REGULATION OF THE MINISTRY OF FINANCE NUMBER 172 YEAR 2023 REGARDING THE APPLICATION OF ARM’S LENGTH PRINCIPLES AND NORMALITY IN BUSINESS TRANSACTION INFLUENCED BY SPECIAL RELATIONSHIP.
I. Arm’s Length Principles and Normality in Business (Prinsip Kewajaran dan Kelaziman Usaha/ ”PKKU”)
Domestic Taxpayers who are the transaction counterparties can make relatedness adjustments if there are:
- a. Determination of Transfer Prices by the Director General of Taxes (Direktur Jenderal Pajak/ ”DJP”) through tax audits; or
- b. Correction of Transfer Pricing Determination by the Authority of the Partner Country of the Avoidance of Double Taxation Agreement on foreign tax subjects,
Relatedness adjustments can be made through the Transaction Counterparty’s Country of Origin which:
1. Located in Indonesia, carried out through:
- a. Amendment of annual income tax return;
- b. Issuance of tax assessment letters; atau
- c. Amendment of tax assessment letters.
Relatedness adjustments can be made in the case of the Domestic Taxpayer who are subject to transfer pricing by the DJP:
- a. Approve the determination of the Transfer Price by the DJP; and
- b. Not submitting any legal action on the tax assessment letters regarding Transfer Pricing Determination material by the DJP.
2. Located outside of Indonesia, carried out through the Mutual Agreement Procedure.
II. Relatedness Adjustment
Amendment of the annual income tax return are performed accompanied by a written notification by the Taxpayer to the DJP through the Indonesia Tax Office (Kantor Pelayanan Pajak/ “KPP”) where the Taxpayer is registered regarding information on Transfer Pricing Determination by the DJP.
Relatedness adjustments through the issuance of a Tax Assessment Letter (Surat Ketetapan Pajak/ ”SKP”) are carried out in the case of:
- a. The Taxpayer has submitted written notification regarding information on Transfer Pricing Determination by the DJP; and
- b. The Taxpayer submits a disclosure of incorrectness in filling out the tax return according to the information on Transfer Pricing Determination by the DJP.
Relatedness adjustments through SKP amendments are carried out ex officio by the DJP preceded by written notification by the Domestic Taxpayer who is the transaction counterparty to the DJP through the KPP where the Taxpayer is registered regarding information on Transfer Pricing Determination.
III. Secondary Adjustment
Secondary Adjustments are made in the case of:
- a. DJP re-determines the amount of income and/or deductions to calculate the amount of taxable income (Official Assessment); or
- b. The Taxpayer implements the PKKU implementation regulations (Self Assessment).
If there is a difference between the value of Transactions Influenced by Special Relationship which is not in accordance with the Arm’s Length Principles and the value of Transactions Influenced by Special Relationship which is in accordance with the Arm’s Length Principles, the DJP has the authority to determine the distribution of profits indirectly to the Affiliated Parties which are treated as dividends which is subject to income tax in accordance with the taxation laws and regulations.
The above regulation applies to:
- a. Cross-border transactions and domestic transactions
- b. All forms of special relationships.
The above regulation do not apply in the case of:
- a. There is an addition and/or return of cash or cash equivalents in the amount of the difference before the SKP was issued; and
- b. The Taxpayer agrees to the Transfer Price Determination by the DJP.
IV. Value Added Tax (VAT)
In the event that the selling price influenced by a special relationship is lower than the fair market price, then the selling price is calculated on the basis of the fair market price in accordance with Article 2 of the VAT Law and does not become a tax credit for the transaction counterparty.
V. Transfer Pricing Document
The DJP has the authority to request Transfer Pricing Documents in the form of Master File and Local File in the context of:
- a. Compliance monitoring and inspections, must be submitted no later than 1 (one) month
- b. Apart from monitoring compliance and tax audits, it is submitted within the time period as regulated in taxation laws and regulations.
Domestic Taxpayers who are the Parent Entity of a Business Group that has a consolidated gross income of at least IDR 11,000,000,000,000 (eleven trillion rupiah) in the tax year before the reported tax year, are required to prepare and submit a Country-by-Country Report (CbCR) to the DJP.
VI. Mutual Agreement Procedure (MAP)
In the event that a Taxpayer is issued a Mutual Agreement Decree (Surat Keputusan Persetujuan Bersama/ ”SKPB”) after the issuance of a tax objection decree, tax appeal decree, and/or judicial review decree, the basis for the imposition of administrative sanctions in the tax collection letter as intended in the tax laws and regulations governing the procedures for issuing the tax assessments letter and tax collection letter, also taking into account the amount of tax in the Mutual Agreement Decree.
VII. Advance Pricing Agreement (APA)
The DJP has the authority to make an Advance Pricing Agreement with the Taxpayer or the Authority of the Partner Country of the Avoidance of Double Taxation Agreement to determine a reasonable Transfer Price in accordance with the PKKU, which is valid for a certain period based on the Advance Pricing Agreement request submitted by the Domestic Taxpayer.
Domestic Taxpayers can submit a request for APA based on:
- a. Taxpayer Initiative (Unilateral APA or Bilateral APA or Multilateral APA)
- b. DJP’s written notification regarding Bilateral or Multilateral APA requests from the Foreign Taxpayers to CA of the Partner Countries.
APA can be submitted for all or part of domestic and foreign Affiliate Transactions for the following periods:
- a. The maximum APA period is 5 fiscal years after the year the APA application is submitted
- b. Backward Implementation (with certain conditions) if the Taxpayer requests it
For further tax assistant please contact:
Rani Widianti
T. (+6221) 2222-0200
E. [email protected]
Alvina Octavia
T. (+6221) 2222-0200
E. [email protected]
