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Documents Required for Annual Income Tax Returns of Multinational Corporations

Indonesia

Empirical data shows that 60 percent of trade transactions involve multinationals. Consequently, in the eyes of the tax authorities, manipulative transfer pricing may be viewed as the safest and most effective form of tax avoidance. In order to determine the compliance of taxpayers and ensure that corporations are not engaging in manipulative transfer pricing, the Director General of Taxes has issued a Regulation that documents and relevant supporting information must be attached to 2010 annual income tax returns. Taxand Indonesia lists the additional information and supporting documents required including tips for meeting the requirements of the Indonesian tax authorities.

In general, in the past, an annual income tax return had to be accompanied by the corporation's audited financial statements. However, now additional information and supporting documents are required in the form of:

a. transcripts of data from the Balance Sheet and Statement of Earnings
b. transcripts of transactions with related parties in accordance with the financial accounting standards
c. a list of transactions with related parties and the values of such transactions, together with an explanation of how prices are determined and the reasons for selecting the methods used
d. a statement of transactions with related parties, including:

  • the corporation's ownership structure
  • organisational structure
  • pricing policies over the last five years
  • details of production costs and costs of services provision

e. a declaration of transactions by corporations registered in a tax-haven country that, according to the Indonesian tax authorities is a country that:

  • applies corporate income tax at a rate lower than 12.5%
  • where the laws of such country prohibit banks from furnishing information on their customers
  • does not exchange taxation data with Indonesia

f. corporations that have subsidiaries outside of Indonesia are required to submit consolidated financial statements, and the financial statements of each subsidiary

Program of the Directorate General of Taxation
In order to ascertain the financial performance of the corporation and the reasonableness of its tax payments, the Directorate General of Taxation will conduct a risk analysis of the annual income tax return that has been submitted by the corporations. Based on this risk analysis, a special examination will be conducted if any of the following criteria are satisfied:

a. for the last three consecutive years, the corporation has suffered losses and consequently paid no tax
b. the value of the transaction with the affiliate is significant
c. the profit performance is considered unrealistic compared with corporations of a similar type


Taxand's Take


It is essential for multinational corporations transacting with related parties in Indonesia:

a. to be aware of and understand the Directorate General of Taxation's program and requirements;
b. provide and prepare the necessary overseas documents and proofs ready from the outset for filing with their annual income tax returns;
c. apply the arm's length principle and document all transaction processes in their dealings with affiliates; and
d. disclose all transactions with related parties in their annual income tax returns.

Your Taxand contacts for further queries are:
Prijohandojo Kristanto
T. +62 21 8399 919
E. prijohandojo@pbtaxand.com

Suryohadi Djulianto
T. +62 21 8399 919
E. suryohadi@pbtaxand.com

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