Taxing authority and tax law

Tax authority: Directorate General of Tax (DGT)

Tax law: Article 18 of the Indonesian Income Tax Law

Relevant regulations and rulings

The new income tax law implemented on 1 January 2009 contains transfer pricing provisions in Article 18 which require that all inter-company transactions be conducted at arm’s length. Its implementing regulation (i.e., PER-43/PJ/2010 or “PER-43”) was issued on 6 September 2010. The regulation mandates the preparation of transfer pricing documentations as well as the guidelines to establish the arm’s length nature of the transactions. In particular, it requires taxpayers to:

• Conduct a comparability analysis and determine comparable transactions
• Identify the appropriate transfer pricing method
• Apply the arm’s length principles based on the results of the comparability analysis and appropriate transfer pricing methods on the transaction between a taxpayer and the parties having special relationship
• Document the steps taken in determining the fair price or fair profit in accordance with the provisions of the prevailing tax regulations

OECD guidelines treatment

Indonesia is not a member of the OECD, but PER-43 reconfirms the basic transfer pricing concepts and principles of the OECD TP Guidelines.

Priorities/pricing methods

Selection of transfer pricing method is to be carried out in a hierarchy of priority, starting from Comparable Uncontrolled Price (CUP) followed by Resale Price (RP) or Cost Plus (CP), and then by Profit Split (PS) or Transactional Net Margin Method (TNMM).

Transfer pricing penalties

There is a penalty of 2% per month up to 48% on any tax underpayment arising from adjustments of income and costs corresponding to related party transactions as a result of the tax audit process.

Inappropriate disclosure of information relating to related party transactions by a taxpayer in corporate income tax return may be construed as an act of fraud that could lead to an administrative penalty of up to 400% of tax underpayment.

Penalty relief

There is currently no penalty relief regime in place.

Documentation requirements

Under PER-43, transfer pricing documentation is mandatory. Within 90 days following the close of the fiscal year and simultaneous with the submission of the corporate tax return, taxpayers are required to disclose information used to establish the fairness of its price or profit in related party transactions. The information required must include:

• Detailed description of the tested party, such as structure of group’s business, ownership structure, organizational structure, operational aspects of business activities, list of competitors, and description of business environment
• Pricing policies and/or cost allocation policies
• Results of comparable analysis on characteristics of products being traded, results of functional analysis, economic conditions, provisions of the contracts/ agreements, and business strategy
• Selected comparable transactions
• Application of the transfer pricing methods selected by the taxpayer

Documentation deadlines

Under PER-43, there is no specific deadline to submit the transfer pricing documentation. However, in a tax audit, any document requested by tax auditor must be provided within a month from the date of request. Further, under PER-43, all documentations to support the arm’s length nature of the related party transactions, including a transfer pricing study, must be maintained within 10 years from the relevant fiscal year.

Statute of limitations on transfer pricing assessments

There is no separate statute of limitations under PER-43. However, under the tax laws, the Indonesian tax authority is allowed to conduct a tax audit which includes assessing the arm’s length nature of related party transactions, within five years from the relevant fiscal year.

Return disclosures/related-party disclosures

Disclosure of related party transactions in the tax return has been required since 1 January 2002. Domestic and international related party transactions are required to be disclosed. The information that must be disclosed includes the type of transaction, the value of the transaction, the transfer price and the method used to determine the transfer price. However, beginning 2009, the disclosure requirements have increased and in addition to the information previously requested, confirmation of the information that have been considered by the taxpayer to establish the arm’s length nature of the related party transactions will also need to be disclosed (refer to section “Documentation requirements”).

Audit risk/transfer pricing scrutiny

There is no specialized investigation unit in the Indonesian tax authority and most transfer pricing queries arise during regular tax audits. In 2010, a special group of transfer pricing auditors is being formed within the tax authority.

Enterprises with significant inter-company transactions have high risks of transfer pricing audit. The number of transfer pricing adjustments increased significantly since fiscal year 2009, especially in cases where Indonesian entities have suffered losses, or where the export prices to related entities differs from the local sales price. The Indonesian tax authority’s efforts have traditionally concentrated on intangibles and services (e.g., management fees, royalties, service fees and interest), but recent experience shows an increasing interest in the transfer pricing of tangible goods.

In practice, taxpayers that exhibit the following characteristics are more at risk of being subject to a transfer pricing audit:

• A large number of related-party transactions
• Losses for more than three consecutive years
• An increase in gross revenue or receipts but no change in net profit
• Erratic profit and loss historiesAssociated parties in tax havens
• Lower net profit in comparison to the industry average or other similar enterprises. Since October 2009, the DGT issued a series of Circular Letters which provide benchmarking ratios for various industries. Under these circular letters, those taxpayers whose profits fall below the range of profit ratios are exposed to transfer pricing audit risks.

In March 2009, the tax authority issued letter No. S-153/PJ.4/2010, which provides guidelines for tax officers applying the arm’s length principle in the context of a tax audit. In general, the main issues that have to be examined in an audit of the related party transactions are:

• The status of special relationship since the recalculation of income or deduction can only be made on related party transactions
• The selection of the independent transactions that are comparable
• The selection of the examined/ audited party and the tested transaction
• The comparability of conditions between those of the related party transaction and the comparable independent transaction
• The selection of profit level indicator for benchmarking
• The selection and application of transfer pricing method to apply the arm’s length principle

Under PER-43, any transfer pricing adjustment made by the tax authority can result in a correlative adjustment on the income or costs of the local counterpart of the transaction.

APA and MAP opportunity

Under PER-43, an Advance Pricing Agreement (APA) is applicable to mitigate future transfer pricing dispute with the tax authority. The APA can be in form of an agreement between the tax authority and the respective taxpayers, or between the Indonesian tax authority and the authority of another country.

In addition, PER-43 has also indicated that a Mutual Agreement Procedure (MAP) is applicable in accordance with the provision of an applicable tax treaty. The procedure for applying for MAP is further regulated under PER-48/PJ/2010.

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