Selling Cheap to Affiliates is Safe? In-Depth Analysis of a VAT Ruling on Transfer Pricing That Failed to Prove State Loss

Tax Court Decision on Domestic Transfer Pricing VAT DPP Correction of PT MS

Tax Court Decision Number PUT-006214.16/2023/PP/M.XIIA Year 2025 firmly emphasizes the principle of substance over form in domestic transfer pricing disputes that impact the Value Added Tax (VAT) Tax Base (Dasar Pengenaan Pajak/DPP). The authority of the Director General of Taxes (DGT) to re-determine the price of affiliated transactions, regulated under Article 18 paragraph (3) of the Income Tax Law (UU PPh), is limited by the essence of preventing profit shifting that harms state revenue. The Judicial Panel found that the correction of the VAT DPP on the non-collectible supply of Crude Palm Oil (CPO) and Palm Kernel (PK) amounting to IDR 4.27 billion, which was based on the Income Tax transfer pricing correction, cannot be sustained because it failed to prove the existence of a tax avoidance motive.

Core Conflict and Arm's Length Principle Application on CPO and PK Sales

The core conflict in this dispute lies in the differing interpretations of applying the Arm's Length Principle (ALP) to the sale of CPO and PK to a domestic affiliate. The Petitioner, PT MS, argued that the price determination using the CUP (Comparable Uncontrolled Price) method with a weekly average price basis was reasonable, especially to mitigate commodity price fluctuations. The Petitioner's main rebuttal also targeted the DGT's rejection of the freight cost adjustment, even though there was a clear difference in delivery conditions between the Petitioner's transaction (Loco Belitung) and the comparable data (Franco Dumai), which substantially necessitates an adjustment to achieve perfect comparability.

DGT's Argument on ALP Consistency and Freight Cost Adjustments

On the other hand, the DGT argued that the taxpayer failed to consistently apply the ALP. The DGT rejected the comparable data considered non-public and deemed the freight cost adjustment irrelevant because both delivery locations were considered to be within the same industrial area. Consequently, the DGT corrected the sales price, which directly increased the VAT Tax Base (DPP) for non-collected VAT supplies.

Judicial Considerations on Tax Avoidance Motive and Double Taxation

In its resolution, the Judicial Panel significantly overlooked the technical debate regarding the selection of comparables and freight cost adjustments. Instead, the Tax Court focused on the key element of using Article 18 paragraph (3) of the UU PPh, which is the proof of a tax avoidance motive or objective. Based on the fact that the Petitioner was in a Fiscal Loss position, while the affiliated counterparty (PT Wilmar Nabati Indonesia) was in a Fiscal Profit and Underpaid position, the Panel concluded that there was no potential loss to the state from the transaction. This finding was reinforced by the DGT's failure to perform a corresponding adjustment on the affiliated counterparty's Income Tax, which potentially led to double taxation for the business group.

Legal Implications for Taxpayers and Conclusion of the Court

The implication of this decision confirms that in domestic transfer pricing disputes (between entities subject to the same tax rate), the DGT's burden of proof is not limited solely to the technical ALP analysis, but also to proving a tax motive detrimental to the state. For taxpayers, this decision serves as a strong precedent that a fiscal loss position can act as a substantial shield to ward off derived corrections, such as the VAT DPP correction. The absence of a tax avoidance motive becomes the primary key to overturning the correction, provided it is supported by adequate documentation and aggregate Income Tax analysis.

The conclusion drawn is that the Judicial Panel was convinced that the VAT DPP correction derived from the a quo transfer pricing adjustment did not meet the juridical elements required by law. Therefore, the Tax Court decided to fully grant the Petitioner's appeal.

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