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13.4.1. Main Rules

The transfer pricing landscape in Indonesia has become stricter in recent years as a consequence of high tax revenue targets set by the Government and Indonesia’s adoption of the OECD Base Erosion and Profit Shifting Action plans.  Accordingly, transfer pricing issues are becoming a focus area during tax audits or inquiries by the Indonesian Tax Authorities (ITA).

Under Article 18(3) of the Income Tax Law, the Director-General of Taxation (DGT) is empowered to re-determine income and deductions between related parties, to reclassify debt as equity in determining taxable income if a taxpayer has related party transactions and to ensure that the transactions reflect the prices and conditions that would have been made between independent parties. Further, the provision also presents the various methods that could be used in computing such arm’s length prices.

The main provisions governing transfer pricing are contained in Article 18 para. 3 of Income Tax Law Number 36 Year 2008 concerning the fourth amendment of Law Number 7 Year 1983 and Article 8 to 14 of Minister of Finance (MoF) regulation (No. 22/PMK.03/2020). Indonesia's practice in this area generally follows the OECD Transfer pricing Guidelines for Multinational Enterprises and Tax Administrations ('the OECD' guidelines'), as a reference for formulating the transfer pricing policy and regulation and for dispute settlement in as much as that certain provisions within the domestic law use various points suggested by the OECD guidelines.

As per the domestic law, transactions between related parties should be conducted in conformity with open market conditions, i.e. the prices must be at arm’s length.

Definition of Related Parties

The term “related parties” as per domestic law includes:

  • Taxpayer who owns directly or indirectly at least 25% of equity of other taxpayer, or two or more taxpayers;
  • Taxpayer who controls other taxpayer or two or more taxpayers that are directly or indirectly under the same control (through management or technology even though there is no ownership); or
  • Family relationship either through blood or through marriage within one degree of direct or indirect lineage.

The term related parties as per the MoF regulation (No. 22/PMK.03/2020) means a condition of dependence or association of one party with the other as caused by:

  • Ownership or participation in capital;
  • Control; or
  • Family relationship through blood or marriage.

Related party relationship by control as per MoF regulation (No. 22/PMK.03/2020) is deemed to exist in the case of:

  • One party controls the other, or one party is controlled by the other, either directly or indirectly;
  • Two or more parties are under the control of the same party, either directly or indirectly;
  • The same person or persons are directly or indirectly involved or participated in the managerial or operational decisions of two or more parties;
  • The parties commercially or financially belong to the same business group; or
  • One party is in a related party relationship with the other.

Applicable TP Methods

The following five OECD approved TP methods apply to the transactions between related parties:

  • Comparable uncontrolled price (CUP) method;
  • Resale price method;
  • Cost-plus method;
  • Transactional net margin method (TNMM); and
  • Profit split method

The domestic law also allows the use of other methods such as:

  • Comparable uncontrolled transaction method;
  • Tangible and intangible asset valuation method; and
  • Business valuation method.

There is no hierarchy of methods; instead a transfer pricing method can be selected based on the most appropriate method criterion, which may be assessed based on the following:

  • Appropriateness of the transfer pricing methods considered in view of the nature of the controlled transaction and the business characteristics of enterprises therein;
  • Respective strengths and weaknesses of the methods;
  • Availability of reliable comparable uncontrolled transactions;
  • Degree of comparability between the controlled transactions and comparable uncontrolled transactions; and
  • Reliability of comparability adjustment that may be made in the event of material differences between the controlled transactions and comparable uncontrolled transactions.

Use and Availability of Comparables

The domestic laws generally follow the OECD guidelines with respect to comparability analysis, which inter alia provides certain economically relevant characteristics for determining arm’s length price, which are as follows:

  • Contractual terms, whether written or unwritten;
  • Function performed, assets used, and risks assumed by each of the parties to the transaction;
  • Characteristics of products (goods or services);
  • Economic circumstances; and
  • Business strategies pursued by the parties.

A fresh benchmarking study is required to be done every year. The use of comparables depends on the facts and circumstances of the transactions. Taxpayers may use local or ASEAN region comparables for determining the arm’s length price.  While applying a comparability factor, the results of the controlled transaction are compared with the results of the uncontrolled transaction for the same tax year.