What is Transfer Pricing?
In Indonesia, transfer pricing is a method for determining the price of a transaction or transfer between related parties. These transactions are usually made between a company and another company, or a company and an individual. The international standard for transfer pricing is the implementation of the arm’s length principle.
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.
Documenting Transfer Pricing Transactions
Indonesia has implemented Action Plan 13, which is part of the Base Erosion and Profit Shifting (BEPS) Action Plans. Under PMK-213 issued by the Ministry of Finance, every transaction – whether local or international – are required to provide documentation known as a TP Doc.
Taxpayers are required to keep three types of documentation: a Master File, a Local File (which must be available within four months after the end of the fiscal year), and a Country-by-Country Report (CbCR). They must all be submitted in Bahasa Indonesia.
Taxpayers must also prepare a statement letter signed by the individual that has prepared Transfer Pricing Documentation to declare when the Transfer Pricing Reports will be available. The statement letter does not have to be filed with tax returns, but it should be attached to the Master File and Local File for submission to the Tax Authorities if requested.
In general, transactions that satisfy any of the following criteria are required to prepare the aforementioned TP Doc:
- Gross Revenue (revenue from main business activities before deducting sales discounts, etc.) in the preceding year exceeding IDR 50 billion
- Tangible goods transactions in the preceding year exceeding IDR 20 billion
- Related party transactions with an affiliated entity located in a jurisdiction with a tax rate lower than Indonesia (e.g. the tax rate in the USA is now lower than Indonesia) with no threshold applicable
- Taxpayers that 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 the Indonesian Financial Accounting Standards), with consolidated gross revenue of at least IDR 11 trillion
Failure to comply with Indonesian transfer pricing policies and procedures, as well as provide the necessary documentation, may result in costly transfer pricing audits and significant additional tax liabilities or penalties.
Country-by-Country Report
In addition to the aforementioned documents, it is also important to familiarise yourself with the preparation of the country-by-country report.
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.
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.