The Constructive Dividend Trap Crumbles: PT GTI Wins, Trillions of Rupiah in PPh Article 26 Adjustments Largely Annulled!

The obligation to withhold Income Tax (PPh) Article 26 on constructive dividends arising from a transfer pricing (TP) adjustment has once again become a central dispute issue, with Tax Court Decision Number 227 - PUT-002121.13/2023/PP/M.VIIIA Tahun 2025 providing a limiting affirmation. This ruling highlights the complexities in applying the PPh Article 26 secondary adjustment and confirms that the recharacterization of an unwarranted transfer price difference as a dividend can only be applied if the non-resident recipient is a shareholder of the domestic taxpayer. PT GTI (the Petitioner) successfully annulled the majority of the Respondent's (Directorate General of Taxes) adjustment of Rp199 billion, with only Rp1.36 billion of the adjustment being upheld.

Core Conflict: DGT vs. Taxpayer Arguments

The Respondent carried out the PPh Corporate Income Tax primary adjustment on two items: Business Turnover and Intra-Group Service Expenses. After the primary adjustment, the Respondent applied a secondary adjustment, considering the difference in profits transferred out of the Indonesian jurisdiction as a constructive dividend subject to PPh Article 26 withholding. The DGT argued that this recharacterization authority is supported by PPh Law Article 18 paragraph (3) and the OECD Transfer Pricing Guidelines, which permit classifying unwarranted wealth transfers to a Non-Resident Taxpayer (NRT) affiliate as an imputed dividend, regardless of the recipient's status as a direct shareholder.

The Petitioner strongly rejected this argument, emphasizing that based on the Elucidation of PPh Law Article 4 paragraph (1) letter g, a dividend must be a share of profit received or obtained by a shareholder. In the case of intra-group service expenses, the payment recipient, PIP., was proven not to be the Petitioner's shareholder. Furthermore, the majority of the Business Turnover adjustment resulted from transactions with Domestic Taxpayer (DT) affiliates, which inherently cannot be the object of PPh Article 26.

Resolution: Panel of Judges' Legal Opinion

The Panel of Judges responded to this conflict of interpretation by adopting a restrictive, rule-based approach. The Panel rejected the DGT's broad interpretation and affirmed that the meaning of "dividend," including constructive dividends, cannot be detached from the shareholder requirement stipulated in the PPh Law. The Panel indicated that the DGT's argument to broaden the meaning of constructive dividend to affiliates in general, other than shareholders, was legally unfounded.

Consequently, the Panel annulled the PPh Article 26 adjustment on the intra-group service expenses because the recipient was not a shareholder. For the Business Turnover adjustment, the Panel only upheld the secondary adjustment proportionally attributed to DP OEP., the NRT that held 99.98% of the Petitioner's shares. The Panel annulled the remainder, including amounts related to transactions with DT affiliates.

Analysis and Impact: Implications for TP Practice

This decision has significant implications for transfer pricing practice in Indonesia. Firstly, it sets a strong precedent that limits the application of the PPh Article 26 secondary adjustment only to NRT entities that hold shareholder status. This provides legal certainty for multinational taxpayers that the risk of secondary adjustment can be mitigated if unwarranted transactions are conducted with NRT affiliates who are not shareholders. Secondly, the ruling confirms that the recharacterization of a constructive dividend arising from transactions with DTs cannot be the object of PPh Article 26. The crucial lesson is that Taxpayers must prepare TP Docs with a robust analysis of the role and legal status of each affiliate entity, particularly when assessing the PPh Article 26 risk.

Conclusion The case of PT GTI reaffirms the importance of adhering to the domestic legal definitions of taxation. Although transfer pricing principles are internationally guided, the application of the PPh Article 26 secondary adjustment must be subject to the legal definition of dividend in the PPh Law. This partial victory for the Taxpayer is an important signal for multinational companies to focus their transfer pricing compliance strategy on proving the substance of transactions, especially the absence of a shareholder-subsidiary relationship in excessive payments to NRTs.

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