Blocked by Their Own Rules, Why Are Transfer Pricing Corrections Between Local Companies Often Overturned by Judges?

Tax Dispute Involving PT WGM: Turnover Corrections on Domestic Affiliated Transactions

Tax authorities often apply the instruments of Article 18 paragraph (3) of the Income Tax Law to adjust turnover through price comparison analysis on affiliated transactions without considering a comprehensive tax risk profile. In the PT WGM dispute, the Respondent made a positive revenue correction of IDR 96,736,251.00 regarding sales to affiliates, claiming the selling price was below market price or did not meet the Arm's Length Principle (ALP). The legal basis used was the authority of the Director General of Taxes to redetermine the amount of income in the event of a special relationship to prevent profit shifting to parties with lower tax rates.

The Core Conflict and Legal Consideration of the Board of Judges

However, the core conflict emerged when the Petitioner was able to prove that the transaction was carried out with a domestic affiliated entity that shared the same tax rate (proportional) and was not in a fiscal loss position. In its consideration, the Board of Judges emphasized that the essence of transfer pricing rules is to prevent the shifting of profits. Since both parties are domestic taxpayers with identical tax rate treatments, there was no tax avoidance motive detrimental to state revenue. The Assembly eventually canceled the entire revenue correction because the Respondent was deemed to have failed to prove the economic urgency behind the correction. This decision serves as an important reminder for tax authorities that the application of transfer pricing rules to domestic transactions must be conducted carefully and based on evidence of actual tax avoidance schemes.