Transfer Pricing Adjustments May Trigger Additional Dividend Tax Even Without Formal Dividends Declaration.

Article 26 Tax Dispute of PT SAS: Secondary Adjustments and the Interdependence of Constructive Dividend Corrections

Tax court rulings on transfer pricing disputes often carry chain consequences, notably the imposition of secondary adjustments. In this case, the Respondent (DGT) designated the turnover correction in Corporate Income Tax as a constructive dividend, subject to Article 26 withholding tax for the offshore parent entity. The tax authority argued that any non-arm's length price difference in affiliated transactions is automatically deemed a dividend flow to shareholders, consistent with the substance over form principle in Article 4 (1) g of the Income Tax Law and its implementing regulation, PMK-22/PMK.03/2020 (now PMK-172/2023).

The Primary Conflict: COVID-19 Pandemic Operational Losses vs. Normalization of Shifted Tax Bases

The primary conflict arose when the Taxpayer (PT SAS) asserted that no actual profit distribution occurred, as the company suffered operational losses due to the COVID-19 pandemic. The Taxpayer argued, per GR 94/2010, that dividend tax is only due if profits are recorded as debt or formally declared. Conversely, the Respondent maintained that secondary adjustment is a crucial instrument to normalize the tax base lost through profit shifting abroad, regardless of the absence of a formal dividend declaration.

Judges' Legal Considerations: Proportional Valuation Derived from Interdependent Primary Corporate Tax Decisions

The Board of Judges, in their legal opinion, emphasized that theoretically and under domestic regulations, secondary adjustment is valid and categorized as a constructive dividend. However, the Judges also provided a critical clarification regarding the interdependence between primary and secondary adjustments. Since this Article 26 tax correction is a derivative of the Corporate Income Tax correction, its value must be adjusted proportionally following the decision on the related Corporate Income Tax dispute.

Ruling Implications: Preventing Over-Taxation and Mitigating Double Taxation Risks via Transfer Pricing Documentation

The implications of this ruling indicate that Taxpayers can no longer rely solely on formal shareholders' meeting (RUPS) formalities to avoid dividend tax if transfer pricing adjustments exist. On the other hand, this decision protects Taxpayers from over-taxation; if the corporate-level transfer pricing correction is overturned or reduced, the derivative Article 26 tax liability must automatically follow suit. The key takeaway is that the accuracy of Transfer Pricing documentation from the outset is the best protection against such double taxation risks.

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