Taxpayer Wins Against PPh 26! Proof of Fund Repatriation Voids DJP's Constructive Dividend Correction

Transfer pricing regulations in Indonesia specifically govern the potential imposition of Secondary Adjustment, where profit corrections arising from primary adjustment are deemed secondary transactions in the form of a constructive dividend subject to PPh Article 26 at a 20% rate. Tax Court Decision Number PUT-002637.13/2022/PP/M.XIVA Tahun 2025 establishes a crucial legal precedent, confirming that the act of repatriating the corrected funds, when factually evidenced, can nullify the object of PPh Article 26.

Core Conflict: Economic Substance vs. Legal Formality

This case originated from a corporate PPh transfer pricing correction that was automatically converted by the Tax Authority (Terbanding) into a PPh Article 26 Tax Base of IDR 12.6 billion, based on Article 4 paragraph (1) letter g of the Income Tax Law. The Tax Authority argued that the abnormal flow of profit to Singapore (the affiliate and shareholder) constituted a constructive dividend that must be subject to PPh Article 26 withholding tax. The core conflict lay in the contradiction between economic substance and legal formality. The Taxpayer (Pemohon Banding) countered, insisting that a dividend requires a formal GMS resolution and that they had negated the tax object by repatriating the corrected funds from the foreign affiliate, evidenced by a Debit Note and transfer proof in the subsequent year. In contrast, the Tax Authority rejected this repatriation action, arguing that the tax liability for 2016 was already accrued and could not be nullified without formal tax mechanisms such as a Disclosure of Incorrectness.

Resolution: The Legal Opinion of the Panel of Judges

In its legal considerations, the Panel of Judges took a stance favorable to the Taxpayer. The Panel was convinced that the good faith and tangible proof of fund repatriation by the Taxpayer had substantially eliminated the basis for imposing PPh Article 26. If the funds considered a constructive dividend had been returned to Indonesia, then economically there was no longer any income "paid" to the Foreign Taxpayer (WPLN). The Panel also explicitly highlighted the principle of justice by preventing economic double taxation on the same profit. Furthermore, the Panel reinforced the non-retroactivity argument, stating that PMK 22/2020, used by the Tax Authority as the basis for the correction, could not be applied to the 2016 Tax Year because it was not yet in effect.

Implications for Taxpayers

The implication of this decision is highly significant. For Taxpayers facing or potentially facing transfer pricing disputes, this Decision serves as strong reference that corrective action in the form of fund repatriation can be used as key evidence to nullify PPh Article 26 corrections. The decision signals that the Tax Court will prioritize the principles of fairness and economic substance when assessing the reasonableness of applying secondary adjustments, particularly for tax periods before the explicit regulation came into force.

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