Transfer pricing is the process of determining prices used in transactions between closely related entities, such as subsidiaries and parent companies. The accurate determination of transfer prices is crucial to ensure fairness and tax compliance among the involved entities.

In this context, local files and master files play a significant role in determining appropriate transfer pricing. This article will explain the importance of local files and master files in transfer pricing, provide an overview of the contents of local files and master files, and describe the information that should be included in these documents.

The Importance of Local Files and Master Files

In the process of transfer pricing, local files and master files play a crucial role in addressing different information needs. Local files refer to the documents prepared by the related entities at the local level, while master files are documents prepared by the parent company at the group or global level.

Local files provide specific information about the activities, risks, and profits of the entities involved in transfer pricing transactions at the local level. These data provide a more detailed understanding of the reasons behind the selected pricing and the relevance of these transactions to the performance of the local entity.

On the other hand, master files provide a broader view of transfer pricing across the group or company. The data includes information about the company's structure, group transfer pricing strategies, economic function analysis, risk allocation, and overall group profits. Master files also provide a comprehensive context for understanding the transactions carried out by local entities.

Overview of Local Files and Master Files

The government has issued regulations through the Minister of Finance Regulation Number 213/PMK.03/2016, which stipulates the obligation for companies to prepare Transfer Pricing Documentation (TP Doc). These documents consist of several types, such as Master File, Local File, or Country by Country Report (CbCR). The regulation requires companies that meet certain criteria according to PMK 213/2016 to provide transfer pricing documents. Companies are required to prepare master files and local files and submit them no later than 4 months after the end of the tax year.

However, it should be noted that master files and local files do not have to be mandatory attachments in the Annual Corporate Income Tax Return (SPT Tahunan PPh Badan), but it is sufficient to attach a summary of the local files and master files. In the summary, companies need to state that they have prepared the master file and local file based on the available data and information at the time of affiliate transactions.

By attaching the summary of local files and master files in the Annual Corporate Income Tax Return, companies declare that they have fulfilled the obligation to provide local files and master files. The contents of the summary of local files and master files must be based on the data contained in both files that have been prepared by the company. Further guidelines on filling out the summary can be found in Annex B of PMK 213/2016.

Instructions on how to fill out the summary of local files and master files are included in the Corporate Income Tax Return. The summary serves as a statement that the company has fulfilled the obligation to prepare and provide these documents in accordance with the applicable regulations.

In the "Tax Year" section, you should enter the company's fiscal year. As for the "Identity" section, it usually includes filling out the Taxpayer Identification Number (NPWP) as stated on the NPWP card, as well as the taxpayer's name or the name of the company.

Part I, the summary of the master file, should be filled out by marking (√) if the requested information has been prepared and is available. Part II, the summary of the local file, is also filled out with a check mark (√) if the requested information has been prepared and is available. Part III, the Statement of Implementation and Provision of the Master File and Local File, is filled out by specifying the complete date when the local file and master file were fully available in the provided box.

Contents of Local Files and Master Files

In the context of determining transfer pricing, local files and master files play a crucial role in providing the necessary information to ensure a company's compliance with transfer pricing regulations. The local file refers to the documentation prepared by the local entities involved in the transactions, while the master file is the documentation prepared by the parent company at the group or global level.

Contents of Local Files

Since the 2016 tax year, companies have been required to prepare Transfer Pricing Documentation (TP-Doc) if they meet the requirements stated in Minister of Finance Regulation No. 213 of 2016. Apart from the master file or master documentation, another component of TP-Doc is the local file.

The local file contains specific information that must be presented in accordance with Regulation No. 213/2016. Firstly, it includes the company's identity and business activities, such as management structure, organizational charts, information about related parties both domestically and internationally, and the countries or jurisdictions where they operate.

Furthermore, the company provides detailed explanations about its business and strategies, including information on any restructuring or intangible asset transfers within the Business Group that occurred in the previous year and their impact on the company. Information about operational aspects of the business activities, including a list of major competitors, is also provided.

The second section of the local file addresses the company's transactions, including transaction schemes, pricing policies in the past five years, and explanations of each transaction along with their background. Information on the nominal amounts per transaction type and counterparty must also be presented, along with details such as invoice numbers, dates, product names, unit quantities, unit prices, and delivery dates.

The third section focuses on the application of the arm's length principle and the business's commercial and economic conditions. It includes comparability analysis for each affiliate transaction, functional analysis, contractual terms, business strategies, economic conditions, and explanations of the chosen transfer pricing methods and the reasons behind their selection.

Lastly, the company is required to provide financial information, such as audited financial statements, segmented financial reports, information on the use of financial information related to the application of transfer pricing methods in financial statements, and summarized financial information from comparables.

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It is important to note that if a company engages in multiple business activities with different characteristics, the local file should be prepared on a segmented basis. The local file and master file must be available no later than 4 months after the end of the tax year.

Contents of Master Files

The information contained in the master file includes the group's structure and ownership, the business activities conducted by the group members, intangible assets owned by the group, financial and financing activities within the group, as well as consolidated financial statements and tax-related information concerning affiliate transactions. Here is the content and information included in the master file:

  1. Group Structure and Ownership:

  • List of shareholders and their percentage of ownership in each group member.

  • Ownership structure indicating the shareholding relationships among group members and their geographic locations.

  1. Business Activities of the Group:

  • List of group members and their respective business activities.

  • Factors influencing the profitability of each group member.

  • Explanation of the value chain for the group's main products or services, as well as for other products or services that contribute 5% or more to the group's total gross revenue.

  • List and explanation of significant contracts or agreements among group members.

  1. Intangible Assets of the Group:

  • Group's strategy for the development, ownership, and exploitation of intangible assets.

  • List of important intangible assets for transfer pricing analysis and explanation of group members legally owning those assets.

  • List of contracts or agreements among group members related to intangible assets, including Cost Contribution Arrangements (CCA), research and development service agreements, and licensing agreements.

  1. Financial and Financing Activities of the Group:

  • Explanation of the financing used by the group, including agreements with independent lenders.

  • Identification of group members acting as financial or financing centers, including information on the countries or jurisdictions where they are established and operate effectively.

  • Explanation of transfer pricing policies related to financing agreements among group members.

  1. Consolidated Financial Statements and Tax-related Information on Affiliate Transactions:

  • Consolidated financial statements of the group for the relevant tax year, prepared for both external and internal purposes.

  • List and explanation of Advance Pricing Agreements (APA) held by group members, as well as other tax provisions related to the allocation of income among group members.

By preparing the master file, taxpayers can fulfill their reporting obligations and ensure compliance with transfer pricing regulations. The information contained in the document provides a comprehensive understanding of the group's structure, activities, intangible assets, financial activities, and consolidated financial statements.

Conclusion

It is crucial for companies to understand and comply with the applicable regulations regarding the preparation of transfer pricing documentation (TP Doc). Compiling these documents is not only a legal requirement but also a strategic step in building trust with tax authorities, maintaining the company's reputation, and conducting business with integrity and transparency. By doing so, companies can avoid detrimental tax disputes and ensure smooth and sustainable operational continuity.

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