Tax Assessment of IDR 14.3 Billion for Article 26 WHT Becomes Zero: Tax Court Rejects Constructive Dividend Assumption on Sales Correction [(193 - PUT-003469.13/2024/PP/M.XVA Tahun 2025)]

The tax dispute between PT ABP and the Directorate General of Taxes ("DGT") concerning the Income Tax Article 26 (WHT) correction re-establishes the absolute dependency principle between the secondary adjustment and the primary adjustment. This case originated when the DGT imposed a correction on the Tax Base (DPP) for Article 26 WHT amounting to IDR 49.99 billion. This was a direct consequence of a sales revenue correction in ABP’s Corporate Income Tax (CIT) dispute for the 2017 Tax Year (primary adjustment). The DGT assumed that the non-arm's length transfer price difference must be re-characterized as a constructive dividend paid to the foreign shareholder.

PT ABP's Arguments Against the Validity of the Correction

PT ABP, a crumb rubber manufacturer classified as a Routine Manufacturer, argued that the correction was invalid. Firstly, the correction itself, stemming from the Arm's Length Principle (ALP) analysis on sales, does not constitute a profit distribution or expenditure arising from capital participation, thus failing to meet the dividend definition under Article 4 paragraph (1) letter g of the Income Tax Law. Secondly, the imposition of Article 26 WHT requires income that is paid, provided to be paid, or due for payment. Since the correction was based purely on assumption without any actual cash outflow or accrual, no Article 26 WHT was considered due. ABP’s arguments were also bolstered by the significant risk of juridical double taxation, a risk recognized even within the OECD Transfer Pricing Guidelines.

DGT's Stance and the Tax Court's Approach

The DGT counter-argued, defending the correction based on its authority under Article 18 paragraph (3) of the Income Tax Law to conduct primary adjustments and the subsequent authority to perform secondary adjustments under DGT Regulations (PER-22/PJ/2013). The DGT maintained that after the CIT primary correction was upheld (as the DGT’s comparable analysis indicated non-arm's length sales prices), the excess profit that was not collected was substantially enjoyed by the affiliate as a constructive dividend.

The Tax Court Judges (Majelis Hakim) adopted a pragmatic and causal approach in their decision. The Council established that since the Article 26 WHT dispute was inherently linked (mutatis mutandis) to the CIT sales correction dispute (primary adjustment) for the same amount, the decision on the primary correction would determine the fate of the secondary correction. Given that in the related CIT decision (Number: 003470.15/2024/PP), the Council had annulled the DGT's sales correction, the logical consequence was that the Article 26 WHT secondary adjustment of IDR 49.99 billion was also unsustainable.

Implications for Transfer Pricing Practices

The implication of this ruling is crucial for Transfer Pricing practice in Indonesia. It provides legal certainty that a secondary adjustment cannot stand alone if the primary adjustment it is derived from is cancelled. Multinational taxpayers gain valuable insight into the critical need for a robust defense at the primary adjustment level, particularly through detailed FAR analysis and strong comparable selection. This ruling effectively cancels the Tax Underpayment Assessment Letter (SKPKB) for Article 26 WHT, which was initially valued at IDR 14.36 billion, resulting in a zero (IDR 0.00) tax due, confirming a significant victory for the Taxpayer.

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