Since tax year 2016, Indonesia has adopted a three-tiered transfer pricing documentation obligation, in line with agreed standards as set out in Action 13 of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan. Transfer pricing documentation obligations are now governed under Minister of Finance Regulation Number 213/PMK.03/2016 (MoF 213/2016). Transfer documentation now consists of a master file, local file and country-by-country report (CbCR).
Master and local file documentation obligations are imposed on taxpayers that have related-party transactions in the current tax year and that meet the following criteria:
- taxpayers with a gross revenue of more than 50 billion rupiahs in the previous tax year;
- taxpayers with related-party transactions in the previous tax year exceeding 20 billion rupiahs or exceeding 5 billion rupiahs if the related-party transaction concerns intangible assets, services and interest payments; or
- if the related-party transaction is conducted with low-tax countries (i.e., jurisdictions with a statutory tax rate lower than 25 per cent).
Master and local files are not required to be filed at the same time as tax return filings. Reporting entities must, however, provide, along with their tax return, a checklist that confirms the availability of master and local files, including the date when this documentation could be made available. When requested by the DGT, reporting entities are required to file the master and local files within one month of the request.
CbCR reporting obligations are imposed on taxpayers that meet the following criteria:
- taxpayers that are considered the ultimate parent entity of a group with a consolidated gross revenue in one tax year of at least 11 trillion rupiahs;2 or
- taxpayers that are not ultimate parent entities but are member entities of a group with an ultimate parent entity that is tax resident in a country that:
- does not impose an obligation to file CbCRs;
- does not have an exchange-of-information agreement with Indonesia; or
- despite having a CbCR reporting obligation and an exchange-of-information agreement in place with Indonesia does not make CbCRs available to the DGT.
CbCR reporting taxpayers or non-reporting taxpayers are all required to file an online notification to the DGT via an online platform. The online notification must identify which entity in the group has a CbCR prepared, including the country where this is submitted. In addition to the online notification, CbCR reporting entities must file the actual CbCR via the same online platform. Taxpayers that have completed the online notification or online submission of the CbCR will receive a receipt. This receipt must be filed along with the tax return.
To provide legal certainty of CbCR reporting obligations by domestic taxpayers that are not ultimate parent entities, the DGT will release a list of treaty partner countries that have a treaty in place containing an exchange-of-information clause, qualifying competent authority agreements (QCAA) and have a QCAA, but their CbCRs are unobtainable by the DGT. Upon the announcement of this list of countries, domestic taxpayers delegated with the CbCR obligation have three months to submit a CbCR. If within that period the taxpayer fails to submit a CbCR, the DGT shall send a formal request letter to the taxpayer and grant a 30-day extension as of the date of the request letter.
Presenting the casei Pricing methods
In line with the guidance provided in the OECD Guidelines, Indonesia has adopted the 'most appropriate transfer pricing method' principle in selecting the transfer pricing method that will be used in analysing affiliated transactions.
There are five transfer pricing methods stipulated in Indonesia's transfer pricing regulations:
- the comparable uncontrolled price (CUP) method;
- the resale price method;
- the cost-plus method;
- the transactional net margin method (TNMM); and
- the profit split method.
In general, both taxpayers and the DGT have a preference for applying the CUP method if an affiliated transaction is made in connection with the commodity sector. The CUP method is also generally applied in royalty and interest payment on loan transactions.
If the CUP method is not applicable, the taxpayers and DGT will usually apply the TNMM. The use of other traditional transaction-based methods, namely resale price method and cost-plus method, are rarely used in practice except in the case of internal comparables because of the limited availability of detailed gross margin data in commercial databases. The transactional profit method (i.e., profit split method) is also rarely used because of the extensive information requirements regarding the taxpayers' group as a whole. Generally, this is because multinational companies (MNCs) that run their business in Indonesia are subsidiaries, and thus the information concerning the MNC group as a whole is not owned by the subsidiary.ii Authority scrutiny and evidence gathering
The DGT has specifically issued guidance on audits in relation to transfer pricing disputes.3 One of the procedures that must be performed by the DGT in conducting transfer pricing audits is to identify the risks in the affiliate transaction performed by the taxpayers. In the risk analysis, the following parameters measuring the risk of transfer pricing are considered by the DGT:
- the significance of the affiliated transaction, measured based on it in proportion to sales or net profit;
- affiliated transactions with entities located in low-tax jurisdictions;
- specific affiliated transactions, such as the transfer of intangibles, payment of royalties, performance of intra-group services and payment of interest;
- the taxpayer's net profit being less than that of other companies in a similar industry;
- the significance of affiliated transactions that are not included in the taxpayers' net profit component, which could be measured based on the affiliated transactions considered in proportion to the taxpayer's net profit;
- interest expense;
- gain or loss on the sale of an asset;
- gain or loss from foreign exchange;
- non-routine affiliated transactions, such as business restructurings that involve or do not involve intangible assets, as well as sales of intangible property; and
- the taxpayer suffering losses for several years.
On 13 August 2018, the DGT issued Circular letter No. SE-15/PJ/2018 (SE-15) concerning tax audit policy. Pursuant to SE-15, various indicators are used in determining taxpayers to be included in the Audit Priority Target List with regard to transfer pricing issues. The following indicators are used:
- taxpayers that have transactions with affiliates that are subject to a zero or low effective tax rate;
- indications that a taxpayer is involved in a transaction scheme involving entities that do not have business substance or do not add economic value (reinvoicing);
- taxpayers that have significant affiliate transactions, particularly in relation to the value of sales;
- the existence of intra-group transactions such as the provision of services, payment of royalties, and cost distribution arrangements;
- the existence of business restructuring transactions such as mergers and acquisitions;
- the taxpayer's financial performance differs from the financial performance of the industry; and
- the taxpayer has had consecutive losses for three tax years out of the previous five years.
Since 1984, Indonesia has applied a self-assessment system in which taxpayers are required to calculate, pay and report their own taxes in accordance with prevailing tax laws and regulations. In connection with affiliated transactions, taxpayers are expected to prepare a transfer pricing report containing the information required by DGT. The role of the taxpayers in any tax audit is to assist in the process by appearing for investigation and producing books of accounts, documents or other relevant records as requested by the DGT for inspection within the specified time limit.
The DGT starting point of analysis is based on the information provided in the transfer pricing documentation as prepared by the taxpayers. However, if taxpayers do not provide transfer pricing documentation and its explanation, the DGT may establish the facts and analysis based on information available to the DGT. If this is the case, the DGT has the authority to propose a transfer pricing adjustment by issuing an ex officio tax underpayment assessment letter, and the burden of proof is on the taxpayer to demonstrate that the assessment letter is incorrect.