Indonesian tax regulations, particularly Article 18 paragraph (3) of the Income Tax Law and Minister of Finance Regulation (PMK) No. 213/PMK.03/2016, explicitly require taxpayers with special relationships (affiliates) to conduct transactions according to the Arm's Length Principle (ALP) and to provide adequate Transfer Pricing Documentation (TP Doc). In this dispute, the Tax Court Panel separated the treatment of export and domestic transactions related to the Revenue Correction on the sale of Crude Palm Oil (CPO) and Palm Kernel (PK) to an affiliate. The core conflict arose when the Directorate General of Taxes (DGT/Terbanding) adjusted the taxpayer’s selling price due to the unavailability of proper TP Doc.

Export Transactions and Formal Compliance Issues

The central conflict in the export transaction was a matter of formal compliance. The Tax Court Panel upheld the DGT's adjustment on export sales, reasoning that the Taxpayer was proven to have an associated relationship and failed to prepare a TP Doc. Consequently, the DGT's adjustment using the Comparable Uncontrolled Price (CUP) method, referencing MPOB (international market) prices, was deemed correct and legally sound.

Domestic Affiliated Transactions and Tax Avoidance Proof Criteria

However, a different resolution was reached for the domestic affiliated transaction dispute. Despite the DGT also adjusting local CPO/PK transactions based on CUP, the Panel nullified this specific correction. The legal opinion of the Panel referred to Article 2 paragraph (2) of DGT Regulation PER-32/PJ/2011, which stipulates the requirement for proof of potential tax avoidance when affiliated transactions occur between domestic taxpayers subject to the same normal corporate income tax rate. Since the DGT failed to prove that the Taxpayer exploited tax rate differences (e.g., Final vs. Non-Final Income Tax), the domestic adjustment was considered irrelevant.

Critical Implications for Corporate Transfer Pricing Strategy

This ruling provides critical implications for Transfer Pricing strategy. First, the absence of TP Doc grants significant authority to the DGT to perform unilateral adjustments, especially in cross-border transactions. Second, for domestic transactions, taxpayers now have a legal basis to argue that the DGT must prove a clear motive or tangible potential for tax avoidance, rather than merely demonstrating an unfair price. In conclusion, taxpayers must prioritize preparing TP Docs for all affiliated transactions while understanding that the burden of proof criteria for the tax authority differs between international and domestic transactions.

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