Failure to Prove the Benefit of Rp8 Billion Group Services, PT BTCI Payment Designated as Deemed Dividend Subject to PPh Article 26

Tax Court Decision Number PUT-001583.13/2022/PP/M.XIIA Tahun 2025

A Taxpayer's inability to sufficiently sustain the validity of intra-group service expenses at the Corporate Income Tax (CIT) audit and objection stages directly triggers the risk of a secondary adjustment, specifically the determination of a deemed dividend subject to PPh Article 26. Tax Court Decision Number PUT-001583.13/2022/PP/M.XIIA Tahun 2025, which rejected the appeal of PT BTCI, establishes an important precedent affirming that formal compliance with Transfer Pricing Documentation (TPD) is inadequate if the Taxpayer substantially fails to meet the benefit test. This case centers on the PPh Article 26 correction for the Tax Period February 2019, which stemmed from the reclassification of periodic service fees paid by PT BTCI to its affiliate, BT Plc, originally recorded as expenses, but determined by the Tax Authority as a disguised distribution of profits.

The Primary Adjustment Conflict: Arm's Length Pricing vs. Lack of Operational Proof

The conflict originated from the primary adjustment correction in the 2018 CIT over the intra-group service fees paid by PT BTCI to BT Plc. PT BTCI, as the Appellant, maintained that the transaction was fair and adhered to the Arm’s Length Principle (ALP). They justified the fairness with Transactional Net Margin Method (TNMM) testing results, showing the Operating Margin was within the arm's length range. Furthermore, they claimed to have provided supporting evidence, such as BT Plc employee timesheets and project workflow evidence, proving the services were genuinely received and provided crucial economic benefits to the Indonesian operation, especially for a limited risk service provider.

The Respondent's Focus on Evidence: Disguised Distribution of Profits

Conversely, the Directorate General of Taxes (DGT) as the Respondent focused heavily on the aspect of evidence. The DGT argued that the documentation provided by PT BTCI was insufficient, lacking detail, and unconvincing in verifying the existence and actual economic benefit of the periodic services. For the DGT, the Taxpayer’s failure to prove the substance of the services within the related-party context indicated profit shifting. Referring to PPh Law Article 4(1)(g) (which broadly defines dividends) and the Commentary on Article 10 Model Tax Convention, the DGT reclassified the unsubstantiated service payments as a disguised distribution of profits or a deemed dividend.

Judicial Resolution: Secondary Adjustment Affirmation and Tax Court Ruling

The Tax Court Panel adopted a position supporting the DGT, particularly by referencing the related 2018 CIT dispute decision. The Panel emphasized that the PPh Article 26 correction was the logical consequence (secondary adjustment) of disallowing the service expenses in the CIT (primary adjustment). In its legal consideration, the Panel stated that PT BTCI failed to meet the burden of proof under Article 26(1) of the Tax Court Law. The Panel concurred that payments to an affiliate, lacking concrete evidence of benefit and existence, meet the criteria for a deemed dividend. This decision strengthens the interpretation that the definition of a dividend encompasses any distribution of profit, direct or indirect, that disguises the transfer of profit to the ultimate shareholder through non-arm's length transactions. Consequently, the Panel rejected the Taxpayer's appeal, although noting that the final PPh Article 26 payable was Nil due to existing tax credits from PPh Article 26 previously withheld on the service payments.

Significant Implications for MNEs: Shifting Focus from Pricing to Substance

The implication of this decision is highly significant for Multinational Enterprises (MNEs) in Indonesia, especially those relying on intra-group services. It demonstrates that compliance at the arm's length pricing level (like TNMM) will not save the Taxpayer if the benefit test (proving the substance of the services) is not strictly met. Taxpayers must shift their focus from pricing to substance and detailed documentation that can demonstrate: a) the service would genuinely be purchased by an independent party, and b) the service provided a specific, measurable benefit to the recipient. Without robust evidence, such payments are vulnerable to reclassification as deemed dividends, resulting in a PPh Article 26 withholding obligation.

The PT BTCI case serves as a stern warning to MNEs to ensure their Transfer Pricing Documentation not only includes a fairness analysis but is also supported by strong operational evidence. The DGT and the Tax Court are increasingly adopting a substance over form approach, making the failure to prove the substance of services a key entry point for secondary adjustment corrections and the determination of deemed dividends.