Mass Annulment! PPh Article 26 Correction of IDR 15 Billion Nullified by Tax Court, Taxpayer's Follow-The-Primary Strategy Triumphs

The tax judiciary institution has once again affirmed the principle of causality in transfer pricing (TP) disputes, where the cancellation of a Corporate Income Tax (PPh Badan) correction absolutely invalidates the basis for the PPh Article 26 assessment. In the decision PUT-001071.35/2024/PP/M.XXB Tahun 2025, the Panel of Judges granted the Taxpayer's (PT STLI) appeal in its entirety. The Taxpayer argued that the PPh Article 26 correction performed by the Tax Authority (Terbanding) was a non-standalone secondary adjustment. The case centered on a PPh Final Article 23/26 Tax Base (DPP) correction of IDR 15,028,662,415.00, which the DJP believed to be a constructive dividend arising from the difference in non-arm's length related-party transactions abroad.

The main conflict stemmed from the Tax Authority's audit findings of an unfair pricing of commodity products sold by the Taxpayer to its affiliated parties in Singapore and Thailand. The resulting profit correction derived from applying the Arm’s Length Principle (ALP) was then converted into a constructive dividend, consequently leading to the imposition of PPh Article 26 (Final Withholding Tax) on the non-resident party, in accordance with the Elucidation of Article 4 paragraph (1) letter g of the PPh Law. The Tax Authority defended its position by citing technical regulations such as Article 22 paragraph (8) of the Minister of Finance Regulation Number 22/PMK.03/2020 and PER-22/PJ/2013, which indeed provide the basis for a secondary adjustment if the counterparty is an indirect shareholder.

Despite the Tax Authority's efforts to legitimize this secondary adjustment, the Taxpayer argued that the constructive dividend elements were not met, both formally and substantially, due to the lack of an actual fund flow identified as a dividend distribution and the counterparty not being a direct shareholder. More fundamentally, the Taxpayer contended that the Tax Authority’s legal basis—converting the Corporate Income Tax correction into PPh Article 26 through a Ministerial Regulation—was legally flawed. However, the Tax Court adopted a simpler, yurisprudentially stronger approach.

The Panel of Judges did not need to engage in the fierce debate regarding the constructive dividend. The Panel's focus was directed to the decision related to the Corporate Income Tax dispute, namely Decision Number PUT-001067.15/2024/PP/M.XXB Tahun 2025, where the Panel had fully annulled the Tax Authority's primary Corporate Income Tax correction. With the annulment of the primary Corporate Income Tax correction, the PPh Article 26 secondary correction, which was causally dependent on the primary correction, lost all its legal footing. The Panel’s decision utilized Article 80 paragraph (1) letter b of the Tax Court Law to grant the Taxpayer's appeal in its entirety and revert the PPh Final Article 23/26 Tax Base to its original value. This provides a crucial legal certainty for taxpayers facing integrated TP cases, where the success of the evidence at the Corporate Income Tax level becomes the main key determinant for success at the Withholding Tax level.

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