Why Intra-Group Service Fees May Be Reclassified as Dividends Even During Financial Losses

Secondary Adjustment and Constructive Dividend Dispute: Tax Court Decision PUT-000059.13/2023/PP/M.XA

Dispute Background and the Concept of Secondary Adjustment

Tax authorities frequently apply the concept of secondary adjustment by reclassifying non-deductible intra-group service fees into constructive dividends pursuant to Article 18 paragraph (3) of the Income Tax Law. The dispute in Tax Court Decision Number PUT-000059.13/2023/PP/M.XA Year 2025 serves as a vital precedent regarding the juridical boundaries of constructive dividends, particularly when the recipient is not a direct shareholder and the company is experiencing both fiscal and commercial losses.

The Core Conflict: Benefit Test vs. Shareholder Subjective Criteria

The core conflict arose when the Respondent (DJP) disallowed Commissions Paid and Regional Cost Sharing fees paid to vBWAPPL in Singapore, citing a failure to meet the benefit test. Consequently, the Respondent reclassified these payments as constructive dividends under PMK-22/PMK.03/2020, triggering Article 26 Withholding Tax liabilities. Conversely, the Petitioner argued that since vBWAPPL is not a shareholder, the payment cannot be legally categorized as a dividend under both the Income Tax Law and the Indonesian Company Law.

Legal Reasoning: Shareholding Relationships and Corporate Profits

Implications for Taxpayers Facing Transfer Pricing Audits

This ruling provides crucial implications for taxpayers facing transfer pricing audits. Even if an expense is adjusted at the corporate level (primary adjustment), it cannot be automatically reclassified as a dividend subject to Article 26 tax if the subjective criteria of being a shareholder are not met. This reaffirms that legal certainty and formal definitions within the Tax Law must prevail over mere administrative assumptions.

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