Taxpayer Beats DGT: Affiliated Services Are Not Hidden Dividends, PPh Article 23 Correction Fully Canceled!

Tax Court Ruling on Secondary Adjustment and Constructive Dividend Dispute of PT WW

The application of a secondary adjustment in the form of a constructive dividend on intragroup service transactions has once again become a crucial subject of dispute in the Tax Court, emphasizing the urgency of proving economic substance and arm's length nature within the transfer pricing domain. In the case of PT WW versus the Director General of Taxes (DGT), the dispute concerning Withholding Income Tax (PPh) Article 23 Payable, amounting to Rp41,730,000 for the June 2021 Tax Period, concluded with a Full Grant for the Taxpayer. The central issue was the reclassification of payments for Management Services and IT Support Services to an affiliated party, PT Indomobil Sukses Internasional Tbk (IMSI), which the DGT categorized as an indirect distribution of profit, in accordance with Article 36 paragraph (6) of Government Regulation Number 55 of 2022.

Core Conflict: Services vs. Hidden Profit Distribution

The Directorate General of Taxes (DGT) argued that the payments to IMSI did not comply with the Arm's Length Principle (ALP), specifically because the Petitioner failed to provide adequate documentation regarding the Benefit Test and a Cost Base that was consistent with the existing Transfer Pricing Documentation (TP Doc). According to the DGT, the excess payment deemed non-arm's length should be treated as a constructive dividend or hidden profit distribution, which should have been subject to a PPh Article 23 rate of 15%, instead of the 2% rate applicable to services. The Petitioner, on the other hand, strongly rebutted this, asserting that the transaction involved vital operational expenses necessary for generating, collecting, and maintaining income (3M principle) and, legally, IMSI was not a direct shareholder, meaning the payment could not be classified as a dividend by definition.

Resolution: The Principle of Interrelation Between Primary and Secondary Adjustments

The Tax Court Panel chose to resolve the dispute based on the principle of interrelation between primary and secondary corrections (follow the primary adjustment). The Panel referred to the primary dispute ruling on Corporate Income Tax (PPh Badan) for the 2021 Tax Year (Decision Number PUT-005502.15/2024/PP/M.XIVB Tahun 2025), in which the DGT's primary positive correction of Other Business Expenses for the same services had been annulled by the Tax Court. With the annulment of the primary correction (disallowance of the expense), there was no longer any excess payment that could be categorized as a hidden profit distribution (constructive dividend). Logically and legally, the secondary PPh Article 23 correction arising from the voided primary correction must also be voided. Consequently, the Panel ruled that the existence of a dividend object was not proven, and fully granted the Petitioner’s appeal.

Analysis and Impact: Legal Clarity in TP Litigation

This ruling provides clarity for Taxpayers that when facing transfer pricing disputes with two dimensions of correction (primary: Corporate Tax and secondary: Withholding Tax/Article 26), the focus of litigation must include substantiating the primary correction. Success in annulling the primary correction becomes the automatic key to annulling the secondary correction, especially those based on the concept of constructive dividend as stipulated in Article 22 paragraph (8) of PMK 22/PMK.03/2020. For the DGT, this decision highlights the need for consistency between examination results and objection decisions that form the basis of the SKPKB, and the importance of solid transfer pricing arguments at all levels of the judiciary.

The Tax Court's decision to fully grant PT WW's appeal reaffirms that transaction substance and the interrelation of legal remedies are critical determinants of the dispute outcome. Taxpayers are advised to strengthen all Corporate Tax and Withholding Tax documentation in an integrated manner, particularly concerning intragroup services, to mitigate the risk of reclassification as a constructive dividend in the future.

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