At an event hosted by the Institute of Indonesia Chartered Accountants (Ikatan Akuntan Indonesia/IAI) and Moody’s in 2024, Affan Nuruliman, Head of the DGT’s Special Transaction Audit Subdirectorate, disclosed that intercompany transactions in Indonesia expanded from IDR 6,248 trillion in 2021 to IDR 10,360 trillion in 2022. Correspondingly, transfer pricing audits surged, resulting in adjustments exceeding IDR 6 trillion. Transfer pricing disputes before the Tax Court remain substantial, recording 310 cases in 2020, 249 in 2021, and 186 in 2023.
International tax dispute resolution using the Mutual Agreement Procedure (MAP) and Advance Pricing Agreement (APA) has also gained momentum. DGT records show MAP and APA filings rising from 43 in 2021 and 37 in 2022 to 55 in 2023 and 59 in 2024. Concurrently, a 2024 global survey of tax practitioners across 37 jurisdictions found that nearly 55% of surveyed countries enforce secondary adjustments, up from about 40% in 2021 (DGT, 2025; International Tax Review, 2024).
The trends are particularly relevant for taxpayers because the treatment of secondary adjustments continues to vary across jurisdictions. These differences can create additional tax liabilities and, in cross-border transactions, a risk of double taxation.
Understanding Secondary Adjustments
In transfer pricing terminology, a primary adjustment refers to an adjustment made by a tax authority to a taxpayer’s income and/or allowable deductions to align pricing with the arm’s length principle (ALP).
A corresponding adjustment is an adjustment granted to the counterparty to reduce or eliminate economic double taxation resulting from a primary adjustment, subject to domestic laws and applicable tax treaties.
A secondary adjustment, meanwhile, refers to a further tax consequence arising when a jurisdiction recharacterizes the excess profit resulting from a primary adjustment into a secondary transaction and levies tax on that transaction.
Legal Basis
The statutory basis for secondary adjustments in Indonesia originates in the Elucidation to Article 18(3) of the Income Tax Law, as amended by Law of the Republic of Indonesia Number 7 of 2021 concerning the Harmonization of Tax Regulations. Under this provision, any variance between non-arm’s-length related-party transaction values and arm’s-length transaction values is treated as a dividend subject to withholding tax.
This rule is reinforced under Article 36(6) of Government Regulation Number 55 of 2022, as amended by Government Regulation Number 20 of 2026 and detailed further under Article 37 of Minister of Finance Regulation (Peraturan Menteri Keuangan/PMK) Number 172 of 2023 concerning the Application of the Arm’s Length Principle to Related-Party Transactions.
PMK Number 172 of 2023 provides detailed execution guidelines. Under Article 37(1), when the DGT redetermines income and/or deductions in calculating taxable income, or where a taxpayer applies the arm’s length principle, and a difference arises between the non-arm’s length transaction value and the arm’s length transaction value, the difference constitutes an indirect distribution of profits to a related party and is treated as a dividend.
The dividend incurs income tax under tax regulations, with timing governed by Article 37(3). For qualifying transactions under a tax treaty, Article 38(2) of PMK Number 172 of 2023 allows taxpayers to claim applicable treaty benefits.
PMK Number 172 of 2023 also specifies circumstances in which the secondary adjustment provisions do not apply. Under Article 37(4), the treatment under paragraph (1) does not apply where there is an addition and/or repayment of cash or cash equivalents equal to the adjustment difference and/or where the taxpayer agrees with the transfer pricing determination made by the DGT.
For an addition or repayment of cash or cash equivalents, Article 37(5) requires the transaction to occur before the tax assessment letter is issued. This rule offers taxpayers an opportunity to avoid the consequences of a secondary adjustment during the audit phase.
The OECD Standards
The OECD Transfer Pricing Guidelines 2022 clarify that primary adjustment and corresponding adjustment do not change the fact that excess profits resulting from a transfer pricing adjustment may not reflect the allocation of profits that would have arisen under an arm’s-length transaction. Consequently, several jurisdictions assert that secondary transactions under domestic law occurred in respect of those excess profits. The tax imposed on that secondary transaction gives rise to the secondary adjustment.
According to the OECD TPG 2022, secondary transactions generally take three forms, i.e., a constructive dividend, a constructive equity contribution, or a constructive loan. Under the constructive dividend approach, the excess profit is treated as a dividend. Under a constructive equity contribution, it is treated as a capital contribution. Under a constructive loan, it is treated as a loan, potentially creating a repayment obligation and arm’s-length interest charges.
The OECD notes that secondary adjustments could trigger double taxation when the other jurisdiction refuses to grant a corresponding credit or other tax relief. This risk is acute in constructive dividend scenarios, as the withholding tax imposed on a deemed dividend may not be creditable in the recipient jurisdiction if that jurisdiction does not recognize a corresponding deemed receipt.
Furthermore, the OECD emphasizes that Article 9(2) of the Model Tax Convention does not explicitly cover secondary adjustments. It neither requires nor prohibits tax authorities from applying them.
Practices Across ASEAN
Regional practices across Southeast Asia show considerable divergence. In Thailand, secondary adjustment consequences on transfer pricing adjustments through constructive transactions are recognized, primarily as deemed dividends or deemed loans. A primary adjustment may therefore trigger additional tax consequences associated with the constructive transaction.
Malaysia takes a different approach. OECD transfer pricing country profiles updated in 2025 confirm that Malaysia’s domestic law contains no statutory secondary adjustment mechanism.
Singapore does not recharacterize transfer pricing adjustments as dividends, equity participation, or loans. Instead, the IRAS levies a flat 5% surcharge on all transfer pricing adjustments, regardless of whether the adjustment results in additional tax payable. This approach differs from the secondary adjustment adopted in Indonesia or Thailand.
Vietnam lacks specific statutory provisions governing secondary adjustments within its transfer pricing framework. Similarly, the Philippines has no secondary adjustment regulations, though Bureau of Internal Revenue (BIR) transfer pricing audit guidelines acknowledge that primary adjustments may lead to secondary adjustments.
This divergence indicates that while the OECD TPG guidelines offer a conceptual model for secondary adjustments, enforcement ultimately depends on each jurisdiction’s domestic laws.
Conclusion
A secondary adjustment is a further consequence of a primary adjustment that determines the tax treatment of excess profits arising from the transfer pricing adjustment. In Indonesia, the legal basis can be found in the Elucidation of Article 18(3) of the Income Tax Law, Article 36(6) of Government Regulation Number 55 of 2022, and Article 37 of PMK Number 172 of 2023.
While Indonesia enforces constructive dividend treatment, PMK Number 172 of 2023 provides circumstances in which the secondary adjustment does not apply. The circumstances include where cash or cash equivalents equal to the adjustment difference are added and/or repaid before the tax assessment letter is issued and/or where the taxpayer agrees with the DGT’s transfer pricing determination.
Across Southeast Asia, treatment varies. Thailand imposes tax consequences on certain deemed transactions, while Indonesia treats the adjustment difference as a dividend subject to specific exceptions. Singapore instead applies a separate 5% surcharge mechanism. Malaysia and Vietnam do not have explicit secondary adjustment provisions, whilst the Philippines recognizes the possibility of secondary adjustments in its audit guidelines but has yet to introduce specific regulations.
For taxpayers engaged in cross-border affiliated transactions, these differences warrant close attention, as secondary adjustments can result in additional withholding tax and potential double taxation. For further assistance, Ideatax can help taxpayers review their transfer pricing policies and anticipate secondary adjustment risks arising from cross-border transactions.
Legal References
- Law of the Republic of Indonesia Number 7 of 1983 concerning Income Tax, as amended by Law of the Republic of Indonesia Number 7 of 2021 concerning Harmonization of Tax Regulations.
- Government Regulation Number 55 of 2022 concerning Adjustments to Income Tax Provisions, as amended by Government Regulation Number 20 of 2026.
- Minister of Finance Regulation Number 172 of 2023 concerning the Application of the Arm’s Length Principle to Related-Party Transactions.
- OECD. (2022). OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022. Paris: OECD Publishing.
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