Winning Strategies Against Constructive Dividend Assessments: Lessons from PT LW Case

Implementation of Secondary Adjustments Following Transfer Pricing Corrections

The implementation of secondary adjustments following transfer pricing corrections has become a major focus for the Directorate General of Taxes (DGT) in securing tax revenue from cross-border transactions. The PT LW case highlights a sharp conflict between the tax authority's assumption regarding constructive dividends and the operational reality of a company experiencing fiscal losses. This dispute centers on a fundamental question: can the difference in affiliation transaction values be automatically classified as a dividend subject to Article 26 Income Tax without any actual cash flow?

Conflict Over Constructive Dividend Assumptions and PMK-22/2020

In the proceedings, it was revealed that the Respondent made a correction to the Article 26 Income Tax Base for December 2020 amounting to IDR 6.07 billion as a consequence of sales corrections. The DGT relied on PMK-22/2020, which mandates secondary adjustments. Conversely, PT LW argumentatively stated that such adjustments create legal uncertainty and international economic double taxation, given there is no guarantee that the tax authority in the partner country (South Korea) would grant a correlative adjustment.

Legal Perspective and Decision of the Tax Court Panel

The Tax Court Panel provided a crucial legal perspective by canceling the entire assessment. The Judges emphasized that the taxation requirement under Article 26 of the Income Tax Law is the existence of payment or the availability for payment. Without evidence of actual profit distribution, and considering that PT LW lacked sufficient retained earnings to distribute dividends under the Company Law, the constructive dividend assumption was deemed legally void. This decision serves as an important precedent for Taxpayers to challenge the automation of secondary adjustment corrections that are not supported by material facts.