Transfer Pricing Issues in Indonesia
Background
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Transfer Pricing is still a hot issue in Indonesia as Indonesian Directorate
General of Taxes (DGT) continues to pursue obedience tax payers by
tightening supervision of transfer pricing or transactions between
Indonesian company with the subsidiaries and/or parent company located
overseas.
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Since 2010, the DGT has been actively issuing tax regulation in relation to
the related party transaction.

This DGT step was considered normal given the fact that there are still
many companies in Indonesia who hold the practice of transfer pricing in
order to reduce the payment of taxes

Type of transfer pricing transaction could occur over the sale price,
purchase price, cost allocation, interest on shareholder loan, payment of
royalty, technical assistance fee, or even sales or expenses over special
purpose company
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Definition of Related Party based on Indonesia
Income Tax Law (Number 36 Year 2008)
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where a taxpayer directly or indirectly participates in 255 or more of the
capital of another taxpayer, or where a company participates in 25% or
more of the capital of two taxpayers, in which case the latter two taxpayer
are also considered to be related;

where a taxpayer directly or indirectly controls another taxpayer or where
two or more taxpayers are under common control;

where there is a family relationship by blood or marriage.
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Indonesian Tax Regulations in relation to
Transfer Pricing

Indonesian DGT Regulation Number PER-43/PJ/2010 as recently amended by PER32/PJ/2011 which provides guidance on comparability analysis required in the
transfer pricing documentation, preference towards internal comparable over
external comparables and application of the most appropriate method as compared
to the hierarchical approach in selecting transfer pricing methodology. PER-32 also
mentioned that it will only applicable to transactions exceeding 10 billion Indonesia
Rupiah with a single related party. Domestic related party transaction are also
covered in the purview of the transfer pricing regulation if the related parties are
effectively not taxed on the same basis

Indonesian DGT Regulation Number PER-22/PJ/2013 is regulating about tax audit
procedures. The regulation provides procedures on how to prepare and conduct tax
audit including these issues:
• application of arm’s length principle
• identification of taxpayer’s business
• how to choose the transfer pricing method
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Implementation of Arm’s-Length Principle
Indonesian DGT Regulation Number PER-32/PJ/2011 regulates that the
arm’s-length principle should use the following steps:
 Perform a comparability analysis and identify comparables
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Determine the most appropriate transfer pricing method
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Apply the arm’s-length principle to the tested transaction based on the
result of the comparability analysis and the selected transfer pricing
method

Document each step of the process used to determine the arm’s-length
principle
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Comparability Analysis
In doing the comparability analysis, taxpayers should consider the
comparability factors as regulated in the OECD guidelines, which are as
follows:
 Characteristic of the industry

Functions performed by parties involved
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Contractual terms

Economic conditions

Business strategies
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Selecting the most appropriate Transfer
Pricing Method
In order to have the most appropriate transfer pricing method, the taxpayer
should consider the following items:
 The strength and weakness of each transfer pricing method

The appropriateness of the method based on the nature of the related
party transaction, determined by a functional analysis

Availability of valid information (on independent transaction) to apply the
selected method

The comparability level between related party transactions with
independent transactions, including whether any appropriate adjustments
would need to be made to eliminate any material differences between the
compared transactions
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The Obstacles during Tax Audit on Transfer
Pricing

Unavailability of the independent comparables
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The Indonesian Tax Office (ITO) still consider that Comparable
Uncontrolled Price (CUP) is the most preferred method

Not all of the ITO officer has the same level of transfer pricing knowledge,
most of the times creating disputes during discussion.
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