The principle of substance over form has been reaffirmed in Tax Court Decision Number PUT-003344.15/2022/PP/M.IVB Tahun 2025, which dismissed the appeal filed by PT PMP. The core of this conflict originated from a Positive Fiscal Adjustment correction of Rp1,470,000,000.00 by the Respondent (DJP). While PMP had recorded the amount as Rent Expense, the tax authority recharacterized it as Profit Sharing, which is absolutely non-deductible from gross income pursuant to Article 9 paragraph (1) letter a of the Indonesian Income Tax Law.
The essential conflict revolves around the compensation basis outlined in the Operational Cooperation Agreement (KSO). Although PMP argued that the payment was a legitimate consideration for the use of the Yayasan's land and that they had already withheld Final Income Tax Article 4 paragraph (2) on the payment, the Respondent and the Tax Court Panel insisted that the compensation was calculated based on 30% of the Net Operating Result (Sisa Hasil Usaha/SHU) after certain cost deductions. This profit-dependent calculation basis was deemed to eliminate the pure nature of a Rent Expense, which should typically be a fixed or fair price not directly tied to the net profit.
In its legal considerations, the Tax Court Panel explicitly accepted the recharacterization argument. The Panel viewed the fluctuating payment basis, which was dependent on the net profit, as inconsistent with the Historical Cost Principle under the Indonesian Financial Accounting Standards (SAK) and failing to meet the criteria for a necessary and reasonable expense (3M: Obtaining, Collecting, and Maintaining Income) as stipulated in Article 6 of the Income Tax Law. Furthermore, the fact that PMP paid less than the calculated 30% SHU without any claim from the Yayasan reinforced the indication of risk participation, akin to profit sharing. The legal consequence was clear: since the transaction was substantively proven to be profit sharing, the expense must be disallowed as a deduction from gross income, thus upholding the Respondent's positive fiscal correction.
This decision emphasizes that Taxpayers must exercise extreme caution when structuring compensation schemes, especially in KSOs or asset usage agreements involving performance- or profit-based compensation. Even if compliance with Final Income Tax withholding has been achieved (governing the recipient's income side), the deductibility of the expense on the payer's side (Corporate Income Tax) will still be rigorously tested under Article 9 of the Income Tax Law. If the substance of the transaction indicates profit or risk sharing, the risk of correction for non-deductible expenses remains critically high. The implication is that ideal rental schemes should utilize fixed prices or verifiable arm's length market prices (using the CUP method) to minimize the risk of expense recharacterization disputes in the future.
A Comprehensive Analysis and the Tax Court Decision on This Dispute Are Available Here
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