The Income Tax Law defines related parties as:
a. Taxpayer has capital participation directly or indirectly at least 25% upon another Taxpayers; the relationship between Taxpayers through ownership at least 25% upon two or more Taxpayers; or relationship between two or more Taxpayers mentioned later;
b. Taxpayer controls the other Taxpayer or two or more Taxpayers are under the same control, either directly or indirectly; or
c. There are family relationship either blood relationship or by marriage in vertical and/or horizontal lineage of one degree.
Transactions between related parties must be consistent with the arm’s length principle. If the arm’s length principle is not followed, the 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/KUP) Law, the government requires specific transfer pricing documentation to prove the arm’s length nature of related-party transactions. Transfer pricing documentation is frequently requested during tax audits because transfer pricing issues are subject to close scrutiny by the Indonesian Tax Office (ITO).
The MoF issued a new regulation dated 30 December 2016 regarding transfer pricing documentation which requires taxpayers under certain criteria to prepare transfer pricing documentation, namely: Master file, Local file, and Country-by-Country Report (CbCR).
Detailed transfer pricing disclosures are required in the CITR. These include:
• The nature and value of transactions with related parties;
• The transfer pricing methods applied to those transactions and the rationale for selecting the methods; and
• Whether the company has prepared transfer pricing documentation.
ITO provides specific technical guidelines to carry out transfer pricing audits.
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 domestic dispute resolution process. There is a restriction that a MAP application cannot be lodged when the Tax Court has declared an end to the court hearing process and an existing MAP will cease when the Tax Court announces its decision.
The tax law authorises the DGT to enter into Advance Pricing Agreements (APAs) with taxpayers and/or another country’s tax authority on the future application of the arm’s length principle to transactions between related parties and therefore 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 involving 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.