DGT Deemed Affiliate Services as Disguised Dividends, Tax Court Annuls Correction. Here’s Why

Tax Court Ruling on Primary vs Secondary Adjustment Linkage in PT WW Case

The Tax Court has reaffirmed the legal principle concerning the linkage between a primary adjustment in Corporate Income Tax and a secondary adjustment in PPh Article 23 (Withholding Tax). In its decision on the dispute between PT WW (Appellant) and the Director General of Taxes (Respondent), the Panel of Judges granted the entire appeal regarding the PPh Article 23 correction for the January 2021 tax period. This dispute centered on the recharacterization of management and IT service fees paid to an affiliate into constructive dividends.

Origin of Conflict and Primary Adjustment in Corporate Income Tax

The core conflict began when the Respondent identified service payments by the Appellant to its affiliate, PT Indomobil Sukses Internasional Tbk (IMSI). The Respondent argued this transaction was not at arm's length due to minimal supporting evidence, such as the absence of an IT service contract and management service invoices being issued before the services were rendered. Based on these findings, the Respondent made a positive correction to these expenses in the Corporate Income Tax (a primary adjustment).

Reclassification and Secondary Adjustment Under PPh Article 23

As a consequence (a secondary adjustment), the Respondent reclassified the transaction from "Service Fees" (subject to a 2% tariff) to "Constructive Dividends" (subject to a 15% tariff) under PPh Article 23, leading to a disputed tax underpayment of IDR 41,730,000. The Respondent based this correction on Article 18(3) of the Income Tax Law and Government Regulation 55/2022, which permit the recharacterization of non-arm's length affiliate transactions as dividends.

Juridical Defense and Substantive Arguments by the Appellant

The Appellant strongly rejected this correction. Juridically, the Appellant argued that PT IMSI was not a direct shareholder, meaning the payment did not meet the definition of a dividend as per the Elucidation of Article 4(1)(g) of the Income Tax Law. Substantively, the Appellant asserted that the services were genuine, necessary (due to having no internal IT division), and directly related to business activities (the "3M principle").

Judicial Panel Findings and Final Decision

The Tax Court Panel of Judges (Decision No. PUT-005503.12/2024/PP/M.XIVB Tahun 2025) based its decision on a fundamental legal fact. The Panel identified that this PPh Article 23 dispute was purely a secondary adjustment.

The Panel of Judges directly referred to the decision on the Corporate Income Tax dispute (the primary adjustment), namely Decision Number PUT-005502.15/2024/PP/M.XIVB Tahun 2025. In that Corporate Income Tax decision, the Tax Court had already annulled the primary correction (the Positive Correction for Other Business Expenses).

Therefore, the Panel concluded that because the primary correction (the cause) had been annulled, the secondary correction (the effect) automatically lost its legal basis. The Panel was convinced that no dividend object was proven and annulled the entire PPh Article 23 correction. This decision confirms that the fate of a PPh Article 23 constructive dividend dispute heavily depends on the evidential outcome of the expense's arm's length nature in the Corporate Income Tax dispute.

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