A Total Victory! How PT FI Overturned Constructive Dividend Recharacterization in a Transfer Pricing Dispute

Secondary Adjustments and Article 26 Income Tax

Tax authorities frequently apply secondary adjustments automatically upon finding primary adjustments in affiliated transactions, assuming a disguised flow of profit or constructive dividends to offshore shareholders. In the case of PT FI, the Respondent adjusted Article 26 Income Tax for June 2020 based on a secondary adjustment derived from a corporate income tax revenue correction. The Respondent argued that the alleged non-arm's length transfer pricing difference constituted a dividend subject to withholding tax under Article 26 paragraph (1) letter a of the Income Tax Law.

Legal Dependency and Board of Judges Resolution

However, the Board of Judges emphasized the principle of legal dependency; since the primary correction on revenue was overturned in a related decision (PUT-010767.15/2023), the secondary adjustment legally lost its tax object. This resolution confirms that without valid evidence of transfer pricing corrections at the corporate level, the recharacterization of constructive dividends cannot be legally sustained.

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