Transfer pricing in Indonesia

1
 Indonesian TP summary | Transfer pricing in Indonesia

Legislation
Indonesias transfer pricing legislation is contained in Article 18 of the Income Tax Law, which allows the Director General
of Taxation (DGT) to adjust a taxpayers related party transactions if they are non-arms length in nature, and DGT
Regulation No 43/2010 entitled Application of Common Business Practices and Arms Length Principle in Transactions
Existence of transfer between Taxpayers and Parties who have a Special Relationship (PER-43/2010), as amended by DGT Regulation No
pricing laws / 32/2011 (PER-32/2011) (hereafter referred to as the Indonesian transfer pricing provisions). Under PER- 32/2011, there
guidelines is a general exemption for domestic transactions, except for taxpayers that are subject to final tax and different tax rate
regimes.
Indonesia is not a member of the OECD, although it has been granted enhanced participation status. PER-43/2010
reconfirms the basic transfer pricing concepts and principles of the OECD Guidelines.
Enterprises with significant intercompany transactions generally face a high risk of a transfer pricing audit. The DGTs
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. Taxpayers with the
following characteristics are at risk of being subject to a transfer pricing audit:
Losses for longer than three consecutive years;
A large number of related party transactions;
Transfer pricing An increase in gross revenue/receipts but no change in net profit;
scrutiny
Erratic profit and loss histories;
Associated parties in tax havens;
Reporting a low profit in comparison to the industrys average;
Reporting a lower net profit to other similar enterprises; and
Paying large fees to associated enterprises.
Since the Indonesian tax system is based on self-assessment, the burden of proof rests with the taxpayer.

An entity is a related party if (1) it directly or indirectly participates in 25% or more of the capital of another taxpayer, or
Definition of related where it participates in 25% or more of the capital of two taxpayers, in which case the latter two taxpayers will be
party considered to also be related parties (2) it directly or indirectly controls another taxpayer or there are two or more
taxpayers under common control and (3) where there is a family relationship by blood or marriage.

1
 Indonesian TP summary | Transfer pricing in Indonesia

There are no specific transfer pricing penalties but the lack of documentation could lead to increased scrutiny by the
DGT which eventually leads to the need to submit documentation. There is a general penalty of 2% per month, up to a
Transfer pricing
maximum of 48%, on any late payment or underpayment of tax discovered during a transfer pricing audit. There may
penalties
also be fines of 200% to 400% of the unpaid tax and three months to six years of imprisonment if criminal action is
involved.

The DGT has issued regulation PER-69/2010 regarding APA guidelines that cover unilateral and bilateral APAs. Such APAs
may be valid for 3 years (or 4 years in the case of bilateral APAs) once agreed and roll back of the APA terms is also
permitted as long as the annual Income Tax Return for that prior year concerned has not been audited, that no
Advance Pricing
Objection or Appeal has been submitted by the taxpayer, and there is no indication of criminal act in the field of
Agreement (APA)
taxation. A further regulation (PMK 7/PMK.03/2015) regarding the APA application process was issued on 12 January
2015. Some taxpayers have submitted bilateral and/or unilateral APA applications but no APAs have been agreed to
date.

High risk areas

The DGT will scrutinize the appropriateness of any royalty payments from an arms length perspective, especially where
the taxpayer is deriving losses or lower than expected financial results. The DGT will question the existence of the
intellectual property (IP) in question, , the value of that IP to the generation of profit in the business of the licensee, the
Royalties ownership of that IP by the licensor and the arms length nature of the royalty rate. Significant amounts of data and
evidence may be required to discharge this burden. In particular, the DGT will challenge the arms length nature of
royalties payable by what they deem to be contract manufacturers, although the precise definition of the term is not
specified and there are significant technical flaws in such an approach.

Service fees are deductible in Indonesia if they can be shown to be arms length. This means that the taxpayer must be
able to demonstrate that the services in question were beneficial to the Indonesian taxpayer; that the services were
actually received; and that the quantum of the services charge is commensurate with the benefits derived. Again, the
Service fees
evidentiary burden for taxpayers is onerous, especially if the dispute proceeds to the Tax Court. In the absence of
specific and detailed documentation to support these contentions, many service fees will be treated as non-deductible
by the DGT and may be deemed to be disguised dividends, thereby giving rise to withholding tax obligations.

Limited attention has been paid by the DGT to the arms length nature of financial transactions such as interest rates,
Financial transactions guarantee fees and so on. However, this is expected to become a more significant area of focus for the DGT in future
years.

2
 Indonesian TP summary | Transfer pricing in Indonesia

The DGT is aware of the issues surrounding business restructuring but this has been of limited significance so far, since
Business restructuring many multinationals have to date been reconfiguring their value chains to shift production facilities into Indonesia rather
than out of the country, particularly in the auto manufacturing sector.

Indonesia is generally considered to be benefiting from the restructuring of business models by multinationals, due to the
Base erosion and generally lower cost and abundant supply of skilled labour in the country, and largely business-friendly economic
profit shifting (BEPS) policies. The DGT is aware of the BEPS developments and is actively enforcing the transfer pricing rules and regulations
to protect the tax base from non-arms length pricing of related party transactions by multinationals.

Case law

Many transfer pricing disputes are dealt with at the Tax Court level which provides taxpayers with a better prospect of a
resolution on a reasonable and objective basis. However, cases are not published and in any case have no
precedential value as each case is decided on its merits, in the light of its specific facts and circumstances.

Documentation and disclosure requirements

Domestic and international related party transactions are required to be disclosed. Information disclosed may include
the type of transaction, the value of the transaction, the party with whom the transaction was made, and the pricing
Tax return disclosures methods used to determine the transfer price. Since 2009, the disclosure requirements have expanded to include a
confirmation of the information that the taxpayer used to establish the arms length nature of the related party
transactions.

3
 Indonesian TP summary | Transfer pricing in Indonesia

Under PER-32/2011, transfer pricing documentation is mandatory. Within four months of the close of the fiscal year, and
simultaneously with the submission of the corporate tax return, taxpayers are required to disclose information used to
establish the arms length nature of its price or profit in related party transactions. The information required must include:
Detailed description of the tested party;
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;
Level of
Selected comparable transactions; and
documentation
Application of the transfer pricing methods selected by the taxpayer.
Under PER-32/2011, transfer pricing documentation is required to be prepared in respect of related party transactions in
excess of IDR 10 billion (approx. USD 780,000), but this threshold applies to the total value of all transactions with each
related party.
Based on the DGTs letter No. S-479/PJ.033/2012 issued on 27 April 2012, taxpayers are not required to submit their
transfer pricing documentation simultaneously with their corporate tax returns. However, taxpayers are required to
present their transfer pricing documentation upon request from the Indonesian tax authorities.

Record keeping In general, documentation should be retained for up to 10 years.

Language for Tax return disclosure is in Indonesian. Documentation currently accepted in English, although it is expected that
documentation Indonesian language documentation will be required soon. Indonesian translation may be required in dispute cases.

Small and medium

sized enterprises No specific rules.
(SMEs)
Deadline to prepare
There is no statutory deadline, but contemporaneous transfer pricing documentation is recommended.
documentation
According to Tax Procedures Law, documentation should be made available within one month of a request by the tax
Deadline to submit
auditor. In practice, certain questionnaires are issued and the taxpayer is given seven days to complete them.
documentation
However, practical experience has shown that in many cases these deadlines are flexible.

Statute of limitations
Generally five years from tax year end filing date, phased in by 2013 from previous 10 years, but there is no time limit in cases of suspected fraud
or tax evasion.

4
 Indonesian TP summary | Transfer pricing in Indonesia

Transfer pricing methods

Following the amendment of PER-43/2010 by PER-32/2011, the Indonesian transfer pricing provisions allow taxpayers to select the most
appropriate transfer pricing method for each transaction and no longer stipulate that the transactional net margin method (TNMM) is the
method of last resort. This is in contrast to the previous version of PER-43/2010 which specified a strict hierarchy of acceptable transfer pricing
methods which could be used to determine a fair price or profit. However, it still requires a few considerations:
Strengths and weaknesses of each method;
Appropriateness based on nature of related party transactions;
Availability of valid information; and
Comparability level between related party transactions and independent third party transactions.
From a practical perspective, in many tax audits the DGT may consider the use of the TNMM method on an aggregate basis. However, the DGT
still considers the comparable uncontrolled price (CUP) to be the most preferred method since it provides the most direct price comparison if
the data is available.

Comparables

Due to the lack of publicly available information in Indonesia, pan-Asian sets may be accepted. The Indonesian tax authorities usually use the
Bureau van Dijk (BvD) databases (i.e. OSIRIS, ORIANA). The DGT also has issued 14 broad benchmarking ratios for 100 types of industries as a
supporting tool to identify potential cases of non-compliance with the arms length principle and hence targets for transfer pricing review.

Databases preferred for benchmarking purposes

The Indonesian tax authorities usually accept the use of the BvD databases (i.e. OSIRIS, ORIANA).

Management fees
Management fees are the subject of particular scrutiny they will generally be treated as non-deductible unless it can be shown that the services
in question were beneficial to the Indonesian taxpayer; that the services were actually received; and that the quantum of the services charge is
commensurate with the benefits derived. In the absence of specific and detailed documentation to support these contentions, management
fees will generally be treated as non-deductible and may be deemed to be dividends, thereby giving rise to withholding tax obligations.

Tax treaties

Indonesia has an extensive network of tax treaties in place.

5
 Indonesian TP summary | Transfer pricing in Indonesia

Secret comparables

The tax authorities sometimes draw upon secret comparables obtained through the tax return lodgment process and tax audit activity, primarily
for risk assessment and audit selection purposes only.

Updated 28 February 2015