Business & Management Studies

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.