Abstract
The rapid changes of globalization
provide easy access for mobilization of people, goods, and investment across
countries creating multinational companies to record royalty expenses in the
form of utilization of intangible properties and or know how. In nowadays
digital era, numbers of cross border royalty payment transaction by the
corporate taxpayers are more intensive in terms of amount and size. In the
event of tax audit, this royalty payment usually being adjusted as non deductible
expense by the Indonesia Tax Authorities despite technically the prevailing
Income Tax Law mentions in explicit that this royalty payment is considered as
deductible expense for the purpose of corporate income tax calculation. The
objective of this research is to identify the rationale of fiscal adjustment
made by the ITA on this royalty expense as well as to analyse this practical
challenge from legal certainty aspect and efforts that are carried out by the
corporate taxpayers to solve this tax dispute. This research used a qualitative
approach with in depth interview and literature study for its data collection
technic. Result of this research identified that royalty expenses in the form
of utilization of intangible properties and or know how, during the tax audit
process conducted by the ITA, usually become a fiscal adjustment due to
unfulfillment of 3 cumulative tests, namely existence test, economic or commercial
benefits test and arms length principle test. However, from the verdicts of the
Indonesian Tax Court, we found many of disputes were won by the taxpayers
making this fiscal adjustment ambigu. As such, it will be critical for the ITA
to reformulate the provision of royalty as deductible expense in order to
increase legal certainty for corporate taxpayers.
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