P.T. Sanken Electric Indonesia Ltd. – an Indonesian subsidiary of Sanken Electric Co., Ltd. Japan – paid royalties to its Japanese parent for use of IP.
The royalty payment was calculated based on external sales and therefore did not include sales of products to group companies. The royalty payments were deducted for tax purposes.
The tax authorities denied the deduction as the license agreement had not been registrered in Indonesia. Furthermore, the royalty payment was not found to have been determined in accordance with the arm’s length principle.
P.T. Sanken Electric Indonesia Ltd appealed the decision of the Tax Court.
Judgement of the Tax Court
The tax court set aside the assessment and decided in favor of taxpayer.
Indonesia PUT 68357-PP-MIA-15-2016
It is an important decision by the Indonesian Tax Court. The tax authorities had denied the deduction of royalty based on the reasons of absence of proof of ownership of IP by the Japanese company, absence of documents to demonstrate the use of IP and also the absence of economic benefits. The Court was satisfied with the documents provided by the company to demonstrate all aspects questioned by the tax authorities. The Tax Court cancelled the decision of the tax authorities holding that it was not based on strong evidence.
The issue whether 5% rate was an arm’s length rate was not questioned and tested by the tax authorities because it denied the deduction of the full amount. The decision suggests an important aspect that royalty is not required to be paid on sales made to the licensor of the technology. Whether royalty can be paid on sales made to other group companies is an issue and will depend on the pricing of products sold. There is an Italian court decision requiring the charging of royalty on sales made to group companies. The decision of the Italian Court was in the case of a Licensor and tax authorities had taken the position confirmed by the Court.
The Supreme Court confirmed the Tax Court decision in 2020.