Does your company perform domestic or cross-border transaction with your related party?
If it does, then you must do the transaction in accordance with the arm’s length principle. Article 18 (3) of the Income Tax Law states that the Directorate General of Taxes (DGT) has the authority to recalculate the taxable income or deductible costs in accordance with the arm’s length principle for taxpayers that have special relationship with other taxpayers. It means that if your company doesn’t apply the arm’s length principle to your related party transactions, the tax authority could make an adjustment to your income or cost.
In December 2016, Indonesia has adopted one of the Base Erosion and Profit Shifting (BEPS) Action Plan which is the three-tiered transfer pricing documentation. It is stipulated under Ministry of Finance Regulation PMK-213/PMK.03/2016. The three-tiered transfer pricing documentation are as follows:
a. Master File, a document containing standardized information relevant for all members of a multinational enterprise (MNE) group;
b. Local File, a document referring specifically to material transactions of the local taxpayer; and
c. Country-by-Country (Cbc) report, a document containing certain information relating to the MNE group’s income and taxes, together with certain indicators of the location of economic activity within the MNE group.
Master File and Local Files are mandatory for taxpayers that have related party transactions in current year and meet the criteria as follows:
a. Taxpayers with a gross revenue of more than 50 billion rupiahs in the previous tax year;
b. Taxpayers with related party transactions in the previous tax year exceeding 20 billion rupiahs or exceeding 5 billion rupiahs if the related party transaction concerns intangible assets, services and interest payments; or
c. If the related party transactions are conducted with related party that located in countries that have lower tax rate than Indonesia.
Those two documents should be available at the lates 4 (four) weeks after the end of tax year. It doesn’t have to be filed at the same time as tax return filings, however the taxpayer must provide a summary of the Master File and Local File along with the tax return that also confirms the date of the availability of Master File and Local File. When requested by the DGT, those two documents are required to file within one month of the request.
In the other hand, CbCR reporting obligations are mandatory for taxpayers that meet criteria as follows:
a. Taxpayers that are considered the ultimate parent entity of a group with a consolidated gross revenue in one tax year of at least 11 trillion rupiahs; or
b. Taxpayers that are not ultimate parent entities but are member entities of a group with an ultimate parent entity that is tax resident in a country that:
- Does not have an obligation to file CbCRs;
- Does not have an exchange-of-information agreement with Indonesia; or
- Despite having a CbCR reporting obligation and an exchange-of-information agreement in place with Indonesia does not make CbCRs available to the DGT.
Every taxpayer that part of business group or have related party transactions are required to file an online notification to DGT by using online platform. The notification contains the information about which entity in the business group is the ultimate parent entity and which entity is prepare the CbCR, including the country where the CbCR is submitted. In addition, the taxpayer are required to file the CbCR along with notification if the taxpayer has the obligation to prepare the CbCR. Taxpayers that have completed the submission will receive a receipt. The receipt must be filed along with the corporate income tax return.
Consequences of not having transfer pricing documentation
PMK-213/PMK.03/2016 stipulates that the taxpayers must have the documentation available at the time of executing the transactions. In reality, if taxpayers do not have the documentation, trying to account for transfer pricing afterwards will not always be possible. Not preparing the documentation in advance usually makes a discussion with the tax authorities much more difficult. In addition, the tax authority may shift the burden of proof to you and increase it. You then have the burden of proof and will have to convincingly demonstrate that an adjustment imposed by the tax authority is incorrect. Demonstrating something convincingly within transfer pricing is a nearly impossible task. It will therefore be very easy for the tax authority to impose a transfer pricing adjustment if you do not have any transfer pricing documentation.