Consolidated returns are not allowed in Indonesia.
Transactions between related parties must be consistent with the arm’s-length principle. If the arm’s-length principle is not followed, the Director General of Tax (DGT) is authorised to recalculate the taxable income or deductible costs arising from such transactions applying the arm’s-length principle.
Under the General Tax Provisions and Procedures (Ketentuan Umum dan Tata Cara Perpajakan or KUP) Law, the government requires specific transfer pricing documentation to prove the arm’s-length nature of related-party transactions.
The MoF issued a regulation, dated 30 December 2016, regarding transfer pricing documentation, which requires taxpayers under certain criteria to prepare transfer pricing documentation, namely the Master File, Local File, and Country-by-Country (CbC) Report.
Detailed transfer pricing disclosures are required in the CIT return, which include the following:
- The nature and value of transactions with related parties.
- The transfer pricing methods applied to those transactions and the rationale for selecting the methods.
- Whether the company has prepared transfer pricing documentation.
Transfer pricing disputes may be resolved through the domestic objection and appeal process, or, where the dispute involves a transaction with a related party in a country that is one of Indonesia’s tax treaty partners, the parties may request double tax relief under the Mutual Agreement Procedures (MAP) article of the relevant tax treaty. MAP may be applied concurrently with the domestic dispute resolution process. An existing MAP will cease when the tax court announces its decision.
In the spirit of adopting the minimum standards included in Action 14 of OECD/BEPS Project to make dispute resolution mechanism more effective, the new tax regulation on MAP seeks to provide additional legal certainty on the procedure, time-line, and follow-up actions of MAP.
The tax law authorises the DGT to enter into Advance Pricing Agreements (APAs) with taxpayers and/or another tax country’s tax authority only on the future application of the arm’s-length principle to transactions between related parties; consequently, taxpayers should not expect an APA to be ‘rolled-back’ to address any transfer pricing matters in open years in relation to the same/similar transactions. Once agreed, an APA will typically be valid for a maximum of three tax years after the tax year in which the APA is agreed or four years if the process involves cooperation with foreign tax authorities that escalate an APA application to be an MAP in order to settle any ongoing double taxation in accordance with a relevant tax treaty.
Increase in transfer pricing focused investigations
The number of tax audits with transfer pricing as the key focus area has continued to increase following the issuance of regulations relating to transfer pricing. The DGT has issued detailed guidelines that, broadly stated, typically follow OECD principles. Transactions under particularly close scrutiny include payments of royalties and technical or management services fees, inter-company services, royalty and financing transactions, and exports to related parties.
Where a taxpayer has no documentation available to substantiate these transactions, there is a high risk that deductions for the payments will be denied in full. In this regard, the 30-day time limit within which a taxpayer must produce any documentation requested by the Indonesian Tax Office (ITO) during an audit is being strictly enforced. Any documentation provided after the 30-day time limit is being disregarded by the ITO in its decision making process.
Transfer pricing specific audits are regularly conducted by the ITO, with the high priority targets generally identified based on:
- profit performance of the company (companies that have incurred consistent losses will be the highest priority, but there is also a risk of being selected for companies with profits below industry norms) and
- materiality of the company's related-party transactions.
The ITO has issued questionnaires to several taxpayers who are not under an audit that focus primarily on transfer pricing issues. It is possible that the information gathered by the ITO from these questionnaires will lead to follow-up investigations or audits in some cases.
The DGT has also reinforced tax audit procedures for taxpayers with related-party transactions. This regulation provides more clarity and is more relevant with the current transfer pricing issues in practice (e.g. the use of the median point as the basis of correction, mandatory use of the comparable uncontrolled price [CUP] method for interest, the use of multiple year data for comparables). Comprehensive forms required to be completed by the taxpayers during a tax audit are also provided in the regulation.
The MoF is authorised to make a determination on an appropriate ratio of debt to equity. The general ratio of 4:1 is applicable for group companies, except for exempted taxpayers.
Controlled foreign companies (CFCs)
See Foreign income in the Income determination section for a description of the CFC regime.