Constructive Dividend Tax Overturned! Why Secondary Adjustments Cannot Exist Without a Solid Primary Basis.

Tax Lawsuit Analysis: PT AITL, the Accessory Nature of Secondary Adjustments, and the Invalidation of Constructive Dividends

The dispute arose when the Directorate General of Taxes (DGT) adjusted PT AITL's purchase transactions with overseas affiliates, claiming they exceeded fair market value. Based on this discrepancy, the DGT applied Article 22 paragraph (8) of PMK-22/PMK.03/2020 to perform a secondary adjustment, reclassifying the excess as a constructive dividend and imposing a 20% Income Tax Article 26 withholding.

The Petitioner’s Defense: Legal Deficits Under Company Law and Multi-Year TNMM Benchmarking Accuracy

The Petitioner firmly rejected this legal construction. Their primary argument was that no actual dividend flow occurred, and legally, the company was in a deficit position, which prohibits dividend distribution under the Company Law. Furthermore, the Petitioner proved that their TP Doc, utilizing the TNMM method with multi-year data, was more accurate for the volatile agricultural industry, contrasting with the DGT's approach which used non-comparable entities.

Judicial Bench Determination: Flawed Functional Profiles and the Loss of the Article 26 Tax Object

The Board of Judges agreed with the Petitioner. The Judges ruled that the DGT’s selection of comparables was substantively flawed due to significantly different functional profiles. Since the primary correction on purchase prices was proven inaccurate and subsequently overturned, the secondary adjustment forming the basis for Article 26 tax automatically lost its tax object. This decision clarifies that the tax on constructive dividends is accessory, depending entirely on the validity of the main transfer pricing correction.

Legal Certainty for MNEs: Rigorous Comparable Selection as the Ultimate Defense Line

This ruling provides legal certainty for taxpayers that secondary adjustments cannot be applied unilaterally without solid transfer pricing evidence at the primary level. For tax practitioners, this case highlights that contemporaneously prepared TP Doc and rigorous comparable selection are the best defense against aggressive transfer pricing audits.

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