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How to select the most appropriate transfer pricing method
Transfer pricing (TP) is still a hot issue in Indonesia as the DGT continue to pursue taxpayers by tightening the supervision of transactions between parent companies and their subsidiairies. Taxand Indonesia explores how to select the most appropriate TP method.
In order to select the most appropriate transfer pricing method multinationals should consider the following items:
- The strength and weakness of each transfer pricing method
- The appropriateness of the method based on the nature of the related party transaction, determined by a functional analysis
- Availability of valid information (on independent transaction) to apply the selected method
- The comparability level between related party transactions with independent transactions, including whether any appropriate adjustments would need to be made to eliminate any material differences between the compared transactions
However multinationals should also look out for potential obstacles when selecting their transfer pricing method such as:
- The unavailability of the independent comparables
- The Indonesian Tax Office (ITO) still considers that Comparable Uncontrolled Price (CUP) is the most preferred method - and therefore may judge other methods more harshly
- Not all ITO officers have the same level of transfer pricing knowledge, which can create disputes
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Also published in Thomson Reuters' Taxnet Pro, 5 May 2014
Since 2010 the DGT has been actively issuing tax regulations in relation to related party transactions. Multinationals should ensure they are up to speed on these regulations and consider all factors when conducting related party transactions, eg the implementation of the arm's length principle. A comparability analysis should also be performed.