Certain taxpayers who conduct transactions with related parties (“transfer pricing”) are required to apply the arm length principles in their business practice, prepare and maintain transfer pricing documents (“TP Documentation”). We will discuss specifically about taxpayer criteria in this article. We have explained the tax provisions regarding special relationships in our other articles (read here).

 

Regulation related to the obligation to prepare and keep transfer pricing documents

 

Before discussing the criteria for taxpayers who are required to make transfer pricing documentation, Let us first describe the regulations relating to this obligation.

 

The taxpayer's obligation to make documentation of transaction price determination (TP Doc) is regulated in the following laws and regulations:

  1. Article 10 of the Government Regulation No. 74 of 2011 regarding the Procedures for Implementing Rights and Fulfillment of Tax Obligations, and

  2. Regulation of the Minister of Finance Number 213 of 2016 regarding the Types of Documents and/or Additional Information That Must Be Retained by Taxpayers Conducting Transactions with Related Party

 

Meanwhile, the guidelines for the application of fairness and business practice in affiliated party relationship transactions (transfer pricing) are regulated in the following laws and regulations:

  1. Director-General of Taxes Regulation No. 32 of 2011

  2. Director-General of Taxes Regulation No. 43 of 2010

 

What are the types of pricing documents in transfer pricing or transfer pricing documentation (“TP Doc”)?

 

The Transfer Pricing Determination Document (TP Documentation) consists of:

a. Master document (“master file”);

b. Local document ("local file"); and / or

c. Country by country reporting

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Please take note, from those three documents, not all of them are required to be prepared by the taxpayer, the requirement depends on the condition of the taxpayer. 

 

The requirement for Master File and Local File

 

The criteria for taxpayers who are required to make Master Documents and Local Documents, if they meet one of the following three criteria:

 

  1. Turnover or income in the previous year of more than Rp.50,000,000,000.00 (fifty billion rupiah);

  2. Value of the Affiliated Transaction for the previous tax year in a tax year:

a. more than IDR 20,000,000,000.00 (twenty billion rupiah) for tangible goods transactions; or

b. more than IDR 5,000,000,000.00 (five billion rupiah) for the respective provision of services, payment of interest, utilization of intangible goods, or other Affiliated Transactions; or

  1. The affiliated party is located in a country or jurisdiction with an Income Tax rate lower than the rate under the Income Tax Law

 

The limits on gross turnover value and the value of Affiliated Transactions as referred to in this provision are calculated on an annual basis in the event that the Tax Year gross turnover is obtained and/or the Affiliated Transaction is carried out covering a period of less than 12 (twelve) months. Such gross turnover is the gross amount of income received or earned in connection with the Taxpayer's main job, business or activity before deducting discounts, rebates, and other deductions.

 

B. Requirement for Master File, Local File, and Country by Country Report

Taxpayers who are required to prepare all types of transfer pricing documents, namely Master Documents, Local Documents, and Country-by-Country Reports (CBCR) if they meet the following criteria:

 

  1. Taxpayers who are the Parent Entity of a Business Group that has a consolidated gross turnover of at least Rp.11,000,000,000,000.00 (eleven trillion rupiah) in the relevant Fiscal Year. Gross turnover is the gross amount of income received or earned in connection with the Taxpayer's main job, business or activity before deducting discounts, rebates, and other deductions.

  2. In the event that the domestic Taxpayer is a member of a Business Group and the parent entity of the Business Group is a foreign tax subject, the domestic Taxpayer is required to submit a country-by-country report as long as the country or jurisdiction where the Parent Entity is domiciled:

a. does not require submission of country-by-country reports;

b. does not have an agreement with the Indonesian government regarding taxation; or exchange of information

c. has an agreement with the Indonesian government regarding the exchange of tax information, however, country-by-country reports cannot be obtained by the Indonesian government from that country or jurisdiction.

 

Provisions for bookkeeping in currencies other than rupiah.

 

In the event that the taxpayer has obtained permission from the Minister of Finance to conduct bookkeeping in a foreign language and a currency other than rupiah, the limit on the value of the currency in rupiah is equivalent to the value of a currency other than rupiah based on the exchange rate determined by the Minister of Finance for tax calculation at the end of the fiscal year.

 

Taxpayers who conduct transfer pricing transaction but do not meet these criteria

 

For taxpayers who carry out transfer pricing transactions and do not meet these criteria, Taxpayers are still required to apply Arm’s-Length Principle in the Affiliated Transaction in accordance with the provisions of laws and regulations of taxation, which is article 18 of the Income Tax Law by implementing several permitted methods.

 

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