Transfer Pricing Indonesia

Transfer Pricing authority and tax law

Indonesian Tax Authority. Article 18 of the Indonesian income tax law.

Transfer Pricing regulations and rulings

A new income tax law implemented on 1 January 2001 contains transfer pricing provisions in Article 18, but implementing regulations have not yet been issued. The only regulations issued to date (Director General of Tax Circular Letter No SE-04/PJ.7/1993) are old and predate the new income tax law. Indonesia’s transfer pricing rules apply to both domestic and cross-border transactions between parties that have a special relationship. Domestic transfer pricing rules apply because there is no grouping of tax losses in Indonesia.

OECD guidelines of Transfer Pricing

Indonesia is not a member of the OECD, but generally favors its principles and methods.

Transfer Pricing methods

The CUP is favored. Other allowable methods include Cost Plus, Sales Minus, Resale Price and those accepted by the OECD (usually profit- based methods).

Penalties in Transfer Pricing

There is a penalty of 2% per month, up to a maximum of 48%, on any tax underpayment discovered during a transfer pricing audit.

Penalty relief in Transfer Pricing

Not applicable.

Transfer Pricing Documentation requirements

There are no formal documentation requirements at this time. However, the tax authority usual y requires the production of invoices and agreements as a minimum requirement.

Documentation deadlines for Transfer Pricing

Not applicable.

Statute of limitations of transfer pricing assessments

Not applicable.

Return disclosures/related-party disclosures

Disclosure of related-party transactions in the tax return has been required since 1 January 2002. Domestic and international related-party transactions are required to be disclosed. The information that must be disclosed includes the type of transaction, the value of the transaction, the transfer price and the method used to determine the transfer price.

Transfer Pricing Audit risk/transfer pricing scrutiny

Disclosure of related-party transactions in the tax return has been required since 1 January 2002. Domestic and international related-party transactions are required to be disclosed. The information that must be disclosed includes the type of transaction, the value of the transaction, the transfer price and the method used to determine the transfer price.

In practice, taxpayers that exhibit the following characteristics are more at risk of being subject to a transfer pricing audit:

• A large number of related-party transactions
• Losses for more than two consecutive years
• An increase in gross revenue or receipts but no change in net profit
• Erratic profit and loss histories
• Associated parties in tax havens
• Lower net profit in comparison to the industry average or other similar enterprises.

Advance Pricing Agreements of tansfer pricing

The income tax law of 2001 contains bilateral and unilateral APA mechanisms. The income tax law suggests that APAs are only for cross border transactions, but conflicting statements have been made by senior tax officials that APAs may also apply to domestic transactions.