The Directorate General of Taxes (DGT) applied a positive fiscal adjustment through an imputed interest scheme on interest-free loans granted to affiliates. Under Article 18 Paragraph (3) of the Income Tax Law, tax authorities are empowered to re-determine income and deductions for taxpayers with special relationships.
The core conflict lies in the interpretation of the Arm’s Length Principle. PT GTS provided interest-free loans to related parties while simultaneously bearing interest expenses from third-party bank loans. The Respondent argued that this violated the ALP because the Petitioner incurred cost of funds that indirectly financed the affiliate loans, contradicting normal business logic.
The Tax Court upheld the DGT’s adjustment, emphasizing that providing interest-free loans while carrying interest-bearing debt is non-arm's length in economic substance. The Petitioner failed to meet the strict criteria for interest-free loans as regulated under Government Regulation No. 94 of 2010, particularly regarding the proof that the funds used were from internal capital rather than bank-sourced loans.
This decision highlights that Transfer Pricing Documentation (TP Doc) is crucial. Taxpayers must be able to prove fund availability to defend interest-free positions. Compliance is not merely a contractual formality; it must be supported by real economic substance. Taxpayers are advised to exercise greater caution in intergroup liquidity management to avoid similar imputed interest adjustments.
In conclusion, the court reinforces that the arm’s length principle prevails over civil law agreements in tax disputes. If the substance of a transaction shows a transfer of value without proper compensation, tax authorities have the right to re-characterize the income to protect the state's revenue.
A Comprehensive Analysis and the Tax Court Decision on This Dispute Are Available Here
tpc.consulting 
tpc.consulting 
info@taxindo.co.id