DDTC Again Represents Indonesia in Global Transfer Pricing Discourse

This edition discusses the transfer pricing regimes of seven countries, including Indonesia. The discussion on Indonesia was again assigned to two DDTC professionals. This marks the seventh time DDTC has contributed to this publication.

The two DDTC professionals are Senior Manager of DDTC Consulting Cindy Kikhonia Febby and Veronica Kusumawardani. They collaborated with contributors from six other countries, including Cyprus, Italy, Japan, Luxembourg, Malta and the United States (US).

Editor of the book, Stanford Stark, explained that the Transfer Pricing Law Review is intended to present an overview of the key transfer pricing rules. Each chapter offers a summary of the substantive transfer pricing regulations applicable in each respective country.

Contributors also elaborated on the management of transfer pricing disputes, covering the preliminary audits through to resolution. In addition, they addressed the interaction between transfer pricing and other areas of tax law, such as withholding tax, customs and measures for the prevention of double taxation.

Fundamentally, all countries featured in the publication have applied the arm’s-length principle and adhere, at least to a certain extent, to the OECD Transfer Pricing Guidelines.

Nevertheless, each country may interpret the arm’s-length standard differently, such as in their preference for certain pricing methods, or the administration of the rules, for example, the enforcement of documentation requirements.

Cyprus, for instance, has officially incorporated the transfer pricing provisions according to the OECD into its national law. Meanwhile, in Luxembourg, the transfer pricing ecosystem initially focused on the financial industry, but the government has now fully adopted the OECD Transfer Pricing Guideline across industries.

Next is Malta, which only began implementing transfer pricing provisions aligned with the OECD in 2024. Consequently, a comprehensive evaluation of the implementation of transfer pricing and its interaction with other tax provisions cannot yet be conducted. A minimum of one year is needed to observe how the policy will operate in practice.

In contrast, in the United States, although President Donald Trump’s leadership has brought a degree of economic uncertainty, transfer pricing remains a central focus of law enforcement efforts by the tax authorities.

From the observation of transfer pricing regimes across various countries, there are a minimum of two notable takeaways. First, transfer pricing disputes continue to escalate. A solid understanding of cases outside one’s jurisdiction serves as a valuable resource for any advisor.

Second, the ongoing challenge of proportionate and comprehensive development of factual evidence. Ensuring the availability of accurate supporting data may be difficult. Much can be learned from countries with a long-standing history in handling transfer pricing litigation.

Transfer Pricing Regime in Indonesia

In the publication, Cindy Kikhonia Febby and Veronica Kusumawardani opened the discussion on the transfer pricing regime in Indonesia by outlining the regulatory developments issued by the government.

They noted that Indonesia has been actively amending regulations on transfer pricing to be in line with the OECD BEPS Action Plan. The consequences of transfer pricing documentation (TP Doc) have become more comprehensive.

Further, the requirement to prepare transfer pricing documentation now extends to nearly all taxpayers constituting members of multinational enterprise groups. Accordingly, taxpayers must recognise the growing importance of transfer pricing documentation, particularly as a risk mitigation strategy in the context of tax audits.

“Taxpayers should consider transfer pricing documentation as an initial defence in the event of a tax audit,” Cindy and Veronica wrote.

They emphasized that well-prepared documentation can play a critical role in reducing potential disputes with tax authorities.

It is important to note that one of the significant changes in the tax audit approach by the tax authorities is the increased focus on intercompany pricing policies (ex ante approach) rather than simply assessing whether the transactions that have occurred are at arm’s length.

In the publication, Cindy and Veronica also highlighted that the frequency of tax audits over the past five years remains high. This trend has contributed to the growing use of Advance Pricing Agreement (APA) as a strategy to prevent disputes.

Despite being relatively new in Indonesia, the outlook of the APA framework is considered promising. Indonesia has successfully concluded numerous bilateral agreements with key trading partner countries.

Looking ahead, Indonesia is expected to continue updating its transfer pricing regulations. The most recent revision is reflected in Minister of Finance Regulation (MoF Reg.) 172/2023, which consolidates multiple former regulations into a single, comprehensive regulation.

The regulation enhances the effectiveness and efficiency in applying the arm’s length principle.

In conclusion, the authors also highlighted the importance of an official government statement regarding the purpose of Article 18 paragraph (3) of the Income Tax Law, particularly in relation to the prevention of double taxation. This need arises from the current perception of transfer pricing as an instrument of tax avoidance.

This publication serves as a valuable resource not only for practitioners, the business sector and academics, but also for policymakers in Indonesia. The comparative information on transfer pricing provisions across various countries may be used as a benchmark for the design of Indonesian regulations. (sap)