In the realm of taxation, Transfer Pricing (TP) refers to the price at which related entities within a multinational enterprise (MNE) group transact with each other for goods, services, intellectual property, or financing. Its definition is rooted in the Arm’s Length Principle (ALP), which is the international standard, articulated by the Organization for Economic Co-operation and Development (OECD), requiring that these intercompany prices must be the same as those that would have been agreed upon by two entirely independent parties engaging in a comparable uncontrolled transaction under comparable circumstances.
In Indonesia, the tax office scrutinizes transfer prices to ensure that MNEs are not manipulating these internal charges to artificially shift profits from higher-tax jurisdictions to lower-tax jurisdictions, thereby eroding the domestic tax base. Consequently, transfer pricing is less about simply setting a price, and more about documenting and justifying that the pricing policy reflects economic reality and the true value-adding functions performed, assets employed, and risks assumed by each related entity.
The regulatory framework for Transfer Pricing Documentation in Indonesia is primarily governed by the Minister of Finance Regulation (PMK) Number 172 of 2023 concerning the Application of the Arm’s Length Principle to Transactions Affected by a Special Relationship. This regulation consolidates and updates previous rules, aligning Indonesia’s standards even closer with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines) (specifically the three-tiered structure of the Base Erosion and Profit Shifting—BEPS—Action 13).
The OECD Guidelines, specifically through the BEPS Action 13 recommendations, introduced the three-tiered TP documentation structure: the Master File, the Local File, and the Country-by-Country Report (CbCR). This structure aims to provide tax administrations with a comprehensive view of how a multinational enterprise (MNE) group operates globally and how its profits are allocated in different jurisdictions. The Minister of Finance Regulation Number 172 of 2023 (PMK-172/2023), reinforces the obligation for taxpayers to prepare these documents. PMK-172/2023, which is the latest comprehensive regulation on the application of the Arm’s Length Principle and transfer pricing documentation, solidifies Indonesia’s commitment to international best practices.
Documentation Obligation and Transactional
The obligation to prepare the TP Documentation (The Three-Tiered Documentation Structure) is generally imposed on taxpayers who engage in transactions with related parties. However, the requirement is often triggered when the value of the related-party transactions exceeds specific monetary thresholds. Taxpayers must prepare the documentation by the deadline for submitting the annual corporate income tax return.
- Local File (LF)
The Local File is the most detailed document, focusing on the specific Indonesian taxpayer and its Related Party Transactions for the relevant tax year. The local file must at least contain the following information on the Taxpayer:
- identity and business conducted;
- the information on Controlled Transactions and Uncontrolled Transactions conducted;
- the application of the Arm’s Length;
- financial information; and
- non-financial events/occurrences/facts that affect pricing or profit levels.
- Availability Deadline: Must be completed and available within four months after the end of the tax year.
- Submission Deadline: Must be submitted to the Directorate General of Taxes (DGT) upon request (e.g., during a tax audit or compliance monitoring), generally within one month of receiving the request letter.
- Thresholds (Obligatory if the taxpayer meets any of these in the previous tax year):
- The taxpayer’s gross turnover for the previous year exceeds IDR 50 billion (approximately $3.1 million USD, though specific exchange rates fluctuate).
- The total value of related-party transactions in the previous fiscal year exceeds:
- IDR 20 billion for tangible goods transactions.
- IDR 5 billion for services, interest-bearing loans, the use of intangible assets or other financial transactions.
- If the transactions are with a related party domiciled in a country/jurisdiction with a lower income tax rate than Indonesia’s highest rate, or if the transactions involve specific types of services or intangible assets, the obligation may apply even if the gross turnover or transaction value is below the general threshold.
- Master File (MF) The Master File provides a high-level overview of the Multinational Enterprise (MNE) group’s global business, its organizational structure, overall transfer pricing policy, and global allocation of income and economic activities. The Master File must at least contain the following information on the Business Group:
- ownership structure and chart as well as the country or jurisdiction of each member;
- business conducted;
- intangible assets owned;
- financial activities and financing; and
- the parent entity’s consolidated financial statements and tax information related to Controlled Transactions
- Availability and Submission Deadlines: Same as the Local File.
- Thresholds (Obligatory if the taxpayer meets any of these):
- Carry out transactions with related parties; and
- Have a gross turnover of more than IDR 50 billion in the previous tax year; and
- Are an ultimate parent entity (UPE) or appointed group entity.
- Country-by-Country Report (CbCR)
The CbCR contains aggregate information relating to the global allocation of the MNE group’s income, taxes paid, and indicators of economic activity across the tax jurisdictions where it operates. The CbCR must at least contain the following information:
- the allocation of income, taxes paid and business activities per country or jurisdiction of all members of the Business Group either domestically and overseas, which includes the names of the countries or jurisdictions, gross income, profit (loss) before tax, income tax that has been withheld, collected or self-paid, income tax payable, capital, accumulated retained earnings, number of permanent employees and tangible assets other than cash and cash equivalents; and
- the list of Business Group members and main businesses per country or jurisdiction.
- Availability Deadline: Must be available within 12 months after the end of the tax year.
- Threshold: Mandatory for the Ultimate Parent Entity (UPE) of an MNE group if the consolidated gross revenue in the preceding fiscal year was at least IDR 11 trillion (approx. $750 million EUR equivalent).
- Notification: Indonesian constituent entities of an MNE Group must also submit a CbCR notification to the DGT, confirming whether they are the reporting entity or identifying the group’s reporting entity.
Importance and Penalty Implications
Compliance with these documentation requirements is paramount. The TP Documentation serves as the primary evidence to justify that the related-party transactions adhere to the ALP. In the event of a tax audit, the Indonesian Directorate General of Taxes (DGT) will scrutinize this documentation.
Failure to prepare, maintain, or submit the required TP documentation can lead to the DGT making transfer pricing adjustments, which can result in significant underpaid tax assessments. Furthermore, if the DGT determines that the documentation is unavailable, incomplete, or lacks adequate supporting evidence, the taxpayer may be subject to penalties in the form of increased taxes and administrative sanctions. PMK-172/2023 and the existing tax laws allow the DGT to impose penalties for non-compliance, emphasizing the DGT’s firm stance on transfer pricing enforcement and the taxpayer’s burden of proof.
By aligning its regulations with the OECD’s framework and clearly defining transactional thresholds, Indonesia aims to create a more transparent and equitable tax environment, facilitating compliance for MNEs while safeguarding its domestic tax base.
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