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Introduction to transfer pricing in Indonesia
Transfer pricing rules
- Indonesian prevailing regulation for Transfer Pricing (TP) compliance is PMK-213/PMK.03/2016 which requires taxpayers under certain criteria to prepare TP documentation, namely: Master File (MF), Local File (LF), and Country-by-Country Report (CbCR).
- Based on the regulation, even though a taxpayer does not fall under certain criteria to prepare MF and LF, the taxpayer is still required to prove the compliance of its related party transactions to the arm’s length principle.
- The MF & LF should be drawn up in Bahasa and will be submitted upon the tax authority’s request.
- An Indonesian taxpayer who is a part of a business group is obliged to prepare CbCR Notification if the ultimate parent of the group has already submitted the CbCR in their jurisdiction country.
- Indonesia adopts the OECD Guidelines with important modifications adopting local requirements.
Transfer pricing methods
- The most appropriate pricing method should be selected on a transaction by transaction basis providing the most reliable measure of an arm’s length result in each case. The current methods, namely the comparable uncontrolled price, resale price, cost plus, transactional net margin, and profit split methods are all accepted but the method used must be in line with the functional and risk profile of the entity. Other methods can also be used if justifiable and appropriate.
- Some transactions are required to use a certain method in applying the arm’s length principle.
- Indonesia has a self-assessment regime, where taxpayers tick the boxes on several forms that declare the taxpayer has prepared the MF and LF in accordance with the prevailing regulations.
Transfer pricing documentation
Preparation of transfer pricing documentation
- Indonesia adopts the OECD transfer pricing guidelines. However, Indonesia also issued its own regulations. In general, the criteria for MF, LF, and CbCR is in line with the criteria set out by the OECD transfer pricing guidelines, but some important areas/aspects should comply with the local requirements.
Master and local file
- The minimum content of MF should include the group structure, business activities, intangible assets, financial activities, consolidated financial report, and tax information on affiliated transactions.
- The minimum content of LF should include business activities, business transactions, ALP implementation, financial information, and non-financial events.
- Transfer pricing documentation should be kept until ten years.
Some risk factors for challenge
- High risk in intangible and intragroup service transactions.
- Having Intergroup Transactions with the lower tax rate entities.
- Having Intra-Group Transactions min. 50% of total transactions.
- The company has intragroup transactions with a Related Party that incurs losses.
- The company experienced consecutive losses.
- The regulations do not mention specific penalties related to transfer pricing.
- Should the taxpayer fail to submit the specific forms, the Corporate Income Tax Return may be deemed incomplete. Then the admin penalty will follow the Corporate Income Tax penalty.
- Should the taxpayer fail to submit MF and LF upon request, the tax authority may have their own analysis to test the arm’s length principle of related party transactions. It could potentially cause unfavorable correction(s) related to the related party transactions.
Economic analysis and how to demonstrate an arm’s length result
- The tax authority would expect to see that a search for potential internal comparables has taken place before defaulting to an external database search for comparables.
- In the regulations, a taxpayer could have any external database for search comparables. However, in practice, the comparables taken from the same database that is used by the tax authority could provide some practical advantages.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
- Indonesia has regulations on APAs, but it has not been utilized by many taxpayers due to some practical factors.
- Unilateral APAs are more preferred than bilateral APAs.
- Should a taxpayer fail to meet certain criteria, they are not obligated to prepare transfer pricing documentation. However, the taxpayer should prove that the related party transactions have been done in compliance with the arm’s length principle. Therefore, in practice, the best approach is to prepare proper transfer pricing documents that comply with local transfer pricing regulations and practices.
Digital services tax
- There are no specific digital services regulations regulating the transfer pricing transactions.
Tax authorities and taxpayer behaviour
- The tax authority holds several seminars to educate taxpayers on improving the standards of transfer pricing documentation, including but not limited the are covering the economic analyses.
- In terms of intangible and intragroup service transactions, the tax authority would initially focus more on the benefit and existence test/analysis before focusing on the arm’s length rate/amount.
- No specific transfer pricing regulation concerning COVID-19 have been issued by the tax authority.