Global Tax Alert (News and views from Transfer Pricing) | 19 June 2013

Indonesia issues new guidance for transfer pricing audits

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On 30 May 2013, Indonesia's Director General of Tax (DGT) issued Guidelines for Audits of Taxpayers with Special Relationships (PER-22).1 PER-22 replaces the previous guidance issued by the DGT in 1993 with respect to transfer pricing audits.2

The implementation date for this new regulation is 1 July 2013 and taxpayers should expect these guidelines to be immediately implemented by the DGT in transfer pricing audits as of this date. PER-22 specifically states that it will be applicable to audit instruction letters that have been issued prior to this regulation when the audit has not yet been completed.

PER-22 was released two months after circular SE-11/PJ/20133 (SE 11) regarding the DGT's strategy and plan of examination for 2013. In SE 11, the DGT announced a 2013 tax collection target through examination/audit of IDR eighteen trillion (approximately US$1.8billion). This is a 40% increase on the 2012 target.

PER-22 contains a number of key items that Indonesian taxpayers should consider, these include:

  • Detailed additional information that will be required to be provided during a transfer pricing audit
  • A requirement to provide information on the value chain relevant to the taxpayer's business and the profitability of each of the entities (including foreign related parties) participating in the value chain
  • Shorter timelines to provide information on audit
  • A focus on the profit split method
  • Increased focus on thin capitalization (debt to equity ratios)
  • Continued focus on segmented financial data
  • The use of additional financial ratios (profit level indicators)

Additional detailed information for transfer pricing audits

PER-22 requires six forms to be completed by taxpayers and provided to the Tax Auditor during an audit. These six forms address:


Information required

Transactions with related parties

Largely similar to Form 3A disclosures

Segmented financial statements

Requires the segmented financial data of the taxpayer

Supply chain management analysis

As discussed below

Functions, assets and risks analysis

A detailed checklist of functions, assets and risks

Entity characterization form

Statement on the characterization of the taxpayer

Comparability analysis form

Details on the comparability of the selected comparable companies

It appears that these forms will be required to be provided by taxpayers within seven working days from the date of request by the auditor. It is recommended that taxpayers be proactive in completing these forms given this very tight timeline. This may include changes to the contents of their current transfer pricing documentation.

The supply chain management analysis and required information

Of the forms listed above, the Supply Chain Management form will likely be the most challenging for taxpayers. In this form, taxpayers are required to identify the value chain for their business, the name of the companies (whether located in Indonesia or overseas) that perform each of the functions identified in the value chain and the net operating profit of each of the companies performing the functions. Indonesian taxpayers may have difficulty in completing this form due to their inability to access broader group information.

The profit split method

The PER-22 includes a significant number of references to the profit split method, both contribution analysis as well as residual analysis, as well requesting supply chain information that could potentially be used by Tax Auditors to make a decision on whether or not to apply this method. As PER-22 will be followed by auditors after 1 July, it is likely that there will be an increase in auditors applying the profit split method after this date given this specific guidance.

Increased focus on thin capitalization (debt to equity ratios)

While Indonesia has a reference to thin capitalization in its tax law, to-date the thin capitalization concept has not been widely applied in transfer pricing related audits. This is now likely to change with the PER-22 requiring auditors to undertake the following steps when analyzing the arm's length nature of intercompany loans:

  • Analyze of the need for the debt;
  • Ensure that the loan was actually incurred;
  • Test the fairness of the debt to equity ratio; and
  • Test the arm's length nature of the interest rate and other expenses relating to the loan.

The use of additional financial ratios (profit level indicators)

The PER-22 does, however, provide taxpayers with an increasing number of financial ratios to apply to analyze the arm's length nature of their transfer pricing. Of particular note is the inclusion of the Berry Ratio (gross profit/ operating expenses) in the list of acceptable ratios given some prior uncertainty around the use of this ratio in Indonesia.

There are also a number of other items that the PER-22 addresses which are of potential interest to taxpayers. This includes a number of examples of the implementation of transfer pricing methods. It is not clear whether items contained in these examples (e.g., the method for calculating an interquartile range, adjustments to the median in the range or profit ratios mentioned for certain types of entities) will be rigidly applied by tax auditors given these items have not been explicitly addressed in the circular itself.


This new regulation provides increased clarity for Indonesian taxpayers on the transfer pricing audit process as well as additional requirements that taxpayers need to consider when preparing for and entering into a transfer pricing audit.

Taxpayers should proactively address the new requirements raised by this circular. This may include changes to the contents of their current transfer pricing documentation.


1. Regulation number PER-22/PJ/2013.

2. Decree of the Directorate General of Taxation number KEP-01/PJ.07/1993.

3. Released 26 March 2013.

For additional information with respect to this Alert, please contact the following:

Purwantono, Sarwoko & Sandjaja Consult, Jakarta, Indonesia
  • Ben Koesmoeljana
    +62 21 5289 5030
  • Jonathon McCarthy
    +62 21 5289 5599

EYG no. CM3547