| Dasaoptima
The Minister of Finance (MoF) issued regulation No.PMK-172 on December 29, 2023, providing guidelines for implementing the Arm's Length Principle (ALP) on Related-Party Transactions (RPT).
PMK-172 consolidates and revokes earlier regulations, i.e. PMK-213, PMK-19 and PMK-22. It prevails as a unified TP guideline. This regulation covers various transfer pricing (TP) aspects, including the definition of related parties, ALP application, TP documentation, corresponding adjustments, Mutual Agreement Procedures (MAP), and Advance Pricing Agreements (APA).
We have summarized the key alterations and reinforcement of provisions covered in PMK-172, and how it potentially impacts transfer pricing practice in Indonesia.
1. Definition of related party
The key changes introduced by PMK-172 include a detailed definition of related parties which will require taxpayers to carefully assess their relationships with transacting parties.
Definition of related parties remains to be based off the Income Tax and Value Added Tax Law, with an additional emphasis that such relationship based on ownership, control, and family relations create a state of attachment and dependency. The regulation also clarifies that relationship based on control also includes one party controlling or controlled by another party through management or the use of technology.
The regulation further puts emphasis on the definition affiliated transaction and transactions affected by special relationship. In the latter, transactions involving unrelated parties can fall under the transfer pricing regulations, provided that one of the parties is influenced by an affiliated entity controlling the pricing and determining the counterparty..
2. Application of the ALP
PMK-172 updates guidelines for implementing the Arm's Length Principle (ALP) on Related-Party Transactions (RPT), covering areas not addressed in previous regulations. It mandates preliminary stage analyses for certain RPTs, such as service transactions, financial transactions, asset transfers, business restructuring, and cost contribution arrangements. The regulation also recognizes "other" financial transactions as a distinct RPT type, with detailed preliminary stage requirements.
For service transactions, PMK-172 requires taxpayers to prove that the provided service does not constitute shareholder activities. The regulation revises the scope of costs related to shareholder activities, encompassing administration, reporting obligations, fundraising, compliance, protection of capital ownership, and overall business group governance.
The selection of TP methods maintains a focus on comparable uncontrolled price (CUP), resale price method (RPM), cost plus method (CPM), and other methods, i.e. profit split method (PSM), transactional net margin method (TNMM), comparable uncontrolled transaction (CUT) method, tangible asset and intangible asset valuation method, and business valuation method.
If both the CUP and CUT methods demonstrate reliable comparability, these methods prevail the other methods. The use of CUP, RPM and CPM is prioritized from TNMM and PSM under the same reliability.
Specific attention is given to the PSM, especially in transactions involving parties with distinctive and valuable contributions. PMK-172 offers comprehensive guidelines for its application, covering considerations for financial statement items, formulas, analysis approaches, and criteria for calculation based on gross profit or net operating profit levels.
The regulation maintains a price indicator in the form of an arm's length point or range, emphasizing its establishment based on single-year comparable data. Multiple-year comparable data shall be used with the aim to improve comparability. In addition, the selection of external comparables prioritizes those from the same country or jurisdiction as the tested party, provided they exhibit higher comparability and reliability levels.
3 .TP Documentation
Domestic taxpayers must now submit the Country-by-Country Report (CbCR) if their entity serves as the parent of a business group with a consolidated gross turnover of at least IDR 11 trillion in the preceding Fiscal Year (FY) from previously current FY. The definition of the parent entity has shifted to rely on ownership rather than control. In the event of a CbCR submission error, PMK-172 allows for correction through a resubmission. The calculation of gross turnover has been revised to encompass income from both business and non-business activities, deducting sales returns and specified discounts, departing from the previous method based on gross sales before such deductions.
Taxpayers must submit TP Documentation within one month upon being requested by the Directorate General of Taxes (DGT) in the event of tax audits and compliance monitoring processes. Failure to fulfill this obligation exposes the taxpayer to sanctions in accordance with the prevailing tax laws and regulations.
4. Compliance assessment
The compliance assessment mechanism involves the DGT evaluating TP documentation compliance and the application of the ALP. If taxpayer fails to appropriately apply the ALP or cannot substantiate RPT compliance, the DGT has the authority to perform TP adjustments based on the ALP.
PMK-172 specifies that TP adjustments made by the DGT are considered indirect profit repatriations, treated as taxable dividends. Exceptions applies if cash adjustments in the amount of TP adjustment occur before the issuance of the Tax Assessment Letter or if the taxpayer agrees to the transfer price determined by the DGT. These provisions are applicable to all types of RPT, and the regulation confirms that applicable tax treaty relief can be utilized for cross-border transactions.
Further on TP adjustments and its VAT implications, PMK-172 grants the DGT the authority to adjust the VAT tax base if the selling price to a related party falls below the arm's length market price. Furthermore, any TP adjustment made by the DGT can be allocated to each transaction involving taxable goods or services. Notably, corrections resulting from TP adjustments do not lead to additional creditable VAT-In for the buyer. Instead, creditable VAT-In still refers to the pre-adjustment price as stated in the original VAT Invoice.
5. Corresponding adjustments
PMK-172 outlines the procedures for corresponding adjustments in TP context to address instances of double taxation. The regulation covers scenarios where TP adjustments are imposed by the Directorate General of Taxes (DGT) during a tax audit, a Treaty Partner's tax authority on a foreign taxpayer, or between two domestic taxpayers. The conditions and methods for carrying out corresponding adjustments, such as amendments to tax returns or issuance of Tax Assessment Letters (SKP), are explained. Additionally, in cases involving a Treaty Partner, the process is conducted through the Mutual Agreement Procedure (MAP) to mitigate double taxation concerns.
6. MAP and APA
The procedures for Mutual Agreement Procedure (MAP) and Advance Pricing Agreement (APA), previously outlined in PMK-49 and PMK-22, are further detailed and clarified in PMK-172. In this updated regulation, when a taxpayer submits a MAP or APA application, the DGT is required to issue a written notification within one month, indicating whether or not the application can proceed. PMK-172 specifies that if the DGT fails to issue this notification within the stipulated timeframe, the application is considered approved, and the DGT must subsequently issue a notification confirming this status. Important changes on MAP and APA are detailed below.
-
MAP
Noteworthy changes in PMK-172 on MAP is related to simultaneous implementation of MAP alongside domestic dispute resolution processes, including lawsuits and judicial reviews (JRs).
The DGT now has the authority to conclude MAP negotiations if a lawsuit decision demands the cancellation of items under consideration in the MAP process. Notably, MAP requests no longer defer tax overpayment refunds, and written notifications on MAP negotiation outcomes become mandatory. The DGT can request additional documents, and failure to comply results in a notification to the Treaty Partner’s tax authority, signaling that MAP cannot proceed. Furthermore, if an MAP process has yet to reach an agreement by the time of a Tax Court or JR decision announcement, the DGT may utilize the Tax Court or JR decision. Additionally, if a Mutual Agreement Decision Letter is issued post a domestic remedy decision, the tax payable must be recalculated according to the domestic remedy decision.
-
APA
Domestic taxpayers applying for APA must now meet additional conditions. The taxpayer shall not be under preliminary evidence examination, criminal investigations, prosecution, ongoing criminal proceedings, or sentencing due to taxation.
If a taxpayer, negatively impacted by a national disaster, applies for an APA, PMK-172 mandates that the profit level in projected financial statements should reflect adjustments to normalize conditions. The regulation also eliminates sanctions related to APA implementation, including amendments to the Annual Tax Return or the issuance of Tax Assessment Letters (SKP) during tax audits.
In cases of mutual agreement in Bilateral/Multilateral APA, the DGT is required to issue an APA decision letter within one month, considering notifications from both the Treaty Partner’s tax authority and the delivered notification indicating the APA's implementation.