Appeal Rejected Due to Weak Evidence: Critical Lessons from a VAT Dispute Over Domestic Transfer Price Correction

The Directorate General of Taxes (DGT) consistently uses primary Income Tax (PPh Badan) correction as the foundation for conducting secondary adjustments to the Value Added Tax (VAT) Taxable Base (DPP) on the supply of Taxable Goods (BKP) involving related parties, as stipulated in Article 2 paragraph (1) of the VAT Law. The case of PT IP in Tax Court Decision Number PUT-009419.16/2024/PP/M.IB Tahun 2025 serves as a crucial affirmation of the urgency of comprehensive transfer pricing documentation, particularly in the context of VAT secondary adjustments on domestic related-party transactions, which ultimately resulted in the rejection of the Taxpayer's appeal.

The Core Conflict: Sales Price Correction and Legal Basis

The core conflict in this case centers on the VAT DPP correction of Rp1,127,849,199.00, which arose as a direct consequence of a local sales price correction established by the DGT in a related 2019 Corporate Income Tax dispute. The DGT, as the Respondent, argued that the sales price set by PT IP for its related party was below the Arm's Length Price (ALP), thus requiring an adjustment (correction) to reflect the fair market price in accordance with the arm's length principle (PKKU). Juridically, the DGT based its authority on Article 18 paragraph (3) of the Income Tax Law and Article 2 paragraph (1) of the VAT Law.

The Petitioner's Argument and Panel's Consideration

PT IP, as the Appellant, counter-argued with two key propositions. First, they claimed to have applied the ALP using the External Comparable Uncontrolled Price (CUP) method and had consistently performed comparability adjustments (including for cargo costs, currency, packaging costs, and price discounts) in line with OECD guidelines. Second, PT IP raised the formal issue of the invalidity of the VAT Tax Assessment Letter (SKPKB) signed by the Acting (Plh) Head of the Tax Office, who was deemed unauthorized to issue strategic decisions, alongside the risk of double taxation due to the DGT's failure to perform a Corresponding Adjustment on the related party buyer.

In its legal considerations, the Tax Court Panel absolutely rejected the Taxpayer's formal claim, asserting that the authority to sign the SKPKB is an inherent official authority validly delegated to the Plh. Furthermore, concerning the substance of the dispute, the Panel upheld the DGT's correction. The Panel found that the Taxpayer failed to meet its burden of proof. Although PT IP claimed to have made various price adjustments, they failed to present detailed and reliable supporting documents to validate the magnitude of these claimed adjustments. Thus, because the primary Income Tax correction was deemed valid (due to the failure of proof), the secondary VAT correction on the DPP must be maintained in accordance with the fair market price established by the DGT.

Implications for Practice

The Majelis Hakim's decision to reject this appeal has significant implications. For Taxpayers with domestic related-party transactions, this ruling serves as a stark reminder that compliance does not stop at determining the Transfer Pricing method, but hinges on the strength and detail of the supporting documents for every element of comparability adjustment. Furthermore, this case underscores the challenge of Corresponding Adjustment in a domestic context, where despite the potential for double taxation at the group level, the failure to prove the ALP remains the determining factor in the Taxpayer's defeat in court. Moving forward, Taxpayers must mitigate risk by ensuring the VAT DPP is fully synchronized with the transfer price that has passed the ALP test, and by preparing bulletproof documentation for all adjustment elements.