The Collapse of Disguised Dividend Corrections: Why Secondary Adjustments Cannot Stand Alone 

Tax Dispute Involving PT WG: Secondary Adjustment Mechanisms in Domestic Affiliated Transactions

The tax dispute between PT WG and the Directorate General of Taxes (DGT) highlights the application of the secondary adjustment mechanism in domestic affiliated transactions that trigger disguised dividend corrections. Under Article 18 paragraph (3) of the Income Tax Law and PMK 22/2020, tax authorities treat the difference between the actual selling price and the arm's length value as an object of PPh 23, yet the existence of this correction is highly dependent on the validity of the primary correction at the Corporate Income Tax (CIT) level.

Audit Background and Arguments of the Parties

The case originated when the Respondent conducted an audit of PT WG and identified sales transactions to affiliates deemed non-compliant with the Arm’s Length Principle (ALP). Consequently, the Respondent applied a positive correction to Sales Revenue in the CIT return and automatically reclassified this gap as a disguised dividend subject to PPh 23. Conversely, the Petitioner argued that the transactions occurred between domestic entities subject to identical tax rates; thus, referring to PER-32/PJ/2011, transfer pricing rules should not apply as there was no motive for tax avoidance or exploitation of tax rate differentials.

Juridical Stance of the Board of Judges

The Board of Judges, in its legal consideration, adopted a fundamental juridical stance. The Judges noted that the PPh 23 dispute in this instance was an accessory dispute, whose legal basis and valuation were derived entirely from the CIT correction (the primary correction). In a parallel trial, it was revealed that the correction of PT WG’s Sales Revenue had already been annulled by the Board of Judges through decision number PUT-004592.15/2024/PP/M.XXA.

Legal Implications of the Primary Correction's Annulment

The implication of the primary correction's annulment is the loss of economic substance and legal grounds for the Respondent to maintain the secondary adjustment correction. Legally speaking, if the "tree" (the CIT correction) is felled, the "fruit" (the PPh 23 correction on dividends) no longer has a branch to hang on. Therefore, the Board of Judges canceled all of the Respondent's corrections regarding the PPh 23 Tax Base for the November 2021 period.