Indonesia: New tax audit guideline on the related party transactions

Effective 1 July 2013, Indonesia issues a new tax audit guideline, PER-22/PJ/2013 (PER-22) , towards tax payers which have transactions with related parties. This regulation superseded the former regulation KEP-01//PJ.07/1993.

PER-22 provides directions to the tax officers on how to carry out an audit of related party transactions, commonly called a transfer pricing audit. In principle, this audit examines the arm’s length principles ontransactions with affiliated parties, including but not limited to sale, purchase and/or transfer of tangible assets, intra-group services, transfer and/or use of intangible assets, interest payments and sale and/ or purchase of shares. The significance of PER-22 for tax payers is to better assist them in preparing for tax audits in Indonesia. Tax audits will be more likely to be conducted in Indonesia as Directorate General of Taxation (DGT) has increased its tax collection target through audit or examination in 2013 by 40% or approximately USD1.8 billion. 

Some key issues that are relevant to the tax payers are as follows:

1. More detailed information is required in a form template to be provided during a transfer pricing audit. Such forms are as follows:

2. Supply chain analysis is now required as described in 1). A tax payer is required to provide information on the value chain relevant to the tax payer’s business and its group as a whole, including the foreign entities. Additionally, it is also required to provide information on net operating income for each entity involved in the value chain. 

3. The use of multiple year data to avoid distortion. 

4. Methods used in transfer pricing audit are Comparable Uncontrolled Price (CUP), Resale Price, Cost Plus, Transactional Net Margin, and Profit Split. The Profit Split method is being discussed in more details in the guidance. Therefore, given more vivid guidance in applying this method, it is likely that the government tax auditors will apply this method during the tax audits. 

5. Continuously focus on segment data.