The legal basis for the fact that Supreme Court justice must make legal arguments in deciding upon a dispute is as follows: First, Article 24 clause (1) of the Republic of Indonesia's 1945 Constitution regulates that the judicial power is an independent power to establish justice to enforce the law and justice. This stipulation determines that the constitution mandates that as the executor of judicial power, the Supreme Court is an independent power to enforce the law and justice. A law may be written, i.e., the state laws and its implementing regulations. However, it may also be unwritten, namely the law that lives in society. This means that Indonesian judges need to enforce the law to achieve justice. The law is a tool to manifest justice. Aquinas classifies the law into four types, namely: 1) lex aeterna: the eternal law of God; 2) lex divina: the revealing of divine laws; 3) ius natural: the natural law as an eternal legal participation of rational beings; and 4) lex humana or lex positive: human laws or positive law. Thus, the law is merely a positive law. There are other laws aside from that law. In this case, Aquinas thinks that the positive law that the state creates, has the possibility of becoming unjust. It is advised to not comply with it as the state must enforce justice for its people, not vice versa (Coyle, 2015).

Second, the Republic of Indonesia’s Law No. 48 of 2009 on Judicial Power: 1) Article 5 clause (1) regulates that judges must discover, follow, and understand the values of law and the sense of justice that exist in society; 2) Article 14 clause (1) and clause (2) regulate that decisions are made based on the confidential judicial deliberation trial. In that deliberation trial, each judge must deliver their written opinions and considerations on the examined case. It becomes an inseparable part of that decision; 3) Article 50 clause (1) regulates that courtly decisions must not only contain the reasons and the basis of the decision. However, it must also contain certain articles from the related legal regulations or unwritten legal sources that are used as the basis of that decision; and 4) Article 53 clause (2) regulates that judicial decisions must encompass judges’ legal considerations that are based on correct and accurate legal bases and reasons.

Third, the Republic of Indonesia's Law No. 14 of 2002 on Tax Courts: 1) Article 84 clause (1) letter h, which regulates that Tax Court Decisions must contain legal reasons that become the basis of the decision and 2) Article 78 which regulates that Tax Court Decisions are made based on the evidence assessment results and relevant tax legal regulations based on the rationing of judges.

Legal argumentation is general argumentation in daily life that is applied in the law as a rationality criterion to determine abstract and general regulations on specific and concrete facts (Weinreb, 2016). Judges use legal arguments to analyze and resolve disputes in their legal consideration to become responsible for their decisions (Feteris, 2017). This is so that their decisions may rationally be accepted based on the true legal facts (Feteris, 2017).

The model that may be used to make decisions for judges includes legal rationing, legal application, legal interpretation, legal construction, and legal evaluation of previous decisions (Dudash, 2022). Legal rationing is the general legal system that is influenced by legal studies and philosophies as opposed to wisdom (Nussbaum, 2020)(Trelles & Paredes, 2021). Legal philosophies and legal principles adopted by judges in the judicial process will influence the making of decisions (Amaya, 2023)(Blažková, 2022).

The Bayesian approach in legal rationing proposes legal syllogism-based rationing between evidence, the credibility of evidence, and the final hypothesis (Constant, 2024). Formal legal rationing offers a framework to make decisions (Zurek et al., 2022) on disputes that consider the core of disputes, applicable laws, relevant facts and evidence, the application of rules on facts, conclusions by still considering the values that judges believe in (Klappstein, 2021), and legal ethics (Navarro, 2022).

The law is not limited to written regulations as there are unwritten laws that exist in society. Legal rationing in the courtly process also sometimes considers sociological and extralegal factors (Leszczyński, 2020). In Indonesia, there are some judicial decisions that are not based on legal arguments. They are not based on legal facts or the sense of justice in society. Such cases became a topic of debate and attracted public attention (Lisdiyono, 2017). Research in Ecuador shows similar situations (Castro-Montero & Proaño Durán, 2018). Meanwhile, Polish judges have an increasing tendency to use international law in making decisions to increase the quality of those decisions (Maroń, 2020).

Geoffrey Samuel proposed a new approach to understanding legal rationing through the contexts of legal epistemology and knowledge which highlights the importance of judicial arguments in previous decisions as a tool to help judges make decisions in the future ((Leszczynski et al., 2019); (Samuel, 2018)). Even so, previous jurists’ decisions have strengths and weaknesses (Florczak-Wątor, 2022) as well as analogies (Rigoni, 2021). They can help current judges understand legal regulations and their applications ((Hernández, 2023); (Pavčnik, 2022)). Previous judicial decisions are important tools in making judicial decisions in the general legal system even though currently, the United States Supreme Court sometimes do not follow them in constitutional rationing (Schultz & Schultz, 2022). Previous judicial decisions do not always have the same argument (Sherwin, 2023). This is because there are always judges who develop their legal principles and who are not bound to previous judicial decisions (Re, 2022). Even though it is prohibited to quote precedents in China, judges are also indirectly influenced by previous judicial decisions (Liu et al., 2021).

In every decision to enforce the law and justice based on written laws, judges must always make arguments, such as laws and unwritten laws from society. Aquinas divided the law into lex aeterna, lex divina, ius natural, and lex humana or lex positif. As lex positif, the law is merely a form of law and judges need to consider all types of law, including international law, to achieve true justice. Judges must also explore and understand the legal values and the sense of justice in society. They must provide written considerations in the deliberation trial and make sure that their decisions contain certain reasons, legal bases, legal regulation articles, and unwritten legal sources. To create good legal arguments, legal rationing, and legal interpretation, judges must understand legal philosophies, legal principles, legal science, and judicial arguments in previous decisions, as well as explore the law and sense of justice that live in society.

The legal basis of transfer pricing in Indonesia is regulated by the Republic of Indonesia's Law No. 7 of 1983 on Income Tax which has gone through several amendments. The most recent one is the Republic of Indonesia's Law No. 7 of 2021 on the Alignment of Taxation Laws, Article 18 clause (3). This regulation stipulates:

The Taxation General Directory has the authority to redetermine the magnitude of income and deductions as well as determine debt as the capital to calculate the magnitude of Taxable Income that has a special relationship with other Taxpayers with appropriateness and business practices that are not influenced by special relationships by using the method of price comparison between independent parties, the method of return sales price, extra fee method, and other methods. This explanation states that the government has the authority to prevent tax avoidance by taxpayers by decreasing, avoiding, or postponing tax payments that they are indebted to pay. One of the ways is to carry out transactions with the parties that have special relationships that are not according to reality, that violate the principle of substance of a form, such as reporting under income, over-costs, small profits, or irrational business losses even though they have commercially operated for five years. The Taxation General Directory may once again determine the magnitude of income and expenditures based on the principle of justice and business practices. If the inclusion of hidden capital is deemed debt, that debt may be deemed company capital. The interest of debt, which is deemed capital, cannot be decreased in calculating taxable income, while related parties that obtain interest are deemed dividends that are imposed with tax. Differences in the irrational transaction value are also deemed dividend that is imposed with income tax.

Transfer pricing involves multinational companies that are located in the whole jurisdiction. Thus, there is a need for international laws or at least international agreements, in this case the OECD (the Organisation for Economic Co-operation and Development) Transfer Pricing Guidelines, that do not only include state laws but also the laws that live in international communities. According to the OECD, prices in transactions between companies in multinational groups must strictly be monitored by national and international tax authorities to prevent the shift of profit to countries with low taxes so that there is a smaller amount of tax that must be paid. The transfer pricing practice that often happens is the payment of management fees, namely the fees that are burdened by the parent company to subsidiary companies for management services. Disputes happen when tax authorities assess that the payment of management fees does not apply the Arm's Length Principle, then there is correction according to the appropriate market price. Thus, the amount of fees decreases, the amount of business profits increases, and the tax that must be paid increases (OECD, 2022).

The OECD Transfer Pricing Guidelines emphasize the importance of applying the Arm's Length Principle (Solilova & Nerudova, 2018). This is because if it is not applied, it will lead to the increase in tax obtainment in the country of the parent company which is generally a developed country and a decrease in the tax obtainment in the country of the subsidiary companies that are usually developing countries, affecting their welfare (Keuschnigg & Devereux, 2013).

The application of the OECD Transfer Pricing Guidelines in Poland may provide a win-win solution between taxpayers and tax authorities compared to the Czech Republic (Brychta & Sulik-Górecka, 2019). In the European Union, the application of the Arm's Length Principle by tax authorities on the allocation of profits is not very effective. However, the Court may give a just decision (Peters, 2022).

So that the payment of management costs that are burdened by one company to another company in the group for management services is given by the Arm's Length Principle, taxpayers must correctly document proofs of the existence of transactions. This is so that in the following years when it is audited by tax authorities, it is not corrected (Treidler, 2020). Tax authorities will carry out functional analyses on disputes of transfer pricing on management costs to identify manipulation of transfer fees and tax avoidance. Thus, taxpayers must also carry out functional analysis to prevent errors in tax calculation, which may lead tax authorities to determine indebted tax and sanctions (Ignat & Ionescu-Feleagă, 2022). One of the ways to determine whether a transaction applies the Arm's Length Principle or not carrying out a functional analysis of the given management services by comparing the same transaction with unaffiliated parties. Therefore, information technologies must be utilized (Jalan & Misquith, 2021).

The application of the Arm's Length Principle in transfer pricing regulations in Indonesia is regulated in the Law on Income Tax, which regulates that tax authorities have the authority to align taxable income for taxpayers with a special relationship (Dwindahany & Efendi, 2024). The OECD Transfer Pricing Guidelines regulate the Arm's Length Principle that transactions with affiliated companies must be in line with transactions with nonaffiliated parties to prevent tax avoidance through manipulation of transfer fees (Rojo & Nina, 2020). The failure to apply the Arm's Length Principle may increase the tax obtainment of the parent company which is commonly a developed country and decrease the tax obtainment of the country of the subsidiary company which is usually a developing country. This disturbs the developing country's welfare (Kato & Okoshi, 2019).

This research shows that the application of the Arm's Length Principle may bring a win-win solution between taxpayers and tax authorities, such as what is seen in Poland (Georgijew et al., 2021). To make sure that the Arm's Length Principle pays management fees, taxpayers must document proofs of transactions and carry out functional analysis of management services' validity by utilizing information technologies (Bochkarev et al., 2021). Transfer pricing often influences a group of companies that are spread in various jurisdictions with different regulations and tax tariffs. Thus, there needs to be cooperation between international and national tax authorities to prevent tax avoidance which may decrease the amount of tax paid. This is because the obtained tax is used for societal welfare (Brosens & Bossuyt, 2020).

Indonesia applies the self-assessment taxation system where taxpayers must independently calculate, pay, and report their taxes. However, if tax authorities obtain proof that the reported tax obligation is inappropriate, they may issue tax assessments according to the situation. Taxpayers who disagree with the tax determination may propose administrative or legal action in the form of an objection to tax authorities, cassation to the Tax Court, and judicial review to the Supreme Court.

Tax authorities or taxpayers may propose a proposal of judicial review to the Supreme Court. Based on the Supreme Court Decision Directory website, it is known that from 2007 to 2021, there were 196 decisions on transfer pricing tax dispute with the keyword "management fee," which includes taxes in general: 171; Corporate Taxpayer Income Tax: 6; Income Tax Article 21: 1; Income Tax Article 23: 5; Income Tax Article 26: 2; and Value-Added Tax: 11 (M.A.R.I., 2024). For this research, the authors chose decisions from the last two years, namely 2020 and 2021 which consist of twelve decisions. Eight of them were proposed by tax authorities while four of them were proposed by taxpayers. The type of tax chosen was the Corporate Taxpayer Income Tax as the management cost is a cost in calculating the Corporate Taxpayer Income Tax. Meanwhile, other types of taxes are secondary adaptations to the calculations in Corporate Taxpayer Income Tax. Arguments and decisions on the Supreme Court’s judicial review on the dispute of transfer pricing management costs is shown in Table 1.

Table 1 shows that the Supreme Court consistently rejects tax authorities’ proposal of judicial review. The main reason was that the tax authorities’ corrections were not supported by strong evidence, such as what happened in cases No. 1631/B/PK/Pjk/2021 and No. 2089/B/PK/PJK/2017. The Supreme Court prioritizes the principle of material truth, the principle of substance over form, which emphasizes substance rather than formality. Apart from that, it also emphasizes the principle of ne bis vexari rule and the general principle of good governance, especially the principle of legal certainty and accuracy. In decision No. 2089/B/PK/PJK/2017, the Supreme Court Judges also considered the OECD Transfer Pricing Guidelines which are not a state law but an international agreement or a law of the international community. In this case, the Supreme Court burdened the court fees on tax authorities as the defeated party.

Meanwhile, arguments and decisions on the Supreme Court’s judicial review on the dispute of transfer pricing management costs proposed by taxpayers are shown in Table 2.

Table 2 shows that the Supreme Court’s decision to review the dispute of transfer pricing management costs depends on the judges' belief in the presented proofs in court to show justice and whether or not there are management fees. Supreme Court Judges are not limited to the application of the positive law. However, they emphasize the principle of truth or material substance over form. In deciding on disputes, the Supreme Court also consider whether the core of the dispute has a legal relationship (innerlijke samenhang) with the case that was decided. This aims to create consistency in related and similar dispute decisions. In accepted decisions proposed by taxpayers, court fees were burdened on taxpayers as the defeated party.

Based on the research results in Table 1 and Table 2, it is known that Supreme Court Judges’ argument in making a decision on a dispute of transfer pricing management costs is to uphold the law and justice by believing that proofs emphasize substantial truth rather than formal truth with the principle of substance over form. Meanwhile, for the legal basis, the Supreme Court is not only guided by the positive law but also the law of the international society, namely the OECD Transfer Pricing Guidelines. It also uses legal principles as its basis. There are no differences in Supreme Court Judges’ arguments in the judicial review decisions of the Republic of Indonesia’s Supreme Court on the demands for transfer pricing management costs that are burdened on taxpayers and that are given to tax authorities.

Concerning court fees, the percentage of Taxation General Directory on Taxation judicial review in the Supreme Court is very small. In 2018, there were 4,087 disputes and 96.5% of the judicial review that was proposed by the tax authorities was rejected by the Supreme Court. This means that tax authorities must pay the court fees in the amount of Rp. 2,500,000 (two million five hundred rupiahs) for every dispute lost (Pratiwi & Laina, 2019). In this research, the number of Supreme Court judicial review decisions on tax disputes was 4,751. If 96% of the time the tax authorities lost and must pay for the court fees with an amount of Rp. 2,500,000 which means that the state must pay court fees with an amount of Rp11,402,400,000 (Mahkamah Agung Republik Indonesia (The Republic of Indonesia’s Supreme Court, 2024). Apart from the burden of court fees, the tax authorities must also return the tax that was the right of the taxpayers. This was because the tax authorities made an error in determining that tax. In 2019, the taxes that tax authorities returned to taxpayers amounted to Rp22.5 trillion due to tax authorities’ losses against taxpayers in the Tax Court and Supreme Court (DDTCNews, 2019).

The Supreme Court's decisions tend to be consistent in deciding similar cases. This shows that legal actions that are repeated in similar cases may not be necessary (Wilkie, 2022). Procedural justice significantly influences the acceptance of tax authorities’ decisions. Taxpayers tend to accept decisions that are deemed just, decreasing the chance for an appeal (Niesiobedzka & Kolodziej, 2019). Tax authorities have a higher probability of winning cases in the Supreme Court administration compared to individuals and business entities. This shows the potential for bias that may be utilized to avoid unnecessary judicial review (Huang et al., 2014). The decrease in audit errors and the increase in procedural justice may result in higher obedience and fewer conflicts will in turn decrease the burdens on the court system (Kogler et al., 2016). For disputes where the Supreme Court consistently countered tax authorities, it is better to avoid proposing judicial review to save court fees and administrative resources (Wilkie, 2022). There must be an increase in taxation procedure appropriateness to increase the acceptance of taxpayers on decisions and decrease the number of appeals (Niesiobędzka & Kołodziej, 2020).

Considering the large percentage of losses that impact a high burden of court fees and the determined tax returns due to calculation errors, tax authorities need to undergo an evaluation. This is crucial as the Supreme Court tends to be consistent in deciding on similar disputes. Thus, for similar disputes that the Supreme Court deemed as lost, there is no need to file a lawsuit for judicial review to the Supreme Court. Apart from that, in deciding on the dispute of transfer pricing management costs, Supreme Court Judges are not limited to only using the positive law. However, they also use principles and legal principles. Thus, in creating laws, the Legislative House and the President need to consider Supreme Court decisions as material legal sources. The President, the Minister of Finance, and the Taxation General Directory must also consider Supreme Court decisions in determining regulations that become guidelines to prevent errors in tax determination.