A Major Win at Tax Court! PT KKM Successfully Overturns Deemed Dividend Correction on Thai Affiliate Services

Secondary Adjustment and Reclassification of Service Fees as Dividends: Analysis of Decision PUT-007420.13/2023/PP/M.VIB

The Directorate General of Taxation (DGT) frequently scrutinizes intra-group service transactions through secondary adjustment mechanisms, reclassifying service fees as deemed dividends. The dispute in Decision Number PUT-007420.13/2023/PP/M.VIB Year 2024 highlights the legality of Article 26 Income Tax corrections on management service payments to a Thai affiliate, CCCL, which the Respondent deemed a profit distribution lacking economic substance. The conflict centered on the Petitioner's failure to provide detailed activity logs during the audit, leading the Respondent to apply Article 18 paragraph 3 of the Income Tax Law to levy a 15% dividend tax under the Indonesia-Thailand Tax Treaty.

Argumentation and Proof of Service Existence by PT KKM

The Petitioner, PT KKM, argumentatively asserted that the consultancy services were genuine and provided significant operational benefits to the company's efficiency. The Petitioner rejected the dividend classification based on strong legal grounds: CCCL is not a direct shareholder of PT KKM but a sister company, meaning it cannot legally receive dividends. Furthermore, the Petitioner proved that the company held a negative retained earnings balance, which, under the Limited Liability Company Law, prohibits dividend distributions. The Board of Judges provided a resolution by considering physical evidence, such as sampled communication invoices and expert travel expenses, confirming the services' existence.

Judicial Ruling and Tax Treaty Application

The Board of Judges ruled that the legal basis of PMK Number 22/PMK.03/2020 used by the Respondent was irrelevant, as that regulation specifically pertains to Advance Pricing Agreement (APA) procedures. This ruling confirms that as long as the service's existence is proven, the taxing rights for those fees reside in the service provider's country of domicile (Thailand) under Article 7 of the Indonesia-Thailand Tax Treaty concerning Business Profits. In conclusion, the court overturned the Respondent's entire correction, providing legal certainty that not all affiliate transactions can be automatically deemed dividends without proof of share ownership and clear transactional substance.