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TP Regulation Amendments Expected to Reduce Administration Burden
The Indonesian Tax Authority (ITA) has issued a new regulation which is a revision of the Director General of Taxes' Regulation No. 43/PJ/2010 concerning the application of the arm's length principle and common business practices in related party transactions. Taxand Indonesia considers the scope of the Transfer Pricing Regulation amendments and whether it is indeed going to make the preparation of tax documentation easier for taxpayers.
The salient features of the new regulation are as follows:
- The old regulation covers both the domestic as well as overseas related party transactions. In the new regulation, the scope has been narrowed to cover the application of the arm's length principle and common business practices for related party transactions conducted by domestic taxpayers or Permanent Establishments (PEs) in Indonesia with overseas taxpayers
- The transaction amount threshold with respect to the application of the arm's length principle has been revised. Taxpayers are no longer obliged to apply 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).
- In determining the fair price or the fair profit for related party transactions, the taxpayer is required to conduct a comparability analysis based on the most appropriate transfer pricing methodologies, i.e. the Comparable Uncontrolled Price (CUP) Method, the Resale Price Method (RPM), the Cost Plus Method (CPM), the Profit Split Method (PSM) and the Transactional Net Margin Method (TNMM). The new regulation does not maintain a hierarchy of methods, i.e. no one method is preferred to another when performing the comparability analysis.
- Taxpayers are required to keep and maintain bookkeeping records concerning:
a. The reasons for selecting a particular transfer pricing methodology in the application of the arm's length principle and common business practice on related party transactions
b. Documents where related party transactions are reported
c. Documents that support the selected method in determining the fair price and fair profit
d. Segmented financial report.
e. The Director General of Taxes is authorised to recalculate the amount of taxable income if the arm's length principle and the common business practice are not applied with respect to the related party transactions of the taxpayer.
The new regulation, which is effective from 11 November 2011, is designed to reduce the uncertainty of the previous regulation by explaining the scope of this regulation, to reduce the difficulties in the selection of the most appropriate comparability analysis methods and the reasons for choosing such methods in applying the arm's length principle. The regulation is also expected to reduce the taxpayers' 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 Director General of Taxes to recalculate the taxable income to instances where the taxpayer has not yet implemented the arm's length principle and common business practices on its related party transactions.
However, this regulation does not address the question of whether Transfer Pricing Documentation for related party transactions amounting to more than US $ 1,111 but less than US$ 1,111,111 annually for the period from January 2011 to November 2011 is required to be prepared. This is because based on the former TP regulation, the tax payer is not obliged to implement the arm's length principle if the amount of the related party transactions (domestic as well as overseas transactions) does not exceed IDR 10 million (US $ 1,111). The new regulation increases the TP transaction threshold from IDR 10 million (US $ 1,111) to IDR 10 billion (US$ 1,111,111). As it has been in effect since 11 November 2011, so it raises the question of whether related party transactions exceeding IDR 10 million (US$ 1,111) but less than IDR10 billion (US$ 1,111,111 that were performed from Jan-Nov 2011 still need to prepare the TP documents. It would be prudent for taxpayers to still prepare the TP documentation during this period for each transaction with related parties that is within the threshold amount.
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