Regulation Update
Confirmation of Secondary Transfer Pricing Adjustment as Dividend

Zulhanief Matsani, Monday, 13 February 2023

Confirmation of Secondary Transfer Pricing Adjustment as Dividend
Ilustrasi: secondary adjustment atas selisih harga transfer perusahaan afiliasi dengan harga wajarnya dianggap dividen tidak langsung

The government emphasized that the secondary adjustment on the difference between the transfer price of an affiliated company and its arm's length price is a form of profit sharing or indirect dividend. So it must be subject to Income Tax in accordance with applicable regulations.

This confirmation is contained in Article 36 paragraph (6) Government Regulation (PP) Number 55 of 2022. This policy is a derivative of Article 18 paragraph (3) of the Law concerning Harmonization of Tax Regulations (HPP Law), which has not been detailed in explaining the definition of a dividend.

In the regulation issued in 2021, the government only explains the authority of the Director General of Taxes (DGT) in determining the arm's length price of an affiliated transaction, using various applicable methods. Thus, it can be ascertained that the debt arising from affiliated transactions is hidden capital or not.

For information, secondary adjustment is a further correction of primary adjustment for affiliated transactions or transfer pricing between business groups. The provision on this matter is also contained in the Minister of Finance Regulation (PMK) Number. 22/PMK. 03/2020.

Read: Secondary Adjustment, New Uncertainty, and Double Taxation Potential

Double Taxation Risk

It should be noted the provision regarding secondary adjustment is the government's effort to prevent base erosion and profit shifting (BEPS).

However, in practice, this policy raises a number of concerns for taxpayers. First, there is a concern that there will be problems with the existence of a secondary adjustment if the primary correction is not convincing.

Second, taxpayers are also faced with the risk of double taxation if the transfer price correction is considered a dividend and deducted by income tax, while the counterparty cannot be credited. This risk may occur not only for cross-border or jurisdictional transactions but also for domestic transfer price corrections.

Third, the existence of a secondary adjustment also allows for excessive transfer price corrections to occur. When the company's correction value is large, the secondary correction can be larger, plus if there is a penalty.

Affiliation VS Ownership

Another issue that remains to be noted from the provisions regarding secondary adjustment is related to the relevance of dividend determination on special relationship transactions that arise not due to ownership relationships.

Moreover, in Article 35 paragraph (2) PP Number 55 of 2022, the definition of a special relationship does not only occur in affiliated transactions arising from ownership, control or blood relations.

Meanwhile, transactions affected by special relationships also include transactions between parties that are not related. However, an affiliated party of one or both parties to the transaction determines the counterparty and the transaction price.

So, it is certainly unusual for affiliated transactions to be declared dividends, even though they are not tied to ownership relationships or even carried out with independent parties.

In fact, the distribution of dividends or profits either directly or indirectly should only be done if there is a significant ownership relationship.

OECD Guidelines

The Organization for Economic Co-operation and Development in the Transfer Pricing Guidelines (OECD TPG) 2022 actually provides three alternatives to tax authorities in the world in determining the secondary adjustment of transfer pricing.

In addition to using the constructive dividends approach chosen by Indonesia, the OECD also offers other alternatives, namely the constructive equity contribution approach and the constructive loans approach.

The application of secondary adjustment is already common in various countries. However, not all countries have applied it. OECD data states of the 74 countries recorded, 51% of them, or as many as 38 countries, have not implemented secondary adjustment.

Meanwhile, the number of countries issuing domestic regulations related to secondary adjustments was less than half or only 36 countries, including Indonesia. Unfortunately, what secondary adjustment approach applies in these countries is not known.

Options for Indonesia

With several risks and taxpayer concerns, it is important for the government to review the use of a single secondary adjustment approach, namely dividends. The OECD's proposed three approaches could be an option to consider.

We all definitely agree that tax avoidance loopholes must be tightly closed. However, taxpayers also have the right to get certainty and a sense of comfort in carrying out all applicable policies. (ASP/KEN)



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