Intragroup Service Costs Disallowed, Resulting in Dividend Tax: Key Lessons from PT BTCI’s Tax Court Decision

The Tax Court Decision Number PUT-003799.35/2023/PP/M.XIIA Year 2025

The Tax Court Decision Number PUT-003799.35/2023/PP/M.XIIA Year 2025 provides a crucial affirmation regarding the application of the secondary adjustment correction in Indonesian Transfer Pricing (TP) cases. This case highlights an Income Tax Article 26 (PPh 26) dispute arising from the reclassification of intragroup service payments made by PT BTCI  to its affiliate, BT Plc (United Kingdom), which were deemed non-arm's length and consequently treated as a disguised dividend. The central issue was the rejection of a portion of the service fees by the tax authority for failing the Benefit Test and lacking substantial evidence, which was then automatically interpreted as a disguised distribution of profit under Article 4(1)(g) of the Income Tax Law.

The Core Conflict: Primary Cost Disallowance vs. Shared Service Justifications

The core conflict originated from the primary adjustment conducted by the Tax Authority (Terbanding), which disallowed Rp10.93 billion in intragroup service costs in PT BTCI’s Corporate Income Tax calculation. PT BTCI, as the Petitioner, insisted that the payment was a legitimate and essential expense, specifically due to its role as a limited risk service provider heavily relying on shared services from the group. The payment was documented in the Transfer Pricing Documentation (TPD), which allegedly proved the price was at arm’s length pursuant to Article 18(3) of the Income Tax Law. However, the Tax Authority Argued that insufficient evidence was provided to demonstrate the real and economic benefit of the services, justifying the cost disallowance.

Judicial Resolution: Primary Adjustments as the Sole Basis for Deemed Dividends

The resolution of this conflict came from the Panel of Judges, who effectively used the outcome of the primary correction as the sole basis for their consideration. The Panel stated that because the Petitioner’s appeal on the Corporate Income Tax correction had been previously rejected (confirming the costs were non-deductible), the remaining funds paid to the affiliate could not be considered a reasonable expense. Therefore, the Panel concluded that the non-arm’s length payment to BT Plc, which indirectly held 95% of PT BTCI’s shares, constituted an indirect distribution of profit. This interpretation validated the Tax Authority's reclassification into a deemed dividend, requiring the imposition of PPh Article 26. By rejecting the appeal, the Tax Court explicitly supported the secondary adjustment mechanism as an inevitable consequence of a confirmed primary TP correction.

Major Implications for MNEs: Double Taxation Risks and the Benefit Test Requirement

The analysis of this decision has major implications for multinational enterprises (MNEs) in Indonesia. It serves as a stark warning that failure to adequately document and substantiate the Benefit Test can lead to double taxation: Corporate Income Tax is due because the expense is disallowed, and PPh Article 26 is due because the same payment is reclassified as a dividend. The primary lesson is the necessity of robust TPD, demonstrable economic substance, and readiness to face a secondary adjustment. Companies must ensure that every intragroup service transaction is supported by documentation that not only specifies the existence of a contract but also provides tangible evidence of the benefits received.