Image by Stephen Kennedy CC 2.0 via Flickr

Transfer pricing has been an important issue in the Indonesian tax system since 2005 when the Indonesian tax authority, the Directorate General of Taxes, received information that there were 750 foreign enterprises that did not pay their taxes due to long-term tax losses. While the law has been significantly changed since that time, issues remain in both administration and compliance for enterprises in relation to transfer pricing.

History of the Indonesian transfer pricing rules

The first transfer pricing rules were adopted in Indonesia in 1983. Despite this, the Directorate General of Taxes had insufficient capability to examine the taxation of business transactions between entities with special relations (companies under the same management control, or a relationship between companies through ownership of at least 25 per cent of equity). In 1993, additional transfer pricing guidelines were enacted to support tax auditors who were responsible for auditing transactions with special relations. However, there was still a lack of explicit guidelines for taxpayers to follow, and the audit guideline did not follow the international transfer pricing standard (for example, in relation to comparability analysis and the arm’s length principle).

The obligation on taxpayers to prepare documentation relating to transfer pricing was enacted in 2001 when the Income Tax Law has been amended in 2000. Under this law, the Directorate General of Taxes was given the authority to redefine income and deductions and debt as equity, in order to calculate the amount of taxable income for taxpayers with special relations according to the OECD arm’s length principle. Advance Pricing Agreements were also introduced at this time. However, the Income Tax Law 2000 did not significantly improve the compliance of taxpayers with the transfer pricing rules, due to the lack of guidelines available for taxpayers to implement the arm’s length principle.

A minor improvement of transfer pricing policy was undertaken through the General Provision and Procedure Law 2007, which states that there is an obligation to report transactions between entities with special relations, and to report the transactions on the company income tax return. Furthermore, minor revisions to the Income Tax Law 2008 stated that the Directorate General of Taxes would perform intensive assessments in response to the enormous numbers of businesses participating in transfer pricing practices. This change marked the restructuring of the Directorate General of Taxes to form special units to tackle the issue of transfer pricing.

It was not until 2010 that the implementation of transfer pricing guidelines has become effective, when the Directorate General of Taxes released the implementing regulation PER-43/2010 of the arm’s-length principle on transactions between taxpayers with special relations; and the implementing regulation PER-69/2010 on Advance Pricing Agreements. While implementing these rules, the dynamic of policy implementation led the Directorate General to revise these rules in 2012 by explicitly adopting the OECD’s guidelines to govern clearer technical detail to taxpayers for the purpose of transaction documentation and to tax auditors for tax assessment objective.

The challenges of implementing transfer pricing rules in Indonesia

While these law reforms are impressive, current Indonesian transfer pricing rules have adopted most of the OECD guidelines for transfer pricing, without any proportionate adjustment in consideration of the economic conditions and the tax system applicable in Indonesia.

There remain a number of challenges of implementing the transfer pricing rules in Indonesia, which have the effect that there is still a lack of a strong and comprehensive transfer pricing policy that is implemented in practice. The most important challenges are about the process of transfer pricing administration.

1. Comparability analysis, transfer pricing audit process and litigation. Several problems are commonly found, including the lack of comparable data used by taxpayers and tax auditors; the different level of understanding on the nature of the taxpayer’s business; the lack of technical guidance on the use of data for transfer pricing documentation; the lack of substantial discussion during the audit process; and, the lack of transfer pricing knowledge/technical skill within the tax authority.

Tax auditors are required to meet transfer pricing audit targets as assigned by the Directorate General of Taxes, which has led to messy and insufficient audits being performed. Most disputes have been brought to the litigation process. During the fiscal years 2012 and 2013, 100 and 105 transfer pricing cases respectively had been settled in tax court, a very large number compared to many OECD countries.

2. The availability of Advance Pricing Agreements: For countries that implement a self-assessment system, the availability of Advance Pricing Agreements is essential to minimise potential transfer pricing disputes. Some enterprises in Indonesia are interested in applying for such Agreements. Up to 2018, 54 applications had been received by the Directorate General of Taxes. In 21 applications, the taxpayer and the Directorate General had successfully reached an Advance Pricing Agreement; however, the remaining 33 were still in discussion.

There are both internal and external obstacles in reaching an Advance Pricing Agreement. The internal factors include no regulation on the timeframe for application approval, and no strong regulation ensuring that information submitted to the tax authority will be kept confidential. The staff in the tax administration who are appointed to deal with the process do not engage based on standardised operating procedures, so it is common that tensions arise in the negotiation process. The external factors are the amount of time and resources of the taxpayer needed for applying for an Advance Pricing Agreement and the uncertainty involved with regard to the approval.

3. The adoption of Country-by-country Reports: As a member of the G20, Indonesia committed to implement full transfer pricing documentation as recommended by the OECD in BEPS Action Plan 13. To achieve this, the Government has released the regulation PMK-213/2016. The regulation has succeeded in forcing hundreds of multinational enterprises to deliver their country-by-country report about profits in each jurisdiction. The goal is to encourage corporate taxpayers to be more transparent, and to assist in transfer pricing assessment processes.

At the beginning of implementation, companies encountered problems in delivering the reports due to the short notice between the policy announcement and the time for delivery. Compliance costs increased as companies are obliged to deliver the reports annually. This is particularly a problem for many Indonesian state-owned enterprises that have a very low possibility of conducting transfer pricing merely to avoid tax; it is notable that PMK-213/2016 regulation does not require the reporting obligation to apply solely for cross-border transactions.

In the country-by-county regulation, there is no explanation of safe harbour provisions that would differentiate high risk from low risk corporate taxpayers. This will lead to an increase in material and non-material compliance costs of taxpayers.

In conclusion, the Indonesian Government’s efforts to tackle transfer pricing issues should be appreciated, but the Government still needs to improve tax regulations and technical aspect. This includes developing a clearer guideline with adaption to domestic conditions, establishing a database accessible by taxpayers and the tax administration, and improving the capability of tax auditors to keep up with the dynamic in the transfer pricing world.



This post is based on ‘Minimising Potential Tax Avoidance by Strengthening Tax Policy on Transfer Pricing in Indonesia’ published in the Journal of the Australasian Tax Teachers Association, 2019, vol.14, no.1



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