Transfer Pricing Services in Indonesia: Inter-Company Transactions

A. What is Transfer Pricing?

Transfer pricing is a method in Indonesia for determining the price of a transaction or transfer between related parties. These transactions are typically made between two companies or between a company and an individual. The implementation of the arm’s length principle is the international standard for transfer pricing.

B. Documenting Transfer Pricing Transactions

Action Plan 13 of the Base Erosion and Profit Shifting (BEPS) Action Plans has been implemented in Indonesia. Every transaction, whether local or international, must provide documentation known as a TP Doc under PMK-213 issued by the Ministry of Finance.

Taxpayers must maintain three types of documentation: a Master File, a Local File (which must be available four months after the fiscal year ends), and a Country-by-Country Report (CbCR). All of them must be submitted in Bahasa Indonesia.

To declare when the Transfer Pricing Reports will be available, taxpayers must also prepare a statement letter signed by the individual who composed the Transfer Pricing Documentation. The statement letter is not required to be filed with tax returns, but it should be attached to the Master File and Local File in case the Tax Authorities request it.

In general, any transaction that meets any of the following criteria must prepare the aforementioned TP Doc:

• Gross Revenue (revenue from main business activities before deducting sales discounts, etc.) exceeded IDR 50 billion in the previous year.
• In the previous year, tangible goods transactions exceeded IDR 20 billion.
• Related party transactions with an affiliated entity in a jurisdiction with a lower tax rate than Indonesia (e.g., the tax rate in the United States is now lower than the tax rate in Indonesia) with no threshold applicable.
• Taxpayers with consolidated gross revenue of at least IDR 11 trillion qualify as a parent entity of a business group (a parent entity is defined as the entity directly or indirectly controlling the business group and is required to prepare consolidated financial statements under Indonesian Financial Accounting Standards).
• Failure to follow Indonesian transfer pricing policies and procedures and provide required documentation may result in costly transfer pricing audits and significant additional tax liabilities or penalties.

A. Tax Return Compliance

Companies are required to submit a summary (ikhtisar) in a prescribed form along with their Annual Corporate Income Tax Return. The summary should include the following information:

• Whether the Master File and Local File contain the required information as per the regulation
• The date on which the Master File and Local File are available (as declared in the statement letter).
• This information is to be submitted in addition to the Special Attachment Forms (Forms 3A/3A-1 and Forms 3B/3B-1) filed along with the Annual Corporate Income Tax Return.

Note: PMK-213 does not replace the current Transfer Pricing regulation issued by the Directorate General of Taxation under Regulation No. PER-43/PJ/2010 (amended by Regulation No. PER-32/PJ/2011). Therefore, documentation requirements under Regulation No. PER-32/PJ/2011 may also need to have complied in tandem with those regulated in PMK-213.

C. Country-by-Country Report

In addition to the aforementioned documents, it is also important to familiarize yourself with the preparation of the country-by-country report.

1. Primary filing requirements for country-by-country report
   • The parent entity of the business group must be an Indonesian tax resident
   • The business group’s consolidated gross revenue should be at least IDR 11 trillion
   • A history of transactions with foreign subsidiaries
   • The country-by-country report should be submitted 12 months after the end of the tax year, with tax year 2016 as the first year of coverage.
2. Secondary filing requirements for country-by-country report
   • The parent entity of the business group is a foreign tax resident 
   • The satisfaction of any of these requirements :
     • The parent entity’s country of origin does not require the submission of a CbCR
     • The parent entity’s country of origin does not have an agreement with the Government of Indonesia on the exchange of information (EOI)
     • The parent entity’s country of origin has an EOI but the CbCR cannot be obtained by the Government of Indonesia.

D. Other Significant Information

1. THE DEFINITION OF A RELATED PARTY
   According to Article 18(4) of the Income Tax Law, a related party is defined as follows:

• • A taxpayer owns at least 25% of the equity of another taxpayer or two or more taxpayers, either directly or indirectly.
  • A taxpayer controls at least one other taxpayer, either directly or indirectly (this particular relationship may result from a contribution in management or technology even if there is no ownership).
  • A family relationship exists between two people through blood or marriage, with one degree of direct or indirect lineage, such as:
    
    • A blood relationship with one degree of direct horizontal lineage (relatives)
    • A marriage relationship with one degree of direct vertical lineage (parents-in-law, stepson, or stepdaughter)
    • A relationship by marriage with one degree of direct horizontal lineage (relatives-in-law)

2. THE CONTENTS OF A LOCAL FILE

• • Information about the local entity, such as its organizational structure
  • A description of the entity’s operations
  • Details of related party transactions – the name of the related party, amount, description of the relationship between local entity and transacting entity
  • The related party transaction’s functional, asset, and risk profiles
  • Analysis of comparability and financial data for the local entity

3. THE CONTENTS OF A MASTER FILE

• • The group’s companies’ ownership structure and jurisdiction
  • Each of the group’s entities’ business activities
  • A description of the most significant products’ supply chains
  • Specifics about the group’s intangible assets
  • Intercompany financial activities of the group
  • The consolidated financial statement of the group