Transfer Pricing Issues in Indonesia

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Transfer Pricing is still a hot issue in Indonesia as Indonesian Directorate General of Taxes (DGT) continues to pursue obedience tax payers by tightening supervision of transfer pricing or transactions between Indonesian company with the subsidiaries and/or parent company located overseas.

Since 2010, the DGT has been actively issuing tax regulation in relation to the related party transaction.

This DGT step was considered normal given the fact that there are still many companies in Indonesia who hold the practice of transfer pricing in order to reduce the payment of taxes

Type of transfer pricing transaction could occur over the sale price, purchase price, cost allocation, interest on shareholder loan, payment of royalty, technical assistance fee, or even sales or expenses over special purpose company

 

Background

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where a taxpayer directly or indirectly participates in 255 or more of the capital of another taxpayer, or where a company participates in 25% or more of the capital of two taxpayers, in which case the latter two taxpayer are also considered to be related;

where a taxpayer directly or indirectly controls another taxpayer or where two or more taxpayers are under common control;

where there is a family relationship by blood or marriage.

Definition of Related Party based on Indonesia Income Tax Law (Number 36 Year 2008)

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Indonesian DGT Regulation Number PER-43/PJ/2010 as recently amended by PER-32/PJ/2011 which provides guidance on comparability analysis required in the transfer pricing documentation, preference towards internal comparable over external comparables and application of the most appropriate method as compared to the hierarchical approach in selecting transfer pricing methodology. PER-32 also mentioned that it will only applicable to transactions exceeding 10 billion Indonesia Rupiah with a single related party. Domestic related party transaction are also covered in the purview of the transfer pricing regulation if the related parties are effectively not taxed on the same basis

Indonesian DGT Regulation Number PER-22/PJ/2013 is regulating about tax audit procedures. The regulation provides procedures on how to prepare and conduct tax audit including these issues:

• application of arm’s length principle• identification of taxpayer’s business • how to choose the transfer pricing method

Indonesian Tax Regulations in relation to Transfer Pricing

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Indonesian DGT Regulation Number PER-32/PJ/2011 regulates that the arm’s-length principle should use the following steps:Perform a comparability analysis and identify comparables

Determine the most appropriate transfer pricing method

Apply the arm’s-length principle to the tested transaction based on the result of the comparability analysis and the selected transfer pricing method

Document each step of the process used to determine the arm’s-length principle

Implementation of Arm’s-Length Principle

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In doing the comparability analysis, taxpayers should consider the comparability factors as regulated in the OECD guidelines, which are as follows:Characteristic of the industry

Functions performed by parties involved

Contractual terms

Economic conditions

Business strategies

Comparability Analysis

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In order to have the most appropriate transfer pricing method, the taxpayer should consider the following items:The strength and weakness of each transfer pricing method

The appropriateness of the method based on the nature of the related party transaction, determined by a functional analysis

Availability of valid information (on independent transaction) to apply the selected method

The comparability level between related party transactions with independent transactions, including whether any appropriate adjustments would need to be made to eliminate any material differences between the compared transactions

Selecting the most appropriate Transfer Pricing Method

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Unavailability of the independent comparables

The Indonesian Tax Office (ITO) still consider that Comparable Uncontrolled Price (CUP) is the most preferred method

Not all of the ITO officer has the same level of transfer pricing knowledge, most of the times creating disputes during discussion.

The Obstacles during Tax Audit on Transfer Pricing