Warning! Related-Party Service Expenses Disallowed by DJP Can Turn into Dividends Subject to PPh Article 26

The Tax Court of Indonesia has reaffirmed DJP's stance on the arm's length determination of related-party transactions, specifically in intra-group service schemes, through Decision Number PUT-009286.13/2023/PP/M.IIB Tahun 2025. This dispute highlights how the positive correction of Sales Commission Expenses, Royalty Fees, and Marketing Fees made by DJP on Corporate Income Tax (Corporate PPh) directly resulted in the imposition of PPh Article 26, reclassifying the corrected difference as Constructive Dividends. The core of the dispute lies in the failure of PT HWH, to convince the Panel of Judges that the three types of related-party services it paid for truly existed, were needed, and provided an economic benefit (benefit test), which is a crucial prerequisite for applying the Arm's Length Principle (ALP).

The main conflict began when DJP deemed that all payments made by PT HWH to foreign affiliates for Sales Commission, Royalty Fees, and Marketing Fees were not at arm's length and lacked sufficient substance. According to the DJP, these services were unnecessary for PT HWH as a local operating company and were deemed a mechanism for profit shifting, violating Article 9 paragraph (1) of the PPh Law. The DJP performed a primary adjustment, increasing PT HWH's taxable income by a total of Rp. 627,470,572. PT HWH argued otherwise, asserting that these services were crucial—for instance, utilizing the "D-BODHI" trademark and accessing the global marketing network—and their transaction value was set at arm's length, supported by its Transfer Pricing Documentation.

In its resolution, the Panel of Judges adopted a position contingent upon the outcome of the previous Corporate PPh dispute involving PT HWH. By referencing the Corporate PPh Decision which had denied the Appellant’s appeal and upheld the DJP's primary adjustment, the Panel concluded that the secondary adjustment on PPh Article 26 must also be sustained. The primary adjustment difference of Rp. 627,470,572, based on Article 18 paragraph (3) of the PPh Law, was automatically classified as a Constructive Dividend distributed to the foreign shareholders. Consequently, PPh Article 26 was imposed at a rate of 15% as stipulated in the Double Taxation Avoidance Agreement (DTAA) between Indonesia and the affiliated countries.

This decision has a significant impact on multinational taxpayers in Indonesia. The main implication is the reaffirmation that transfer pricing compliance is not only about pricing but also about substance and benefit. If DJP successfully proves that an intra-group service does not exist or provides no benefit, the expense correction will be a non-deductible charge. Furthermore, this decision reinforces the application of the secondary adjustment concept in Indonesian tax practice, where the corrected difference in Corporate PPh is automatically reclassified as a dividend subject to PPh Article 26/Final PPh. The key takeaway for taxpayers is the necessity of preparing Transfer Pricing Documentation that not only compares prices but also meticulously presents a Functional Analysis (FAR Analysis) and robust evidence of the benefit test for all intra-group service payments.

In conclusion, PT HWH's loss in the PPh Article 26 dispute underscores the urgency for taxpayers to comprehensively mitigate Transfer Pricing risks, starting from the Corporate PPh primary adjustment stage. Mitigation strategies must include the preparation of superior documentation and the anticipation of PPh Article 26/Dividend consequences arising from secondary adjustments.

A comprehensive analysis and the Tax Court Decision on This Dispute Are Available Here