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New Indonesia transfer pricing tax audit

The Indonesian Tax Authority (ITA) recently issued Regulation No. PER 22/PJ/2013 “Guidelines for the Audit of Taxpayers with Related Parties/Affiliates”, which will come into effect from 1 July 2013. These regulations require the preparation of transfer pricing documentation while conducting a comparability analysis to prove that transactions with related parties are consistent with the arm’s length principle. Taxand Indonesia details the impact that these new guidelines will have on MNCs moving forward.

The Director General of Taxes issued regulations in 2010 which required taxpayers with related party transactions to:

  1. Perform a comparability analysis on transactions between affiliates and independent parties
  2. Create a record and documentation of transactions with affiliates
  3. Enter into Advance Pricing Agreements (APAs) and implement Mutual Agreement Procedures (MAPs) with the tax authority
  4. Provide information regarding its shareholder structure, the list of overseas affiliated companies and the transaction value in its annual income tax return

An “affiliate” or “related party” is defined in the current income tax legislation as someone:

  • Having a capital participation of a minimum of 25% in the company of another taxpayer
  • Having control (through management and use of technology) by the other taxpayer, or because of a family relationship

The new regulations have been implemented to test taxpayers’ compliance with the arm’s length principle. In essence, the regulations are intended to:

  1. Examine the characteristics of the taxpayer’s business and the factors that affect the industry in question, such as: use of technology, competitor, economic and regulatory factors; terms of agreement; terms of delivery; relationship among the parties involved; financial risks; and others.
  2. Conduct a functional analysis to accurately identify the characteristics of a taxpayer’s and its counterpart’s transactions to  estimate of the risks involved in the taxpayer’s transactions and  the profit that is proportionate to the risks
  3. Identify the availability of independent comparables that are classified as:
    1. Internal or external
    2. Characteristics of the goods or services, functional analysis on the goods and services, terms of the contract, economic conditions and business strategies
  4.  Select the transfer pricing method that can be used from the following list:
    1. Comparable Uncontrolled Price Method (CUP)
    2. Resale Price Method (RPM)
    3. Cost Plus Method (CPM)
    4. Profit Split Method  (PSM)
    5. Transactional Net Margin Method (TNMM)
  5. Apply the arm’s length principle by:
    1. Setting appropriate comparables
    2. Using multi-year data
    3. Adjusting the comparability, and
    4. Allowing an adjustment phase

The regulations also contain a special provisions concerning the application of the arm’s length principle in relation to:

  1. Transactions involving payment for internal group services

Transactions involving tangible and intangible assets​

Your Taxand contact for further queries is:
Suryohadi Djuilianto
T. +62 21 8399 9919

Taxand's Take

One of the main focuses of the tax audit, as explained in the 2013 Tax Audit Strategies, is the review of related party transactions. The audit will be conducted in field audit format and must be completed within two years.

To ensure that the tax audit is as efficient as possible, multinationals should:

  1. Prepare their transfer pricing documentation in accordance to the guidelines
  2. Take advantage of the facilities provided through an APA or MAP with the tax authority where appropriate

Taxand's Take Author

Prijohandojo Kristanto

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