Tax Alert! Transfer Pricing Price Differences Can Lead to Article 26 Constructive Dividend Tax Corrections

Tax Ruling: Secondary Adjustments and the Constructive Dividend Domino Effect (PT LI Case)

Secondary adjustment corrections in transfer pricing disputes often impose a heavy double tax burden on Taxpayers if not mitigated with robust documentation. Based on the Tax Court Decision Number PUT-006980.13/2023/PP/M.XIA Year 2025, the Board of Judges emphasized that the discrepancy in the unfairness of purchase prices from overseas affiliates is automatically classified as a constructive dividend, which is subject to Article 26 Income Tax withholding.

The Conflict: Recharacterization of Affiliated Purchase Prices

The dispute arose when the Respondent audited PT LI and discovered that the purchase price of goods from Sonicgear Lab Pte. Ltd., Singapore, exceeded the arm's length range. The Respondent applied Article 18 paragraph (3) of the Income Tax Law and PMK-22/PMK.03/2020 to recharacterize the value difference as a dividend flow to shareholders or foreign affiliates. Conversely, PT LI rejected the correction, arguing that the transactions were at market price and contested the primary adjustment in Corporate Income Tax.

Judicial Consideration: Indirect Distribution of Profit

In its consideration, the Board of Judges took a stance consistent with the related Corporate Income Tax dispute decision. Since a portion of the primary correction on the Cost of Goods Sold (COGS) was upheld, the difference is legally deemed an overpayment that is substantively an indirect distribution of profit. Furthermore, because the Petitioner could not present a valid Certificate of Domicile (CoD) during the process, the Judges confirmed the application of the domestic rate of 20% pursuant to Article 26.

Implications: The Critical Need for CoD and Price Justification

This decision sends a strong message to multinational businesses regarding the importance of synchronizing the defense against primary and secondary corrections. A loss at the level of price fairness testing in Corporate Income Tax will have a domino effect on Article 26 withholding obligations. Companies are expected to not only focus on price justification but also ensure administrative compliance, such as the availability of the counterparty's CoD, to mitigate higher tax rates.

Conclusion

In conclusion, the court reinforces that transfer pricing is not just a material issue of pricing, but a formal issue of administrative validity. Secondary adjustments remain a high-risk area for taxpayers who lack comprehensive cross-border documentation and treaty-required certifications.

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