interest Expense or Transfer Pricing. In the case of PT GCPI, the DGT disallowed the Foreign Exchange Loss of Rp33.6 billion on the grounds that it arose from debt deemed related to final income (following the logic of the Interest Expense correction). Thus, the DGT considered the Foreign Exchange Loss non-deductible.

Taxpayer Counterarguments and Legal Basis

The Taxpayer countered this, asserting that the Foreign Exchange Loss arose from foreign currency trade payables directly related to the purchase of raw materials and merchandise (operational activities). According to Article 6 Paragraph (1) letter e of the Income Tax Law, foreign exchange losses related to the Taxpayer's business activities are deductible expenses.

Panel of Judges Ruling and Implications

The Panel of Judges, having annulled the Interest Expense correction in the previous item, consistently annulled the Foreign Exchange Loss correction. The ruling explicitly affirmed that the Foreign Exchange Loss arising from foreign currency trade payables has a causal relationship with efforts to obtain, collect, and maintain income (3M). The Panel reiterated that the recognition of Foreign Exchange Loss cannot be prohibited solely based on assumptions or correlations that are not supported by clear evidence of fund flows. The implication of this decision reinforces the principle that Foreign Exchange Loss on operational foreign currency transactions is a fiscally recognizable expense.