Unveiling PMK-172: The Impact on Indonesia´s Transfer Pricing Landscape

    

PMK-172 consolidates and revokes earlier regulations, i.e. PMK-213, PMK-19 and PMK-22. It prevails as a unified Transfer Pricing guideline. This regulation covers various transfer pricing (TP) aspects, including the definition of Related Parties, ALP application, TP documentation, corresponding adjustments, Mutual Agreement Procedures (MAP), and Advance Pricing Agreements (APA). 

    

We have summarized the key alterations and reinforcement of provisions covered in PMK-172, and how it  will potentially impact Transfer Pricing practice in Indonesia.

    

The key changes introduced by PMK-172 include a detailed definition of related parties which will require taxpayers to carefully assess their relationships with transacting parties. 

   

The definition of related parties continues to be based on the Income Tax and Value Added Tax Law, with an additional emphasis that such relationship based on ownership, control and family relations creates a state of attachment and dependency. The regulation also clarifies that relationship based on control also includes one party controlling or being controlled by another party through management or the use of technology.

   

PMK-172 updates the guidelines on implementing the Arm's Length Principle (ALP) in Related-Party Transactions (RPT), covering areas not addressed in previous regulations. It mandates preliminary stage analyses for certain RPTs, such as service transactions, financial transactions, asset transfers, business restructuring, and cost contribution arrangements. The regulation also recognizes "other" financial transactions as a distinct RPT type, with detailed preliminary stage requirements.

    

For service transactions, PMK-172 specifically emphasizes an additional scope of costs that falls under the category of shareholder activities. PMK-172 also lays out the acceptable TP method and adds comprehensive guidelines for PSM application. Further, the application of single-year and multiple-year comparable data is mentioned with the aim of improving comparability.

    

Domestic taxpayers must now submit the Country-by-Country Report (CbCR) if their entity serves as the parent of a business group with a consolidated gross turnover of at least IDR 11 trillion in the preceding Fiscal Year (FY). The definition of the parent entity has shifted to rely on ownership rather than control. The calculation of gross turnover has been revised to encompass income from both, business and non-business activities, deducting sales returns and specified discounts, departing from the previous method based on gross sales before such deductions. 

    

Taxpayers must submit TP Documentation within one month upon being requested by the Directorate General of Taxes (DGT) in the event of tax audits and compliance monitoring processes. Failure to fulfil this obligation exposes the taxpayer to sanctions in accordance with the prevailing tax laws and regulations.

   

The compliance assessment mechanism involves the DGT evaluating TP documentation compliance and the application of the ALP. If the taxpayer fails to appropriately apply the ALP or cannot substantiate RPT compliance, the DGT has the authority to perform TP adjustments based on the ALP.

    

PMK-172 specifies that TP adjustments made by the DGT are considered indirect profit repatriations, treated as taxable dividends. Exceptions apply under certain circumstances. Further to TP adjustments on VAT, PMK-172 grants the DGT the authority to adjust the VAT tax base (sales amount). 

    

PMK-172 outlines the procedures for corresponding adjustments in TP context to address instances of double taxation. The regulation covers scenarios where TP adjustments are imposed by the Directorate General of Taxes (DGT) during a tax audit, a Treaty Partner's tax authority on a foreign taxpayer, or between two domestic taxpayers. 

    

The procedures for Mutual Agreement Procedure (MAP) and Advance Pricing Agreement (APA), previously outlined in PMK-49 and PMK-22, are further detailed and clarified in PMK-172. In this updated regulation, when a taxpayer submits a MAP or APA application, the DGT is required to issue a written notification within one month, indicating whether or not the application may proceed. PMK-172 specifies that if the DGT fails to issue this notification within the stipulated timeframe, the application is considered approved, and the DGT must subsequently issue a notification confirming this status.