The Tax Court, in Decision Number PUT-010567.35/2021/PP/M.XIIA Year 2024, explicitly upheld the application of secondary adjustments stemming from a Transfer Pricing (TP) correction on commodity sales, which culminated in an Income Tax (PPh) Article 26 withholding obligation.

The core of this dispute originated from a corporate income tax business turnover correction implemented by the Directorate General of Taxes (DGT / DJP) regarding the sale of Arabica and Robusta coffee beans by a Taxpayer to its foreign affiliate. The tax authority discovered that the selling price utilized by the Taxpayer fell significantly below the terminal price or the arm's length price established by international commodity exchanges (LIFFE and ICE), creating a massive profit discrepancy that required structural recalibration.

The Core Conflict: Failure in Substantiating Arm's Length Pricing vs. International Exchange Benchmarks (CUP Method)

The core conflict in this case centered on the Taxpayer's failure to substantiate the arm's length nature of their selling price. Although the Taxpayer claimed to have implemented price adjustments based on quality (grade) and market value, they were unable to present credible, itemized, and quantitative comparative documentation capable of refuting the commodity exchange price comparisons introduced by the tax auditors.

The Taxpayer argued that the prices utilized aligned with the Arm's Length Principle (*Prinsip Kewajaran dan Kelaziman Usaha* / PKKU). However, the DGT maintained that the profits, which should have rightly belonged to the Indonesian Taxpayer but were instead retained by the foreign affiliate, constituted a mechanism of *profit shifting* that legally must be treated as a Deemed Dividend distribution.

Resolution: The Legal Causality Between Primary and Secondary Transfer Pricing Adjustments

The Panel of Tax Court Judges, after examining the comparative evidence presented during the court hearings, concurred with the DGT's position. The Panel determined that the Taxpayer had failed to prove the arm's length nature of its selling price. With the *primary adjustment* of the business turnover successfully proven, the Panel confirmed its legal consequence pursuant to Article 4 paragraph (1) letter g of the Income Tax Law: the shifted profit discrepancy automatically constitutes a dividend.

This ruling solidifies the tax jurisprudence that a transfer pricing *primary adjustment* correction will be followed by the automatic application of an Income Tax Article 26 *secondary adjustment* as a deemed dividend, subject to a domestic 20% withholding tax rate (or preferential treaty rates under the applicable Tax Treaty / P3B).

Analysis and Strategic Blueprint: Rigorous CUP Documentation Requirements to Mitigate Deemed Dividend Risks

The analysis and impact of this decision emphasize the urgent need for Taxpayers operating in the commodity export sector to significantly enhance the quality of their Transfer Pricing Documentation. The application of the Comparable Uncontrolled Price (CUP) method for commodities must be accompanied by robust economic evidence regarding the exact adjustment factors—such as freight costs, moisture content, volume premiums, and contract timing—that differentiate the affiliated transaction price from the global exchange market price.

Without adequate evidentiary proof or comprehensive working papers backing such adjustments inside the *Local File*, the risk of a deemed dividend classification and the resulting final Income Tax Article 26 withholding liability remains exceptionally high and practically irrefutable at the yudisial litigation level.

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