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Revised Transfer Pricing Regulation – What’s New?
The Director General of Taxes has issued a new regulation (PER 32/PJ/2011) which is a revision of Director General of Taxes Regulation No. 43/PJ/2010 concerning the application of the arm's length principle and common business practice in related party transactions. Taxand Indonesia discusses the changes and how they are likely to affect the tax position of mulinationals in Indonesia.
The major changes in PER 32/PJ/2011 are as follows:
a. The scope of the regulation has been narrowed to cover the determination of the arm's length principle and common business practice on transfer pricing transactions conducted by domestic taxpayers or permanent establishments (PEs) in Indonesia with overseas taxpayers.
b. The regulation also applies to related party transactions conducted with domestic taxpayers or permanent establishments in Indonesia, if such transactions are carried out with the intention to take advantage of different tax rates, which include taxpayers who are subject to final and non final tax in certain industries; taxpayers who are subject to sales tax on luxury goods; and transactions conducted with oil and gas contractors
c. The threshold on transaction amount to implement the arm's length principle has been revised. Now, the taxpayer is not obliged to implement the arm's length principle if the transaction amount with each related party in one year does not exceed Rp 10 billion (US $ 1,111,111)
d. In determining the fair price or the fair profit for transfer pricing transactions, the taxpayer has to conduct comparability analysis based on the most appropriate method from the Comparable Uncontrolled Price (CUP), Resale Price Method (RPM), Cost Plus Method (CPM), Profit Split Method (PSM) and Transactional Net Margin Method (TNMM). In the new regulation, the taxpayer does not have to use the hierarchy in selecting the most appropriate methods when performing the comparability analysis
e. Taxpayers have to keep and maintain bookkeeping records concerning:
- The reasons and determination of the selection of related comparability analysis methods and the reason for choosing it in the implementation of the arm's length principle and common business practice on related party transactions
- Documents where related party transactions are reported
- Documents that support the chosen method in determining the fair price and fair profit
- Segmented financial report
The Director General of Taxes is authorised to recalculate the amount of the taxable income if the taxpayer has not yet implemented the arm's length principle and the common business practice in its related party transactions.
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The new regulation is designed to reduce the uncertainty of the previous regulation by explaining the scope with the updates. This is to help reduce the difficulty in the selection of the most appropriate comparability analysis methods and the reason for choosing such methods in implementing the arm's length principle. The regulation is also expected to reduce the taxpayer's difficulties in relation to the preparation, management and submission of the transfer pricing documentation to the tax authorities. It also limits the authority of the DGT to recalculate the taxable income, unless the taxpayer has not yet implemented the ALP and common business practice on its related party transactions. Since this new regulation was effective from 11 November 2011, it raises the question of whether the transfer pricing (TP) documentation should still be prepared for related party transactions from January to November 2011 that amount to less than Rp 10 billion for each transacting party per year.