Transfer Pricing and CFCs in Indonesia
The principal transfer pricing legislation is:
Transfer pricing rules are enforced by the Directorate General of Taxes (DGT) that under the Ministry of Finance of the Republic of Indonesia.
As reference for formulating Indonesian transfer pricing policy and regulation and for dispute settlement.
Transfer pricing rules apply for any type transactions if the following conditions are met:
A special relationship between taxpayers may result from the dependency or the relationship of the following condition between those parties:
In addition, related parties between individual taxpayers may also result from their relationship by blood or by marriage.
As defined in article 18 (4) Indonesian Income Tax Law and its elucidation, the special relationship is deemed to exist if:
Furthermore, the elucidation of article 18(4)(b) provides the more guidance, as follows.
A special relationship between taxpayers may also result from a participation in management or technology even though there is no ownership. A special relationship is deemed to exist if one or more enterprises are controlled by the same persons, or the relationship between enterprises is controlled by the same person.
The term ‘relationship by blood in one degree of direct lineage vertically’ means parents, and son or daughter. The term ‘relationship by blood in one degree of direct lineage horizontally’ means relatives. The term ‘relationship by marriage in one degree of direct lineage vertically’ means parents-in-law, and a stepson or stepdaughter. The term ‘relationship by marriage in one degree of direct lineage horizontally’ means relatives-in-law.
Transfer pricing rules should be applied for domestic and cross-border transactions between related parties.
Yes. The DGT adheres to the arm’s-length principle as enshrined in article 9 of the OECD Model Treaty in applying the transfer pricing legislation.
Base erosion and profit shifting
Indonesia follows the guidance provided in the OECD Transfer Pricing Guidelines 2010 version. Indonesia is now in the process of finalising the finance ministry regulation to adopt the OECD’s recommendation in BEPS 8-10. The BEPS Action 13 recommendation has been fully adopted in the local transfer pricing rules with PMK 213/PMK.03/2016.
The DGT adopts the most appropriate method. The DGT accepts all OECD transfer pricing methods. However, if a traditional transaction method and a transactional profit method can be applied in an equally reliable manner, the traditional transaction method is preferable to the transactional profit method. Moreover, where the comparable uncontrolled price method (CUP) and another transfer pricing method can be applied in an equally reliable manner, the CUP method is preferred.
If a reliable CUP cannot be found, then, in line with the Guidelines, the DGT places emphasis on choosing the most appropriate method for the particular type of transaction, rather than establishing a rigid hierarchy of methods. For tangible or intangible property transactions, the DGT accepts the following five methods:
Other methods, such as valuation techniques using income-based approach, cost-based or market-based approach also accepted by the DGT as transfer pricing method for intangible property transactions.
For intragroup services transactions, the DGT has accepted the following three methods: the CUP, CP and transactional profit methods.
The Indonesian TP regulation also provides detailed guidelines on assessing the arm’s-length nature of intragroup services (IGS) and intangible property (IP) transactions. Rigorous tests must be applied in a hierarchical manner to prove the arm’s-length nature of IGS and IP transactions.
For loan transactions the DGT only accepts the CUP method. Current transfer pricing regulation does not contain specific mention of a method to be used for commodity. However, in current regulation regarding transfer pricing documentation the DGT encourages the use of CUP for commodities.
Following BEPS, the DGT has noticed an increasing acceptance of and reliance on profit split methods.
Cost-sharing arrangements are permitted in Indonesia. A cost-sharing arrangement is a framework agreed among business entities to share the costs, risks of developing, providing or obtaining assets, services, or rights and determine the nature and extent of the interests of each participant in those assets, services or rights. However, any detailed explanations on how it can be applied are not clearly stated and ruled out in Indonesian transfer pricing regulation. Indonesia follows the guidance provided in the OECD Transfer Pricing Guidelines 2017.
There is no strict hierarchy of methods; rather, the DGT follows the Guidelines’ ‘natural hierarchy’. Generally, the CUP method is preferred and in practice the DGT expects sufficient effort to be made to identify a suitable CUP. If both traditional transaction methods and transactional profit methods can be applied with equal reliability, the preference is for traditional transaction methods.
If a reliable CUP cannot be found, then, in line with the Guidelines, the DGT places emphasis on choosing the most appropriate method for the particular type of transaction.
The selection of the most appropriate method requires the following considerations:
For more complex transactions, the DGT is open to exploring other methods if they are considered to provide a stronger case for application of the arm’s-length principle.
Taxpayers are allowed to make year-end adjustments based on a self-assessment system (eg, as a year-end true-up or true-down) as long as they comply with the arm’s-length standard and are made before the tax audit notification letter is issued and received by the taxpayer.
There are no safe harbour methods available in the current Indonesian Transfer Pricing regulation.
Disclosures and documentation
The DGT requires a separate master file and local file. As regulated in PMK 213, the minimum contents of the master file and local file are as follows.
The master file and local file must be prepared in Bahasa Indonesia.
Other than complying with mandatory documentation requirements, the main benefit of preparing and keeping proper transfer pricing documentation is that it would assist in resolving any future transfer pricing enquiries by the DGT and in general helps the taxpayer to achieve and maintain a lower transfer pricing risk rating with the DGT.
Indonesia operates on a self-assessment system, with companies setting their own transfer prices. The taxpayer should have documentation to prove that the transfer price of related parties’ transaction has been set at arm’s length on an ex-ante basis. In a tax audit context, having this documentation will shift the burden of proof to the DGT. If a taxpayer does not have documentation to support its transfer pricing policy, there is a high risk that the Indonesian Tax Office will make substantial adjustments during the tax audit, such as the denial of all deductions for management services fees or royalties paid to related parties.
Maintaining good transfer pricing documentation helps to demonstrate that the taxpayer has taken reasonable care in making any transfer pricing adjustments to its tax return, were this to be inquired into in future.
The DGT adopts country-by-country reporting as guided by OECD BEPS Action 13 Deliverables in the local rules. There is no difference between the local country-by-country reporting rules and the consensus framework of BEPS Action 13.
Timing of documentation
The master file and local file should be available four months after each fiscal year-end, in either Bahasa Indonesia or English (for taxpayers with approval to maintain bookkeeping in English, but it must be accompanied by a Bahasa Indonesia translation). The CBCR should be available 12 months after fiscal year end. The taxpayer should submit the transfer pricing documentation upon DGT’s request. The CBCR submission is due within one year after each fiscal year-end and together with the submission of subsequent year’s tax return and the notification of CBCR electronically, at the latest, 12 months after the fiscal year ends. The DGT can request the documents for compliance checking, a tax audit, an objection, a reduction of an administrative sanction and in other cases. In the next regulation, taxpayer should submit the transfer pricing documentation contemporaneously with the filing of the corporation tax return.
Failure to document
A taxpayer has four months (12 months for CBCR) after each financial year-end to prepare and declare, starting in its 2016 corporate tax return, that it is ready to submit the MF/LF. The MF/LF must be summarised in an attachment to the annual corporate income tax return (CITR) and the CBCR attached to the tax return of the following year.
Penalties exist for failing to prepare and submit the MF/LF upon request. Failure to prepare MF/LF is treated as not applying the arm’s-length principle. Failure to deliver an MF/LF when requested would result in the taxpayer being deemed as not having transfer pricing documentation.
Adjustments and settlement
Limitation period for authority review
Articles 15 and 16 Minister of Finance Regulation No.17/PMK.03/2013 last amended by PMK-184/PMK.03/2015 concerning ‘Tax Audit Procedures’, regulate the time line of a tax audit. In the field tax audit process, the examination phase should be done within six months and can be extended for two more months and the discussion phase should be completed within two months. Furthermore, for taxpayers with transfer pricing issues or financial engineering issues, an extension can be granted of three times for six months each.
Rules and standards
There are two transfer pricing audit guidance documents that govern the Indonesian Tax Authority in reviewing company compliance with transfer pricing rules:
The Indonesian tax system adopts a self-assessment system in which the burden of proof is on the taxpayer. In this regard, the taxpayer needs to prove that the argument to determine the price and its method is consistent with the arm’s-length principle. If the taxpayer cannot provide the required documentation, a substantial adjustment will be imposed, based on market prices, by the DGT.
If the taxpayer does not agree with the transfer pricing adjustment applied by DGT, the dispute should be solved through objection and appeal process. The taxpayer may seek judicial review of a transfer pricing adjustment in the Supreme Court if the taxpayer disagrees with the tax court’s decision. The taxpayer may also resort to an alternative dispute resolution (ADR) mechanism using MAP (mutual agreement procedure). A MAP application can be made simultaneously with the objection application to the DGT. Advance pricing agreement (APA) also available to a taxpayer that needs to prevent transfer pricing disputes through a unilateral APA or bilateral APA.
Relief from double taxation
Indonesia has concluded tax treaties with more than 60 countries and jurisdictions covering its major trading partners in the Association of Southeast Asian Nations (ASEAN), America, Europe and much of the Asia-Pacific region. All of those tax treaties have MAP provisions.
PMK-240 is the published MAP guidelines. A MAP application may be submitted by a taxpayer through the DGT or the tax competent authority of a tax treaty partner country or jurisdiction. As stated in PMK-240, an Indonesian taxpayer shall submit a request for a MAP to the Directorate of Regulation II of the DGT within the time limit stipulated in the relevant tax treaty. The request for a MAP shall provide certain information or explanations regarding, among others, the following matters:
The taxpayer must submit the certificate of domicile of the relevant foreign taxpayer from the tax treaty partner country or jurisdiction in the MAP request.
When relief is available
A request for a MAP should be completed with the supporting documents and submitted to the DGT within a time limit as stipulated in the relevant tax treaty by:
For a MAP application initiated by the Indonesian taxpayer, the time limit to lodge an MAP application is the first notification of any action that triggers a tax assessment not in accordance with the relevant tax treaty.
As for the MAP application made by DGT or a tax authority of the tax authority of the country or jurisdiction, PMK 240 states that the starting points for counting the time limit for a MAP application that is stipulated under a tax treaty can be:
The MAP application cannot be lodged when the tax court has declared an end of the court hearing process, regardless of the outcome of the Tax Appeal. MAP will cease when the Tax Court announces its decision. Furthermore, consultation with the treaty partner’s tax authority should ideally be concluded within three years of initiating MAP. However, the timeline may be extended after an agreement between two competent tax authorities.
Limits on relief
Yes, there are. The DGT only gives a response to the corresponding adjustment conducted by the tax treaty partner country.
Currently, there are no statistics published on MAP case resolution by the DGT. The DGT do not published MAP agreement publicly, only the corresponding taxpayers could gather the information regarding the mutual agreement reached. However, based on information on Indonesian dispute statistics on the OECD website (www.oecd.org/tax/dispute/mutual-agreement-procedure-statistics-2016-per-country-all.htm), the average times needed to close MAP by the DGT are 39.98 months for transfer pricing cases and 27.9 months for non-transfer pricing cases. Details on MAP outcomes can be accessed via that link.
Advance pricing agreements
Indonesia has an APA programme consisting of unilateral and bilateral APAs (BAPAs). Indonesia basically does not have a multilateral APA programme. However, if the covered transactions and covered entities are from more than two countries, the APA can be conducted by applying multiple BAPAs with the countries concerned. The DGT is open and is willing to optimise APAs as a means to prevent double taxation and BEPS. This can be seen from the significant increase in the number of APAs completed in 2018. The statistics for APAs requested and closed can be found at www.pajak.go.id/id/apa-map.
PMK 7 sets out the process or procedures to obtain an APA into the following two broad stages.
Establishment of the APA:
The second is the implementation stage including the evaluation of the APA through an annual compliance report and the potential to submit a new APA application for the subsequent year. This stage is relevant both for unilateral APAs (UAPAs) and BAPAs. There is no filing fee for APAs.
Generally, the entire process of applying for a unilateral APA until it is completed may require six to 18 months, whereas an application for a bilateral APA may require three years, as stipulated in the tax treaties between Indonesia and the tax treaty partner country.
According to PMK-7, a unilateral APA will be valid for a maximum of three years. However, in relation to bilateral APAs, the validity period can be extended to a maximum of four years. Rollback facilities are available for bilateral APAs, and the DGT is currently in the process of revising the APA regulation to allow rollbacks for unilateral APAs.
All types of related-party transactions can be covered by APAs, inclu-ding tangible and intangible property transfers, related-party services, cost-sharing arrangements and financial transactions covering guarantees and the allocation of income of a financial institution engaged in the global trading of financial instruments.
Yes, the APA programme is independent from the tax authority’s examination function and from the competent authority staff handling other double taxation cases. All of the taxpayer’s documents will be returned to the taxpayer if the taxpayer’s APA application is not approved by the DGT or cancelled. No documentation during the APA process can be used by the DGT for tax audit and tax investigation purposes. Prior to 2016, MAP cases were handled by the Directorate of Tax Regulation II in the DGT. In 2016, a new International Tax Directorate was established and took over this role and responsibility.
Advantages and disadvantages
The key advantages of APAs are minimising transfer pricing disputes, providing legal certainty and ease of tax calculation.
The advantages of an APA can include:
The disadvantages of an APA can include:
It should be noted that there is no guarantee that an APA application will be approved by the DGT.
There are some factors that cause difficulties in reaching agreement about APAs with the DGT:
Under article 18(3) of the ITL, the DGT may challenge the form of related-party transactions as structured by the taxpayer. The DGT is authorised to determine the amount of income and expenses, and determine or recharacterise the debt as capital to calculate the amount of taxable income for taxpayers having a special relationship with the other taxpayer in accordance with the arm’s-length principle. Generally, the DGT may execute its authority to adjust and recharacterise the related-party transactions if those transactions are considered as not complying with the arm’s-length principle.
Indonesian transfer pricing guidelines do not specifically mention that local comparable companies are preferable, but in practice the local comparable is preferred. However, owing to lack of local comparable company database from Indonesia, the DGT has no objection to using a set of comparable companies from the Asia-Pacific region. The DGT uses some parameter screening criteria, statistical screening, manual review and website review for selecting and evaluating comparable companies. The purpose of this search process is to find companies that have the highest degree of comparability in business function, assets, risks and products with the taxpayer. The detail of the comparable company’s search process should be attached to the transfer pricing documentation.
In existing regulation, there is no restriction on using secret comparables. However, so far the DGT have not yet made use of any secret comparables in auditing or litigation.
The primary adjustment performed by the tax auditor may result in a secondary adjustment. The secondary adjustment is a further correction that may occur owing to the primary adjustment on related-party transactions. If a tax auditor makes a positive correction on related-party transactions and the result of the correction is an overpayment to the related party, the tax auditor may make a secondary adjustment for such overpayment applied under applicable taxation provisions (eg, withholding tax on deemed dividends).
There is also a possibility that equity is stated as debt, namely disguised equity. In such case, the DGT is authorised to characterise debt as equity. This recharacterisation may be made by comparing the ratio of the company’s liabilities to the company’s equity of independent parties or based on other data. As a result, interest paid with respect to that debt is not deductible, and in the hands of shareholders such payment is considered as a dividend that is subject to tax.
To obtain relief from the adverse tax consequences of certain secondary adjustments, the taxpayer should be able to prove that all of its related-party transactions have been conducted in accordance with arm’s-length principles. Having an APA with the DGT may exempt the taxpayer from this transfer pricing adjustment.
Non-deductible intercompany payments
There are no specific categories of intercompany payment that are non-deductible. Intercompany payments shall comply with transfer pricing regulation and subject to the same tax rules on their deductibility as third-party payments.
The regulations governing tax avoidance are:
There is no specific ruling regarding location savings and other location-specific attributes under the applicable existing transfer pricing rules. However, Indonesia follows the guidance provided in the OECD Transfer Pricing Guidelines 2017 version. Indonesia is now in the process of finalising the finance ministry regulation to adopt the OECD’s recommendation in BEPS 8-10.
Branches and permanent establishments
The profits attributed to the PE are those that it might be expected to make if it were a separate enterprise, dealing independently with the enterprise. Profits are therefore calculated on an arm’s-length basis.
No specific exit charges are imposed on restructurings, although a transfer pricing adjustment may be applied within the normal course of transfer pricing if certain aspects of the restructuring are considered not to be arm’s-length.
Temporary exemptions and reductions
Yes. As stated in Minister of Finance Regulation No. 150/PMK.010/2018 dated 26 November 2018, the tax holiday is available for new investments that meet the requirements as listed.
The facilities under MoF 150 are:
Update and trends
Tax authority focus and BEPS
Tax authority focus and BEPS41 What are the current issues of note and trends relating to transfer pricing in your country? How is the OECD’s project on base erosion and profit shifting affecting both policymakers and tax administrators?
The focus and targets of transfer pricing audits based on Circular Letter of DGT No 15/PJ/2018 are:
Deemed Dividends for CFCs
Indonesia's Ministry of Finance (MOF) issued a regulation (PMK-93) on 26 June 2019 that updates the controlled foreign corporation (CFC) rules as from fiscal year 2019. PMK-93 amends certain provisions of a regulation dating from 2017 (PMK-107) relating to the determination of deemed dividends from CFCs.
Under Indonesian tax law, a CFC is a foreign company in which an Indonesian resident company or individual (either alone or together with other shareholders) holds at least 50% of the company’s total share capital. An Indonesian shareholder in a CFC must pay Indonesian tax on its share of deemed dividends from the CFC each year, to the extent the related profits are not distributed to the shareholder in the form of actual dividends. Where an actual dividend distribution exceeds prior year deemed dividends, the excess is taxable in the year the actual dividend is paid. The CFC rules do not apply to shareholdings in listed foreign companies.
Determination of deemed dividend income
PMK-93 updates the rules for determining deemed dividends from CFCs. As opposed to the rules prescribed under PMK-107, which stipulated that deemed dividends include all income from both direct and indirect CFCs irrespective of the nature of the income (i.e. whether active or passive), PMK-93 limits deemed dividends to the following types of passive income:
- Dividends (excluding dividends from other CFCs);
- Interest (excluding interest received by a CFC that is owned by an Indonesian tax resident bank; however, this exception does not apply to interest income received by a CFC from Indonesian tax resident related parties);
- Rent from land, buildings and other assets (if received from a related party);
- Royalties; and
- Gains from the sale or transfer of assets.
Deemed dividend calculation
Under PMK 93, deemed dividends are calculated as the gross income of the CFC from the types of passive income described above, reduced by the following deductions and taxes:
- Expenses incurred by the CFC to obtain, maintain and collect the income; and
- Income taxes due or paid by the CFC with respect to the income, including taxes withheld from the income when it was paid to the CFC.
The new CFC rules are expected to accommodate the needs of Indonesian businesses to expand overseas. The exclusion of active business income from deemed dividends means that offshore subsidiaries of Indonesian holding companies will be able to reinvest their net active business income without incurring additional Indonesian tax.