Prior to the enactment of Government Regulation No. 55 of 2022, titled “Adjustment of Regulations in the Field of Income Tax” (“GR 55/2022”), Indonesia had several regulations that potentially granted the Directorate General of Taxes (“TAX AUTHORITY”) the authority to recalculate and reclassify income between parties with a special relationship, including Income Tax Law, Law No. 7 of 2021 on Harmonization of Tax Regulations, and Ministry of Finance Regulation No. 22/PMK.03/2020. However, this authority was insufficient, as the TAX AUTHORITY frequently lost to taxpayers during tax proceedings in Tax Courts. This publication will examine one of the cases that could serve as an illustration of this situation. This circumstance necessitates the issuance of a new regulation that provides even more legal foundation and authority to the TAX AUTHORITY to carry out the recharacterization and recalculation of tax for incomes derived from transactions between parties with a special relationship, i.e. Tax Court Decree No. PUT-012352.13/2023/PP/M.IIIB dated 15 July 2025.
Case Background
This case pertains to the recharacterization of royalties and interest fees as dividends for the financial year 2020, primarily due to the nature of special relationship transactions between the parties involved. The TAX AUTHORITY has informed that the taxpayer is liable to pay income tax as a result of an adjustment related to transfer pricing on corporate income tax (royalties and interests), which has been reclassified as a dividend. The taxpayer contends that the recharacterization is inaccurate because the transaction does not meet the dividend criteria established by prevailing laws, including the absence of a shareholders-subsidiary relationship between the parties. Conversely, the TAX AUTHORITY employs the legal framework provided by Income Tax Law No. 7 of 2021 on Harmonization of Tax Regulations and Ministry of Finance Regulation No. 22/PMK.03/2020 to adopt a secondary adjustment approach for reclassifying royalties and interests as deemed dividends. One of the reasons cited by the Department of Taxation (TAX AUTHORITY) for its actions is the belief that these services could have been provided by the Taxpayer’s own employees, potentially leading to duplication of services rendered by affiliated parties. Based on this assessment, the TAX AUTHORITY concludes that the Taxpayer is engaging in profit shifting within the group.
Tax Court Decision
In essence, the panel of judges ruled in favor of the taxpayer. They asserted that, despite the transactions in question being between parties with special relations, the taxpayer had complied with the regulations by preparing the necessary TP documentation. The nature of the transactions can also be substantiated by the taxpayer based on the evidence provided. Therefore, the recharacterization of the profits derived from royalties and interests as deemed dividends is inappropriate.
Connection between the Case and GR 55/2022
As previously discussed in the introductory section of this publication, the prevailing circumstances that frequently result in the loss of TAX AUTHORITY to the taxpayer in tax court necessitate the government (and also the TAX AUTHORITY) to draft more comprehensive regulations that can effectively aid the TAX AUTHORITY in collecting taxes from transactions between related parties that are ostensibly disguised as royalties or interests. Consequently, the issuance of GR 55/2022 serves as an additional implementation of similar regulations that have previously been regulated under the Income Tax Law, specifically Law No. 7 of 2021 on Harmonization of Tax Regulations, and the Ministry of Finance Regulation No. 22/PMK.03/2020.
Under Article 32 of GR 55/2022, the TAX AUTHORITY is empowered to reassess a taxpayer’s income, deductions, and reclassify debt as equity for the purpose of calculating taxable income. The authority granted to the TAX AUTHORITY under Article 32, paragraph (3) of GR 55/2022, aligns with existing regulation under the Income Tax Law, wherein such re-determinations shall be conducted in accordance with the principle of fairness and business custom.
Commentary
Although the prevailing laws and regulations have granted the TAX AUTHORITY the authority to reclassify income as dividend, such authorization is not granted in an absolute or unrestricted manner. Once a tax case is brought before the court, it would be up to the panel of judges to review the case and implement their interpretation of the regulations to that specific case. Boundaries and procedures for evaluating compliance serve as safeguards to restrict such authority, as evidenced in the above case in which the Tax Court overturned the TAX AUTHORITY’s decision.
For Further Information, Please Contact:
MetaLAW, Legal Consultant, Jakarta, Indonesia
general@metalaw.id
