Transfer Pricing Documentation (TP Doc) is one of the tax administration obligations for Taxpayers who conduct transactions with related parties. The preparation of TP Doc aims to demonstrate that the applied transfer pricing complies with the Arm’s Length Principle (ALP), ensuring that affiliate transactions are conducted as if they were transactions between independent parties.
With the enactment of Minister of Finance Regulation (PMK) Number 172 of 2023, the provisions regarding the application of the ALP and the preparation of TP Documentation have been refined, ranging from the stages of analysis and the selection of transfer pricing methods to the compliance testing mechanism by the Directorate General of Taxes (DJP). Therefore, the preparation of TP Documentation is no longer seen merely as the fulfillment of an administrative obligation, but also as a primary instrument in supporting the fairness of affiliate transactions in the event of a tax audit.
I. TYPES OF DOCUMENTS IN TRANSFER PRICING DOCUMENTATION
PMK 172 of 2023 stipulates that transfer pricing documentation consists of several types of documents that have different functions according to the characteristics of the business group and the affiliate transactions conducted. These documents include:
A. Master File
The Master File provides a general overview of the business group globally, including:
- group organizational structure;
- main business activities;
- intangible assets;
- financing activities;
- group transfer pricing policies; and
- consolidated financial statements.
The Master File provides a comprehensive overview of the group’s business model so that it can be used to understand the entity’s position within the overall business group.
B. Local File
The Local File contains more specific information regarding the Taxpayer in Indonesia, including:
- company profile;
- affiliate transactions;
- industry analysis;
- functional, asset, and risk analysis;
- comparability analysis;
- applied transfer pricing methods; and
- transfer pricing arm’s length analysis.
C. Country-by-Country Report (CbCR)
For business groups that meet certain criteria, the preparation of a CbCR is also required. This document contains information regarding the distribution of income, taxes paid, business activities, number of employees, tangible assets, as well as information on business group members in each country’s jurisdiction as a basis for transfer pricing risk assessment by the tax authorities.
II. CRITERIA FOR MANDATORY TP DOC (MASTER FILE & LOCAL FILE)
Taxpayers are required to maintain and store the Master File and Local File if, in the preceding tax year, they meet one of the following gross turnover criteria or transaction value thresholds:
- Consolidated gross turnover of more than Rp50,000,000,000 (fifty billion rupiah).
- Affiliate transaction value for tangible goods of more than Rp20,000,000,000 (twenty billion rupiah).
- Affiliate transaction value for services, interest, intangible goods, or other transactions of more than Rp5,000,000,000 (five billion rupiah).
- Conducting transactions with affiliated parties located in countries or jurisdictions with an income tax rate lower than the Article 17 of the Income Tax Law (UU PPh) rate.
III. STAGES OF THE APPLICATION OF THE ARM’S LENGTH PRINCIPLE (ALP)
To ensure that the transfer pricing meets the arm’s length criteria, Taxpayers are required to conduct testing by complying with the following ALP application stages:
- Preliminary Stage: Specifically for certain transactions (such as services, royalties/intangible assets, and loans), Taxpayers must first prove the economic or commercial benefits of the transaction;
- Stage 1: Identifying transactions influenced by special relationships (affiliate transactions) and the affiliated parties involved;
- Stage 2: Conducting an industry analysis related to the Taxpayer’s business activities, including identifying factors that influence business performance within that industry;
- Stage 3: Identifying commercial and/or financial relationships between the Taxpayer and Affiliated Parties by analyzing transaction conditions;
- Stage 4: Conducting a comparability analysis between the tested affiliate transactions and independent transactions (potential comparables);
- Stage 5: Determining the most appropriate transfer pricing method, such as Comparable Uncontrolled Price (CUP), Resale Price, Cost Plus, Transactional Net Margin Method (TNMM), or Profit Split Method (PSM);
- Stage 6: Applying the selected transfer pricing method and determining the arm’s length transfer price.
IV. ADMINISTRATION AND REPORTING PROVISIONS
In terms of administration and reporting, the maintenance of TP Doc must comply with the following provisions:
- The Master File and Local File must be prepared based on data and information available at the time the transaction is conducted (Ex-Ante).
- The Master File dan Local File must be available no later than 4 (four) months after the end of the Tax Year (Contemporaneous).
- Country-by-Country Report (CbCR) must be available no later than 12 (twelve) months after the end of the Tax Year.
- The TP Doc must be prepared in Indonesian. For Taxpayers who have permission to maintain bookkeeping in a foreign language, the TP Doc can be prepared in that foreign language but must be accompanied by its translation in Indonesian.
- The summary of the Master File and Local File must be filled out and attached to the Corporate Annual Income Tax Return (SPT Tahunan PPh Badan) filing for the respective Tax Year.
For Tax Service Assistance, please contact:
Rani Widianti
T. (+6221) 2222-0200
Alvina Oktavia
T. (+6221) 2222-0200
E. alvina.oktavia@shinewing.id
