Many companies hedge risks they cannot control: exchange rates, interest rates, or commodity prices. When the market moves in favor of the hedged position, the hedging contract records a loss, and that loss is often disallowed by the DJP (Directorate General of Taxes, Indonesia’s tax authority) on the grounds that the transaction was speculative.
Such corrections can be challenged. In a corporate income tax (PPh Badan) dispute handled by AnB Consulting, the Tax Court (Pengadilan Pajak) canceled the entire hedging correction, worth millions of US dollars. This article covers the DJP’s usual arguments and how to prepare a defense.
Key points
- Indonesia’s Income Tax Law does not specifically regulate hedging losses. The test is whether the expense relates to the company’s business.
- Net settlement (cash-settled or non-deliverable) does not automatically mean speculation.
- A correction built on a false premise can be overturned with facts.
- Documentation prepared when the contract is signed often decides the outcome of a dispute.
How the Income Tax Law treats hedging losses
The Income Tax Law (UU PPh) has no specific provision on losses from derivative transactions. Gains are clearly taxable income (Article 4(1) of the Income Tax Law). For losses, the test goes back to Article 6(1)(a): an expense is deductible if it relates to earning, collecting, and maintaining income.
This is where hedging and speculation differ. A hedge protects an asset, liability, or cash flow the company actually has, such as a US dollar import payable, a floating-rate loan, or production that will be sold. Speculation seeks to profit from market movements without any underlying exposure. Without a specific rule, the case rests on facts and documents.
Three common grounds for correction, and how to respond
“No delivery of the underlying asset, so it is speculation”
Many hedging instruments are settled on a net basis, such as non-deliverable currency forwards, interest rate swaps without exchange of principal, or commodity swaps with a bank. The absence of physical delivery is a feature of the instrument, not evidence of speculative intent. Show how the contract’s value, period, and benchmark match the company’s exposure.
“The pricing basis is unclear”
This argument is weak if the contract references a recognized and verifiable benchmark, such as an official reference exchange rate, a benchmark interest rate, or an exchange settlement price. Provide the contract and the benchmark data for each settlement date.
“Hedging was unnecessary because the risk was already covered”
Auditors sometimes argue that the company already had a natural hedge. For example, its selling price is assumed to be fixed, or its revenue is assumed to be in the same currency. Address the premise, not only the conclusion. If the facts show the risk was real, the conclusion falls with it.
Illustration: how a hedge locks in cost
PT Contoh Jaya (a fictitious company) imports raw materials and has a USD 1,000,000 payable due in three months. To protect its budget, it buys a forward contract from a bank at IDR 16,000 per US dollar.
Scenario 1: the rupiah strengthens to IDR 15,500.
- Payment of the payable: IDR 15.5 billion.
- Forward: the company bears the difference of (16,000 minus 15,500) times USD 1,000,000, or IDR 500 million. This is the hedging loss.
- Net cost: IDR 16 billion, in line with the budget.
Scenario 2: the rupiah weakens to IDR 16,800.
- Payment of the payable: IDR 16.8 billion.
- Forward: the bank pays the company IDR 800 million. This gain is taxable.
- Net cost: still IDR 16 billion.
The illustration shows two things. First, the forward loss mirrors the lower import cost, so it is clearly business related. Second, if hedging gains are taxed in one year but losses are disallowed in another, the company is taxed on an economic position it never enjoyed.
Case example: a hedging dispute handled by AnB
The taxpayer in this dispute was a palm oil plantation company. It sold crude palm oil (CPO) at market prices and entered into cash-settled commodity swaps with an independent bank. For a tax year before the HPP Law (Law on the Harmonization of Tax Regulations) took effect, the DJP disallowed the swap losses on the three grounds discussed above. The defense addressed each one:
- A bank cannot take physical delivery of CPO, so cash settlement was the normal form.
- Pricing referenced the official settlement price of a commodity derivatives exchange, which is also one of the benchmarks the government uses to set CPO reference prices.
- The natural hedge argument assumed the company sold at fixed prices. In fact, it sold at market prices.
The Tax Court canceled more than 98% of the corrections, including the entire hedging correction. The Tax Court had also canceled the same correction, on the same instrument, for the prior tax year. That decision is not binding precedent, but consistent facts across years strengthen the taxpayer’s position.
The principle is simple: corrections must rest on evidence. Indonesia’s tax audit rules require an auditor’s findings to be based on strong and relevant evidence (Minister of Finance Regulation/PMK 15 of 2025). At the Tax Court, decisions are based on the assessment of evidence and the judges’ conviction (Article 78 of Law Number 14 of 2002).
A note from the same case: in-kind benefits at the work site
The same dispute involved corrections to in-kind benefits and employee facilities at the plantation, because the company held no valid remote-area designation (SKDT, Surat Keputusan Penetapan Daerah Tertentu) for that year. The company showed that the location had not changed since it first received an SKDT, and the panel canceled most of the correction.
Substance can prevail over form, but the outcome depends on the panel and the evidence, so it should not be the primary strategy. Since tax year 2022, in-kind benefits are generally deductible (PMK 66 of 2023), so this lesson matters most for tax years up to 2021 still under audit or in dispute.
What this means for your business
CFOs and treasury teams. Hedging decisions also have a tax dimension. A commercially sound contract can still be corrected if the documentation does not show the exposure being hedged.
Tax teams. Auditors’ questions on hedging should be anticipated when preparing the annual tax return, not when the SPHP (notice of audit findings) arrives.
Boards of directors. Large hedging disputes tie up cash and can last for years. Prevention costs far less.
Practical steps
- Adopt a written hedging policy approved by the board, covering objectives, instrument types, and limits.
- Map the hedged exposures: foreign currency payables or receivables, floating-rate loans, or planned commodity sales and purchases.
- Keep contract amounts within the hedged exposure.
- Match the contract period to the exposure period.
- Keep evidence of the exposure, such as import contracts, loan agreements, or sales contracts.
- Document the price or rate benchmark and its data for each settlement date.
- Complete hedge accounting documentation under the applicable accounting standards.
- Transact with independent counterparties, such as banks, and keep all trade confirmations.
A hedging loss is not automatically a problematic expense. If the exposure is real and documented, a company has solid grounds to defend it.
If your company’s hedging losses or other expenses have been corrected by the DJP, AnB Consulting’s Tax Dispute team can support you through audit, objection, appeal, and judicial review (Peninjauan Kembali). Contact us to discuss your position.
This article is for general information only and does not constitute tax or legal advice for any specific situation. For guidance on how it applies to your business, please contact the AnB Consulting team.
