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Indonesia vs PK manufacturing Ltd, March 2020 Supreme Court, Case No. 366/B/PK/Pjk/2020

Posted on March 19, 2020 | By Courts of Indonesia | No comments

Category: Disallowed Deduction, Legal Ownership, Losses, Royalty and License Payments | Tag: Contract manufacturing, Definition of royalty, Legal ownership, Royalty payment

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PK manufacturing Ltd was a contract manufacturer of cabins for excavators for the Japanese parent and paid royalties for use of IP owned by the parent.

Following an audit, the tax authorities issued an assessment where deductions for royalty payments were disallowed due to lack of documentation for the Japanese parent’s ownership to the intellectual property.

Furthermore, the tax authorities did not see any economic benefit for the contract manufacturer in paying the royalties, as it had been continuously loss making.

The Company disagreed and brought the case to court.

The Court of Appeal ruled in favor of the tax authorities. Existence and ownership to the intellectual property in question had not been sufficiently documented by the Japanese parent company.

A request for review was filed with the Supreme Court, but the request was later dismissed.

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Related Guidelines

TPG2022 Chapter VI paragraph 6.64When funding is provided to a party for the development of an intangible, the relevant decisions relating to taking on, laying off or declining a risk bearing opportunity and the decisions on whether and how to respond to the risks associated with the opportunity, are the decisions related to the...

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Supplemental Guidance

Indonesia vs PK manufacturing Ltd, January 2019 Court of Appeal, Case No. PUT-115599.15/2014/PP/M.XIIIB Tahun 2019An Indonesian contract manufacturer of excavator cabins paid royalties to its Japanese parent for use of intellectual property. The tax authority disallowed the deductions, citing inadequate documentation of the parent's IP ownership and no demonstrable economic benefit given the subsidiary's persistent losses. The Court of Appeal upheld the assessment in...

Indonesia vs “Indonesia Ltd”, April 2016 Supreme Court, Case No. Put-70118/PP/M.IA/15/2016An Indonesian subsidiary paid royalties to its Japanese parent for the use of intellectual property. Following an audit, the tax authorities disallowed the royalty payments. The Indonesian Supreme Court ruled in favour of the taxpayer in April 2016, finding that the subsidiary had sufficiently proven that the services underlying the...

Indonesia vs PT PK Manufacturing Indonesia, March 2021, Supreme Court, Case No. 131/B/PK/Pjk/2021A Japanese-owned contract manufacturer in Indonesia paid royalties to its parent for use of intellectual property but failed to document IP ownership or demonstrate economic benefit. The tax authority disallowed the deductions, and the Tax Court agreed. In March 2021, the Indonesian Supreme Court dismissed the taxpayer's review request, confirming...

Indonesia vs Panasonic Indonesia, May 2013, Tax Court, Put.45162/2013Panasonic Indonesia sought deductions for royalties and technical service fees paid to Panasonic Corporation Japan, amounting to 3% and 1% of net sales respectively. The Indonesian tax authorities disallowed these deductions, arguing no actual services were received and that a contract manufacturer should not pay royalties. The Tax Court ruled...

Indonesia vs Roche Indonesia, February 2014, Tax Court, Put.50616/2014Roche Indonesia's deductions for royalties paid to F. Hoffmann-La Roche & Co. were disallowed by Indonesian tax authorities and upheld by the Tax Court in 2014. The court found that Roche Indonesia failed to prove the value, existence, and ownership of the underlying intangible assets. Half of the disputed marketing...

Indonesia vs Sharp Semiconductor Indonesia, December 2013, Tax Court, Put.49339/2013Sharp Semiconductor Indonesia claimed deductions for royalties paid to its Japanese parent, Sharp Corporation. The Indonesian tax authority disallowed the payments, arguing no demonstrable benefit was received. The Tax Court ruled in favour of the tax authority in 2013, finding the taxpayer failed to prove the existence of know-how, training,...

Poland vs “Brewery S.A.”, March 2019, Provincial Administrative Court, Case No I SA/Lu 48/19A Polish brewery transferred its trademarks to a Cyprus subsidiary and subsequently paid royalties for their use. The tax authority disallowed the deductions, finding the payments lacked genuine business purpose and were designed solely to generate artificial tax costs. The Provincial Administrative Court dismissed the brewery's appeal in March 2019,...

Portugal vs R… Cash & C…, S.A., June 2023, Tribunal Central Administrativo Sul, Case 2579/16.6 BELRSA Portuguese subsidiary paid royalties to its Polish parent company for trademark rights while also providing unpaid management and promotion services for those brands. The tax authority disallowed the royalty deductions, arguing the arrangement deviated from arm's length conditions. After the Administrative Court annulled the assessment, the Court of Appeal...

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Indonesia vs PK manufacturing Ltd, March 2020 Supreme Court, Case No. 366/B/PK/Pjk/2020

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