DGT's Attempt to Shift Tested Party Fails Completely, PT AI's Appeal Granted

The Tax Court Decision No. PUT-009630.15/2020/PP/M.VIIIA Year 2025 reaffirms a crucial principle regarding the tax authority’s burden of proof in Indonesian transfer pricing disputes. The core legal conflict in this case is the correction of the Cost of Goods Sold (COGS) arising from import transactions with related parties, where the Directorate General of Taxes (DJP) deemed that these transactions did not comply with the Arm’s Length Principle. This dispute highlights the complexity of implementing Article 18 of the Income Tax Law, which grants the DJP the authority to recalculate the Taxable Income if related-party transactions are deemed non-arm’s length.

The essential conflict in this case centered on two main aspects. On one hand, DJP argued that the Appellant, PT AI, failed to provide adequate documentation—specifically detailed information regarding the functions, assets, and risks (FAR) of the foreign affiliated entity—leading the DJP to use its authority to determine the correction. On the other hand, PT AI refuted the correction, asserting that they had submitted all complete bookkeeping evidence and Transfer Pricing Documentation (TP Doc). PT AI contended that the DJP’s correction was presumptive and fundamentally flawed due to a difference in opinion over who should be the Tested Party.

In the Transfer Pricing analysis conducted by PT AI, they consistently chose themselves (PT AI) as the Tested Party, supported by the argument that PT AI is the Least Complex Entity in the group's transaction chain, as it only performs distribution and sales functions in Indonesia. Conversely, the foreign affiliate performs production functions, carries greater risks, and owns complex intangible assets.

The DJP, in its correction, rejected this selection and attempted to test the foreign affiliated party. This move, according to PT AI, constituted a fundamental methodological error.

The Judicial Panel ultimately upheld the Taxpayer's position. The Panel asserted that the DJP’s attempt to test the more complex entity (the foreign affiliate) essentially violated the Arm's Length Principle (PKKU), specifically the Least Complex Entity rule within profit-based methods like TNMM. Furthermore, the Panel concluded that the DJP, as the party making the correction, failed to prove that PT AI’s selection of the Tested Party was wrong, and failed to present convincing transactional evidence to support its Cost of Goods Sold (COGS) correction.

In resolving this conflict, the Tax Court Panel, after conducting an in-depth review of the evidence, concluded that the DJP, as the party making the correction, had failed to meet its burden of proof. The COGS correction related to Transfer Pricing proposed by the DJP was deemed unsupported by sufficient, convincing, and relevant evidence and argumentation to override the evidence and arm’s length analysis presented by PT AI, including PT AI's chosen TP methodology. While this case is a dispute over the burden of proof, the final ruling implies that the Panel found the validity of the documentation and arm's length analysis prepared by the Petitioner more convincing than the Tax Authority's correction arguments.

The implications of this decision are highly significant for multinational tax practices in Indonesia. The Panel’s decision to grant a substantial part of PT AI’s appeal and reduce the payable tax to zero places a strong emphasis on the quality and substance of TP Documentation. This ruling serves as a reminder to all multinational taxpayers to proactively ensure that their documentation is not only formally compliant but also possesses analytical depth (especially regarding FAR Analysis, tested party selection, and comparables) that can withstand scrutiny before the Tax Court, even when facing correction arguments from the tax authority.

Comprehensive and Complete Analysis of This Dispute is Available Here