At a glance: Transfer Pricing Audit in Indonesia

Not only is transfer pricing an anticipated subject, but transfer pricing audit has become a ‘rising star’ amongst tax officials. The growth of business in Indonesia also means the growth of taxpayer coming from multinational corporations. As a result, transfer pricing within multinational corporations has become a common practice.

The discussion on transfer pricing audit is an intriguing topic. Tax officials may challenge taxpayer’s transfer pricing practice with the aim to prove whether the taxpayer has adopted the appropriate arm’s-length principle. Indonesian Directorate General of Taxation (“DGT”) has specifically issued several guidelines for tax officials on transfer pricing audit procedure.

Identifiying Risks

DGT Circular Letter No. SE-15/PJ/2018 mentioned that certain conditions could indicate incompliance and might arise a transfer pricing risk. Those conditions are:

Taxpayers transacting with entities in jurisdictions applying lower effective tax rates;
Indications of a transaction scheme involving parties without business substance and/or not adding any economic value;
Taxpayers with a significant amount of related party transactions compared to their turnover;
Intra-group transactions such as service provision, royalty payments, cost distribution agreements, and others;
Occurrence of restructuring activities such as merger, acquisition, and others;
Taxpayers showing an anomaly in their financial performance compared to the industry financial performance; and
Taxpayers suffering loss for 3 years within a 5 years period.

The dispute area during tax audit could be varied. It could be as fundamental as formal compliance. Indonesian regulation requires Transfer Pricing Documentation to be ready at the latest 4 months after taxpayer’s fiscal year end. Once the tax office has requested such documentation, and the taxpayer fails to provide, scrutinization could arise. Tax officials may deem their own arm’s-length price.

Indonesia adopts the ex-ante approach. Dispute related to whether a taxpayer has appropriately complied with ex-ante has been arising. Tax officials nowadays are making sure that taxpayers have set their pricing with the available data when the transaction occurred. That being said, the scrutinization would fall on the benchmarking time-frame.

Methodology and Comparable

Another common dispute area would be the choice of methodology and comparable. Choosing a transfer pricing method relies heavily on facts and circumstances surrounding a related party transaction, as well as on the availability of comparable data. However, oftentimes taxpayers and tax officials have different perspectives when delineating such related party transaction. For instance, a taxpayer may conduct its transfer pricing analysis using a transactional profit method. Tax officials, on the other hand, might challenge that the traditional transaction method is the proper method.

Disputing comparable is rather classic. It takes a village to find the perfect comparable, yet it only takes one tax audit to reject it. Different product or service, different understanding on the business, some financial conditions are only some of the possible causes of comparable dispute.

Another potential dispute area is the choice of transfer pricing analysis i.e., segregation or aggregation, the use of testing year i.e., single year or multiple year.

It is crucial for multinational corporations to be prepared for any challenges that may arise from transfer pricing audits. To mitigate potential challenges, taxpayers therefore should ensure that their transfer pricing practices adhere to the prevailing local regulations. One way to anticipate such potential challenge is by maintaining a transfer pricing documentation.