Domestic Affiliate Transaction Accused of Transfer Pricing? Tax Court: If One Party Has a 0% Effective Rate, Where is the Tax Avoidance Motive?

Tax Court Decision No. PUT-006216.16/2023/PP/M.XIIA Year 2025: Precedent in Domestic Transfer Pricing

Tax Court Decision No. PUT-006216.16/2023/PP/M.XIIA Tahun 2025 sets a fundamental precedent in Indonesian domestic transfer pricing (TP) disputes. The judicial panel granted PT MS's appeal in its entirety, annulling a VAT (Value Added Tax) assessment of IDR 1.69 billion. This VAT dispute was a direct flow-through consequence of an Income Tax (PPh) adjustment on business revenue, stemming from the sale of Crude Palm Oil (CPO) and Palm Kernel (PK) to a domestic affiliate, PT Wilmar Nabati Indonesia. The panel invalidated the correction, not based on technical disputes over comparables, but on two primary juridical pillars: the absence of a tax avoidance motive and the occurrence of double taxation.

Core Conflict and the DGT's Technical Correction Arguments

The core conflict began with the Directorate General of Taxes' (DGT) correction of the CPO and PK selling prices from the Appellant (PT MS) to PT Wilmar. The DGT deemed the prices non-arm's length based on three technical arguments. First, the Appellant was considered inconsistent in applying CPO price comparables (sometimes using a weekly KPBN average, other times using 'on the spot' prices). Second, the DGT rejected the PK price comparable data (internal data of PT Wilmar's purchases from independents), citing it as closed-source and unreliable, and replaced it with public tender data from PT Astra Agro Lestari (AAL). Third, the DGT disallowed freight cost adjustments for deliveries from the Appellant's PKS-2 (Belitung) to PT Wilmar's factory (Pelintung), assuming both were located within the same industrial estate (Kawasan Industri Dumai), thus rendering the 'Loco Belitung' terms comparable to 'Franco Dumai'.

The Appellant's Juridical Defense and Absence of Tax Avoidance Motive

The Appellant refuted these technical corrections but, more importantly, raised a fundamental juridical defense. The Appellant emphasized that this was a domestic affiliated transaction where both parties were subject to the same 22% corporate income tax rate. Crucially, the Appellant (Seller) proved its fiscal position in Tax Year 2020 was a Tax Loss (effective 0% rate), while PT Wilmar (Buyer) was in a Taxable Profit and Tax Underpayment position. With these facts, the Appellant argued there was no tax avoidance motive. If the selling price were increased (per the DGT's correction), profit would shift to the Appellant (who paid 0% tax) and PT Wilmar's Cost of Goods Sold (COGS) would increase, thereby reducing the state's income tax revenue from PT Wilmar.

Judicial Findings and Prevention of Double Taxation

The Tax Court panel fully concurred with the Appellant's juridical reasoning. The panel referred directly to the Elucidation of Article 18(3) of the Income Tax Law and DGT Circular SE-50/PJ/2013, which both affirm that the DGT's authority to make TP corrections is intended to prevent tax avoidance. The panel examined the tax returns of both parties and concluded that there was provenly no tax avoidance motive in this transaction. Furthermore, the panel highlighted the fact that the DGT could not prove that a corresponding adjustment had been made on PT Wilmar's side. This lack of adjustment, the panel ruled, created double taxation on the same object, which violates the principles of justice.

Key Takeaway and Precedent for Transfer Pricing Authority

This decision affirms that the application of TP correction authority, especially in a domestic context, cannot be merely mechanical price-testing. The tax authority must first prove the principal 'sin'—a tax avoidance motive—in line with the intent of the Elucidation of Article 18(3) of the Income Tax Law. Without proof of motive, and if the correction itself leads to double taxation, the TP adjustment cannot be upheld.

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