Indonesia: The changing landscape of transfer pricing in Indonesia

Transfer pricing has entered a more mature stage since 2009 with more rigorous regulations and enforcements. Since then the transfer pricing audit has become more daunted for taxpayers. Transfer pricing itself is not a new issue in Indonesia. It was already introduced in the 1983 Income Tax Law issued by the Indonesian Tax Office (ITO). However, it was never enforced in practice until 2009 with the issuance of Government Regulation (PP) 80 on 28 December 2007, effective on 1 January 2008, which required tax payers engaging in transactions under common control to maintain transfer pricing documentation. 

In 2009, the ITO started to demand more by requiring tax payers to submit special appendix which contains related party transactions along with the submission of CITR. In 2010, Indonesian transfer pricing had strong grounds with the issuance of PER-43/PJ/2010 (PER-43), the first specific transfer pricing guidance, followed by PER-48/PJ/2010 (PER-48) on the Mutual Agreement Procedure, and PER-69/PJ/2010 (PER-69) on the Advance Pricing Agreement. PER-43 was amended in November 2011 by PER-32 in order to provide clarity with respect to domestic transactions between related parties. 

Previously under PER-43, all domestic related party transactions were subject to transfer pricing documentation requirements. With PER-32, the documentation requirements are only for domestic transactions between related parties that are effectively not taxed on the same basis. Another notable change is the replacement of the hierarchy of transfer pricing methods with the most appropriate method approach in line with the OECD transfer pricing guidelines. PER-32 adopted, a strict hierarchy in the selection of transfer pricing method of which comparable uncontrolled prices (CUP) method must be considered first, followed by adjusted CUP method, then by one of the two gross margin methods, i.e. resale price method (RPM) or cost plus method (CPM). Net-profit-based methods, such as the transaction net margin method (TNMM), may be applied only if there are “difficulties” in applying one of the more direct pricing methods. Another change is the increased exemption limit from transfer pricing documentation from previously IDR 1 million (approx. US $110) to IDR1 million (approx. US $110). 

In November 2012, new regulations regarding the conduct of transfer pricing (TP) documentation and audits were being drafted and are expected for release immediately in 2013. The highlights of key potential changes TP guidelines of the upcoming regulations are discussed below. 

1. Expanded definition of related party 

Current definition includes the following: 

• Share participation of 25% or more through direct, indirect or shared) 

• Control through management or technology; or 

• Family relationships. 

The upcoming regulations are likely to include parties involved in Production Sharing Contracts and Contracts of Work. Another major change is the inclusion of major customers and/or vendors which could potentially create disputes in international taxation cases given that this is different from OECD’s ruling. 

2. Increased threshold for TP Documentation requirements 

The proposed exemption limited would be taxpayers with sales or purchase transactions amounting to more than IDR 50 billion (approx. USD 5.5 million) and related party transactions more than IDR 5 billion (approx. USD 550,000) per fiscal year. 

3. Amended TP documentation requirements 

The new regulation will likely to require TP documentation only for domestic transactions involving taxpayers subject to different tax profiles, such as taxpayers who are subject to different tax rates, taxpayers who are subject to a different tax system (e.g. final tax), transactions that are subject to Luxury Goods Sales Tax, taxpayers reporting significant/abnormal losses, and transactions with oil and gas contractors.

The selection of transfer pricing method is still likely to apply the “most appropriate method” approach. Although the new upcoming regulations would emphasize that the most appropriate method should not disregard the hierarchy of the methods, meaning CUP would always be preferable. 

4. Revised Mutual Agreement Procedure (MAP) 

The key revision of the MAP regulations is that the MAP application can be processed simultaneously with the domestic dispute resolution process in Indonesia. 

5. Revised Advance Pricing Agreement (APA) 

Currently, APA – an arrangement where the tax payers and the ITO agree in advance, on an acceptable transfer pricing result for three years- is not commonly pursued in Indonesia as a way out to tax disputes as APA is not a replacement of a tax audit. Therefore, the new regulations are designed to encourage tax payers to negotiate APA. 

6. More clarity in intellectual property (IP) transfers 

In practice, TP audits have been focusing on related party transactions, in particular royalty payments to related parties. The general rule is that a tax payer must be able to show that the royalty payments meet the three-step test, i.e. verified ownership of the IP, verified benefits from the ownership of the IP, and lastly the payments meet the arm’s length test. The new regulations, therefore, provide more clarifications in determining the arm’s-length nature of IP transfers among related parties.