Negative Equity? Be Prepared for Your Interest Expenses and Exchange Losses to Be Non-Deductible

DER 4:1 Dispute: The Fate of Interest Expenses in Companies with Negative Equity

The core conflict in this dispute item is the adjustment of Positive Fiscal Adjustments amounting to IDR 39,140,849,951, which includes interest expenses and unrealized foreign exchange losses. The Respondent applied the Debt to Equity Ratio (DER) of 4:1 in accordance with PMK Number 169/PMK.010/2015, where for companies with zero or negative equity, all borrowing costs cannot be deducted from gross income (non-deductible).

Conflict Analysis: Commercial Equity vs. Fiscal Equity Re-engineering

The Petitioner defended themselves by stating that fiscally, their equity should be positive if the impact of tax adjustments from the previous tax year (2017) were taken into account. Furthermore, the Petitioner claimed the existence of interest-free loans from shareholders that should have improved the capital structure. However, the Respondent rejected this argument because, commercially, in the audited financial statements, the equity position remained negative.

Judicial Rationale: Commercial Financial Statements as the Single Source of Truth

The Board of Judges agreed with the Respondent and rejected the Petitioner's argument. The Board opined that the DER calculation must be based on commercial financial statements in accordance with applicable accounting standards in Indonesia, not on fiscal equity values derived from post-adjustment calculations. Regarding the interest-free loan claim, the Board also found no evidence of fund inflows in the company's bank statements, thus the financing requirements were deemed unmet.

Conclusion: The Risks of Under-Capitalization in Tax Audits

This legal resolution provides a crucial lesson that meeting the 4:1 DER threshold is mandatory for the deductibility of interest expenses. Companies with weak capital structures (under-capitalized) face a massive risk of tax adjustments on all their financial burdens, regardless of whether the interest is paid to affiliates or third parties. Cash flow transparency and the strength of the equity balance in the commercial ledger are the primary defenses in maintaining interest expense deductions.