Tax Regulation for Transfer Pricing Transaction

The Directorate General of Taxation (DGT) has published the regulation about transfer pricing for Indonesian Taxpayers. The Director General of Taxation Regulation Number PER-43/PJ/2010 dated September 6, 2010 as amended by The Director General of Taxation Regulation Number PER-32/PJ/2011 about Application of Common Business Practice and Arm’s Length Principle in Transaction between Taxpayers and Parties who have a special Relationship, represents the first specific guidance to Indonesian taxpayers since the Income Tax Law amendment in 1983. So far the determination of transfer pricing is only determined only by the DGT. But now, by the PER-43/PJ/2010 as amended by PER-32/PJ/2011, Indonesian Taxpayers compulsory to prepare the transfer pricing documentation. PER-43/PJ/2010 as amended by PER-32/PJ/2011 are based on the Organization for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD Guidelines).

1. Scope of Regulation
PER-43/PJ/2010 as amended by PER-32/PJ/2011 applies to cover the determination of the arm’s length principle and common business practice on transfer pricing transactions conducted by domestic taxpayers or permanent establishments (PEs) in Indonesia with overseas taxpayers. This regulation also applies to related party transactions conducted with domestic taxpayers or permanent establishments in Indonesia, if such transaction are carried out with the intention to take advantage of different tax rates, which include taxpayers:

a.  who are subject to final and non final tax in certain industries;

b.  taxpayers who are subject to sales tax on luxury goods; and

c.  transactions conducted with oil and gas contractors.

2. Implementation of the arm’s length principle
Taxpayers that make the transactions between related parties should be implemented the arm’s length principle (ALP). ALP should be implemented by the following steps:
a. Perform a comparability analysis and identify comparables;
b. Determine the most appropriate Transfer Pricing Method;
c. Apply the ALP to the tested transaction based on the result of the comparability analysis and the selected transfer pricing method;
d. Document each step of the process in determining the arm’s length price or profit in consideration of the prevailing tax regulations.

The taxpayers is not obliged to implement the arm’s length principle if the transaction amount with each related party in one year does not exceed Rp 10 billion.

a. Comparability Analysis

In conducting proportionality analysis as referred to in point 2 letter a above, must consider the following matters:
- transactions between the taxpayer and the entity has the Related Parties are considered comparable to transactions conducted between parties who do not have in terms of special Relationship:
* there is no material difference or significant conditions that could affect the price or income of the comparable transactions; or
* there are different conditions, but can be adjusted to eliminate the influence of a material or significant differences between these conditions on prices or profits;
- If the Internal and External Comparative Data is available with the same level of proportionality, the taxpayer must use the Internal Comparative Data for the determination of Fair Price or Fair Profit.

The comparability analysis outlined is based upon the five comparability factors contained in the OECD Guidelines, are as follows:
a) Characteristics of property or services;
b) Functional profile of parties involved;
c) Contractual terms;
d) Economic conditions; and
e) Business strategies.

Taxpayers required to document the steps, studies, and results of studies in conducting proportionality analysis and determination of comparison, the use of Comparative Data Internal and/or Comparative Data External and keep books, the basic records, or documents in accordance with applicable regulations.

b. Selection the Transfer Pricing Methods

OECD apply five methods of pricing that endorsed by the DGT and formally recognized in the Indonesian Tax Law. Taxpayers are required to apply the methods to pricing are:
a) Comparable Uncontrolled Price (CUP) method;
b) Resale Price Method (RPM);
c) Cost Plus Method (CPM);
d) Profit Split Method (PSM); or
e) Transactional Net Margin Method (TNMM).

c. Format of Transfer Pricing Documentation

PER-43/PJ/2010 as amended by PER-32/PJ/2011 requires that a taxpayer must be present the transfer pricing documentation consist of a minimum:
a) Overview of the company such as group structure, organization chart, shareholding structure, business operations, list of competitors and description of business environment;
b) Price policy and/or and cost allocation policy;
c) Comparability analysis (i.e. the five comparability factors);
d) List of selected comparables; and
e) Application of the selected method.

As long as these minimum requirement, the specific format and contents of the transfer pricing documentation may be determined by the taxpayer.

d. Transfer Pricing Adjustments by the DGT

In PER-43/PJ/2010 as amended by PER-32/PJ/2011 states that the DGT has the authority to re-determine the amount of related party income and deductible expenses in calculating the taxable income of a taxpayer. The DGT adjustments may be based on the taxpayer’s own transfer pricing method and documentation. If the taxpayer’s documentation is insufficient, the DGT will conduct its own analysis to re-determine the related party income and/or expense amounts.
If there are evidences of a tax crime, then the DGT may perform an investigation as outlined in Article 44 Law No. 16 Year 2009 about tax administration law.

e. Correlative Adjustments

The DGT has the authority to make correlative adjustments to a taxpayer’s income as a follow up to a primary transfer pricing adjustment made by the DGT or an overseas tax authority to the income of one of the taxpayer’s related parties. In this regulation does not provide detailed guidance on the process that taxpayers must follow to seek such a correlative adjustment.
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Related Topic:
Transfer Pricing