Transfer Pricing Service in Indonesia
Transfer pricing has received serious attention from the Indonesian government. Transfer pricing cases are exposed to higher tax sanctions and also special tax audit procedures. Although Indonesia is not a member of the OECD, Indonesia is quite active in implementing the OECD BEPS Action Plan, including those related to Transfer Pricing issues.
The Income Tax Law gives the Minister of Finance the authority through the Director-General of Taxes to determine a reasonable transaction price or transfer pricing. The Indonesian Income Tax Law requires taxpayers conducting transfer pricing transactions to apply the arm's length principle in their transactions and maintain documentation related to transfer pricing (TP Doc).
Some Important Points About Tax Obligations Related to Transfer Pricing in Indonesia
The implementation of the steps to apply the principle of reasonableness must be in accordance with the procedures required by tax regulations in Indonesia:
- The obligation to apply the arm's length principle by every taxpayer who performs transfer pricing
- Implementation of the steps for implementing the arm's length principle must be in accordance with the procedure required by the tax regulations in Indonesia
- Documentation on the application of transfer pricing (TP Doc) must be prepared every year by certain taxpayers. TP Doc consists of Master File, Local File, and Country Country Reporting (CBCR). This obligation is stated in the Minister of Finance Regulation No. 213 which is in line with the OECD BEPS Action Plan 13
- For taxpayers who receive tax holiday facility 2018 regulation, transfer pricing is not an obstacle anymore as in the previous tax holiday
- The TP Doc must be maintained and made available annually. Taxpayers are required to state the availability of a TP Doc on the annual corporate income tax return.
- Taxpayers are asked to fill in the information in the annual corporate income tax return regarding the transfer pricing method applied
The Taxpayer is Required to Apply the Arm’s Length Principle in its Business Practice
According to the DGT Regulation 11/2011, The Arm's Length Principle (ALP) must be implemented by the taxpayer with the following steps:
- Conduct Comparability Analysis and determine comparisons;
- Determine the appropriate Transfer Pricing method;
- Apply The Arm's Length Principle (ALP) based on the results of the Comparative Analysis and the appropriate Transfer Price Determination method to transactions made between the Taxpayer and the party having a Special Relationship; and
- Document each step in determining the Fair Price or Fair Profit in accordance with the provisions of the applicable tax laws.
The Arm's Length Principle (ALP) is based on the norm that the price or profit on transactions carried out by parties who do not have a relationship is determined by market forces so that the transaction reflects a fair market value (Fair Market Value/FMV).
TP Doc Requirement
Master File and Local File Requirement in Transfer Pricing
According to MoF-Reg 213-2016, the criteria for taxpayers are required to prepare a Master File and Local File, if they meet one of the following three criteria:
- Turnover or income in the previous year of more than Rp.50,000,000,000.00 (fifty billion rupiahs);
- Value of the Affiliated Transaction for the previous tax year in a tax year:
- more than IDR 20,000,000,000.00 (twenty billion rupiahs) for tangible goods transactions; or
- more than IDR 5,000,000,000.00 (five billion rupiahs) for the respective provision of services, payment of interest, utilization of intangible goods, or other Affiliated Transactions; or
- 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.
CBCR Requirement for Transfer Pricing
According to MoF-Reg 213-2016, the criteria of the taxpayer to prepare CBCR in addition to the master file and local file are as follows:
- 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 rupiahs) 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.
- 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:
- does not require submission of country-by-country reports;
- does not have an agreement with the Indonesian government regarding taxation; or the exchange of information
- 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.
TP Doc Master File
The master file in TP Doc must contain information regarding the Business Group, including:
- Ownership structure and chart as well as the country or jurisdiction of each member;
- Business activities carried out;
- Intangible property owned;
- Financial and financing activities; and
- Parent Entity Consolidated Financial Statements and tax information related to Affiliated Transactions.
TP Doc Local File
Local files in TP Doc must contain information regarding the Taxpayer, including:
- Identity and business activities carried out;
- Information on Affiliated Transactions and independent transactions;
- Application of the arm’s length principle;
- Financial information; and
- Non-financial events/events/facts that affect the formation of prices or the rate of profit.
TP Doc Country by Country Report (CBCR)
Country-by-country reports must contain the following information:
- Allocation of income, taxes paid, and business activities per country or jurisdiction of all members of a Business Group both domestically and abroad, which includes the name of the country or jurisdiction, gross turnover, profit (loss) before tax, Income Tax that has been deducted/ self-collected/paid, income tax payable, capital, accumulated retained earnings, number of permanent employees, and tangible assets other than cash and cash equivalents; and
- List of Business Group members and main business activities per country or jurisdiction
TP Doc Language
The Indonesian Tax Law required TP Docs to be prepared in the Indonesian language.
Advance Pricing Agreement for Transfer Pricing in Indonesia
An Advance Pricing Agreement can be submitted by a taxpayer with the following conditions:
- Has fulfilled the obligation to submit the Annual Corporate Income Tax Return based on the provisions of the law in the field of taxation for 3 (three) tax years prior to the tax year the APA application is submitted;
- Has been required and has fulfilled the obligation to organize and keep Transfer Pricing Documents in the form of master files and local files based on the provisions of laws and regulations in the field of taxation for 3 (three) tax years before the tax year the APA application is submitted;
- Not being investigated for a criminal act or not currently undergoing a crime in the taxation sector;
- Affiliated Transactions and Affiliated Parties that are proposed to be covered in the APA application as referred to in Article 2 paragraph (2) are Affiliated Transactions with Affiliated Parties that have been reported by the Taxpayer in the Annual Corporate Income Tax Return; and
- The proposal for the Determination of Transfer Prices in the APA application is made based on the business arm’s length principle and does not result in the Taxpayer's operating profit being less than the operating profit that has been reported in the Annual Corporate Income Tax Return.
Our Transfer Pricing Services
TGS AU Partners transfer pricing services scope is including:
- We help the client in the implementation of the arm’s length principle on the transaction to comply with the Indonesian Transfer Pricing Regulation
- Identify the transaction, critical point of transaction, and contracts
- Conduct comparability analysis and other necessary analysis
- Application of Transfer Pricing Methods
- Determination of transfer pricing amount and range
- Preparation of TP Doc (Master File, Local File, and CBCR)
- Assist client in transfer pricing tax audit and case
- Arrangement of Advance Pricing Agreement
- TP cases advisory
TGS Indonesia (AU Partners) Tax Service Team
Our tax team consists of tax consultants, tax attorneys, and senior tax practitioners with a lot of experience in taxation. Our team is quite active in both national and international tax communities, including local tax authorities, the International Fiscal Association, and the TGS Global Tax Committee. Our regular tax seminars and training help to shape our tax know-how. Through experience, know-how, network, and training activities, we have access to information and best practices for taxation which will certainly help in every tax work, especially international tax consulting and litigation, including transfer pricing service engagements.