Imposition of Constructive Dividend in Affiliated Transactions (Secondary Adjustment)

A recent enforcement from the Indonesian Tax Administration based  on the Minister of Finance Regulation number PMK-22/PMK.03/2020 about Procedures for Implementing the Advanced Pricing Agreement, states that this Minister of Finance regulation can be used as a legal basis and/or guideline for implementing the imposition of secondary adjustments resulting from transfer pricing corrections (primary adjustments), in audits carried out after the effective date as of 18th March 2020 without paying attention to the tax year being audited. For the guidelines and applying the transfer pricing corrections in audits carried out before the enactment of PMK-22/PMK.03/2020, the provisions in the Income Tax Law, PER-22/PJ/2013, and SE-50/PJ/2013 can be used.


Article 22 Paragraph (8) Minister of Finance Regulation Number: 22/PMK.03/2020 concerning Procedures for Implementing a Transfer Pricing Agreement (Advanced Pricing Agreement) states that: “Article 22 (8) The difference between the value of Transactions Affected by Affiliated Enterprises which are not in accordance with the Arm’s Length Principle and the value of Transactions Influenced by the Affiliated Enterprises which are in accordance with the s Arm’s Length Principle is considered as dividends which are subject to Income Tax in accordance with the provisions of the laws and regulations in in the field of taxation”.


The income tax on dividends arising from this is final income tax, as stated regulated in Article 26 of the Income Tax (UU PPh) Law. Due to its final nature, withholding tax on dividends cannot be credited to income recipients in the affiliated company’s country, thereby giving rise to the potential of double taxation. The Organization for Economic Co-operation and Development (OECD) has also warned that with the implementation of secondary adjustments there could be potential for double taxation in the implementation of secondary adjustments as stated in Chapter IV Paragraph 4.70. The 2020 OECD Transfer Pricing Guidelines state that: “4.70 A secondary adjustment may result in double taxation unless a corresponding credit or some other form of relief is provided by the other country for the additional tax liability that may result from a secondary adjustment. Where a secondary adjustment takes the form of a constructive dividend any withholding tax which is then imposed may not be relievable because there may not be a deemed receipt under the domestic legislation of the other jurisdiction.” Based on the guidelines above, the potential for double taxation can be avoided if appropriate tax credits (corresponding credits) or some other forms of relief are provided by the counterparty country for tax liabilities that may arise as a result of secondary adjustments. If the Tax Authority continues to carry out secondary adjustments in the form of constructive dividends, any tax deductions may not be refunded or credited because it is considered that there is no receipt of the dividends from the perspective of the domestic law of the opposing country’s jurisdiction. Based on the discussions above, it is debatable to agree of the Secondary Adjustment because it is contrary to the principle of justice as it results in double taxation.


Besides that, amongst other considerations, in accordance with Law Number 7 of 2021 concerning the Last Amendment to Law Number 7 of 1983 concerning Income Tax, does not regulate the same things and not in line with what are considered as dividends as regulated in Article 22 paragraph (8) PMK 22 of 2020. Considering this, what is considered a dividend in the Ministry of Finance Regulation is contradictory with the definition of dividends that have been stipulated in the Law.





TBrights is a tax consultant in Indonesia which currently is an integrated business service in Indonesia providing comprehensive tax and business services

By Olina Rizki Arizal – Partner TBrights




Leave a Comment

Your email address will not be published. Required fields are marked *

Whatsapp Us
💬 Need Consultation ?
Hello, Can TBrights help you?