Articles

Transfer pricing

Since the enactment of Minister of Finance Regulation number 213/PMK.03/2016, the following taxpayers are required to make TP Doc, namely:

• a year's gross circulation of more than 50 billion rupiah (if it operates for less than a year, it must be annualized);
• the value of affiliated transactions for the previous tax year 20 billion rupiah for tangible goods, or 5 billion rupiah for providing services, paying interest, utilizing intangible goods, or other affiliated transactions; or
• the affiliate is located in a country that has a lower rate than the Indonesian Income Tax Law rate.

Transfer pricing can only be applied if there is a transaction between parties that have a special relationship.

Provisions for a special relationship are regulated in Article 18 paragraph (4) of the Income Tax Law. According to the provisions, a special relationship is considered to exist if:

• Taxpayers have direct or indirect capital participation of at least 25% (twenty five percent) in other Taxpayers; relationship between Taxpayers with participation of at least 25% (twenty five percent) in two or more Taxpayers; or the relationship between two Taxpayers or more last mentioned;
• The Taxpayer controls another Taxpayer or two or more Taxpayers are under the same control either directly or indirectly; or
• There is a family relationship either by blood or by marriage in a straight line and/or one degree sideways.

Apart from the PPh Law, special relationship provisions are also regulated in Article 2 paragraph (2) of the VAT Law.

The Arm's Length Principle

The key word for transfer pricing is the arm's length principle (ALP), or the principle of fairness and customary business. If a special relationship is the entry point for transfer pricing, then ALP is the basis for calculation. All transfer pricing calculation methods aim to find arm's length prices.

The application of ALP refers to conditions that should be obtained from transactions between independent companies. Namely comparable uncontrolled transactions.

The approach used is as if transactions between companies (special relations) are transactions with independent companies.

TP Doc

Transfer pricing documents are regulated by Regulation of the Minister of Finance number 213/PMK.03/2016 concerning Types of Documents and/or Additional Information Required to be Kept by Taxpayers Conducting Transactions With Parties Who Have Special Relationships, and Procedures for Their Management.

Basically there are 3 types of TP Doc, namely:

• Master file (master document)
• Local files (local documents), and
• CbCR (country report)

Comparability analysis is an analysis by a taxpayer or tax authority of conditions in related transactions to be compared with conditions in transactions without related parties and to identify differences in conditions in the two types of transactions.

A transaction is considered comparable if:

• there is no material difference in circumstances, or
• There are material differences in conditions but adjustments can be made.

To make the price comparable, it is necessary to do a comparison in 5 factors.

• Contract terms
• FAR analysis
• Characteristics of Goods and Services
• Economic Situation
• Business strategy

Three Stages Towards Implementing ALP

• determine the characteristics of the business
• choose the transfer pricing method
• apply the principle of fairness and business custom (ALP)

Defining Business Characteristics

The purpose of determining business characteristics is:

• Understand the description of the company's industrial conditions (business fields).
• understand the business picture of the group of companies
• understand the characteristics of the company's business and the functions performed by affiliated parties understand the risk of tax avoidance

There are 4 steps to understanding business characteristics:

• industry analysis
• affiliate transaction scheme
• supply chain analysis
• function analysis

Industry analysis is not just analyzing the performance of one company. But the performance of a similar group of companies.

For example the performance of the semiconductor industry around the world, Asia or ASEAN. The goal is to understand the general picture. This data is widely provided for the analysis of stock performance on the stock exchange.

Understanding affiliate transaction schemes includes understanding the parties involved in transactions with the company and their country locations.

Factors to consider include:

• parties conducting related transactions
• the functions performed by each party
• the country where the counterparty is located
• the type of transaction made
• the value of transactions made
• the flow of goods/services

Supply chain analysis aims to understand how a group of companies does business.

Factors to watch out for:

• map the supply chain of group companies
• distinguish the main functions of the group of companies from their support functions
• indicate and understand the main functions of the group of companies that are the main factors of its success.
• Function analysis maps facts

• -economically relevant facts and characteristics of affiliated transactions by taking into account functions, assets and risks (FAR), as well as the allocation of FAR between parties involved in affiliated transactions so that the characteristics of each party can be quickly identified.

Transfer Pricing Method

The next stage, after understanding the characteristics of the company, is to choose the transfer pricing method that best fits the facts (actual situation).

The OECD Transfer Pricing Guidelines 2017 divides the transfer pricing method into 2 methods, namely:

• traditional transaction methods
• transactional profit methods

The traditional method, namely:

• Comparable Uncontrollable Price (CUP)
• Cost Plus Method (CPM or C+)
• Resale Price Method (RPM)

Meanwhile, transactional profit methods consist of:

• transactional net margin method (TNMM)
• profit split method (PSM)

The following is an explanation of each transfer pricing method according to the Appendix to Regulation of the Director General of Taxes number PER-22/PJ/2013.

Price Comparison Method Between Independent Parties (CUP)

Price Comparison Method Between Independent Parties (CUP) is a transfer pricing method that compares the prices of goods or services in affiliated transactions with the prices of goods or services in independent transactions.

The CUP method is appropriate when the conditions are as follows:

• Goods or services transacted have identical characteristics under comparable conditions; or
• Conditions of transactions made between parties who have special relations with parties who do not have special relations are identical or have a high level of comparability or accurate adjustments can be made to eliminate the effect of differences in conditions that arise

Resale Price Method (RPM)

The Resale Price Method (RPM) is a transfer pricing method that determines the purchase price of goods and services from affiliated parties by deducting the gross profit of the independent party which is proportional to the resale price of the goods and services to independent parties.

Proper conditions for implementing the RPM method:

• A high level of comparability between transactions between taxpayers who have a special relationship and transactions between taxpayers who do not have a special relationship, especially the level of comparability based on the results of functional analysis, even though the goods or services traded are different; and
• The reseller does not provide significant added value to the goods or services traded.

Cost-Plus Method (CPM)

The Cost-Plus Method (CPM) is a transfer pricing method that adds the gross profit from independent transactions in proportion to the costs incurred in affiliated transactions.

Proper conditions for the CPM method:

• semi-finished goods are sold to parties who have a special relationship;
• there is a joint facility agreement or long term buy and supply agreement between parties who have a special relationship; or
• the form of the transaction is the provision of services.

Transactional Net Profit Method (TNMM)

The Transactional Net Profit Method (TNMM) is a transfer pricing method that uses comparable independent transaction profit level indicators to determine the net profit of affiliated transaction businesses.

The right conditions to apply the TNMM method:

• One of the parties in a special relationship transaction makes a special contribution; or
• One of the parties in a Special Relations transaction performs a complex transaction and has transactions that are related to one another.

Profit Sharing Method (PSM)

The profit-sharing method (PSM) is a transfer pricing method that distributes joint profits among affiliates involved in affiliated transactions based on the contributions made.

Proper conditions for the use of PSM:

• involves integrated operations; or
• both parties make unitary contributions and are of great value so that tests cannot be carried out separately.

The PSM method is divided into two, namely:

• Contribution Profit Split Method
• Residual Profit Split Method (Residual Profit Split Method)

Contribution Profit Sharing Method is a profit sharing method between affiliated parties based on the functions performed, the assets used and the risks borne by each party involved in the affiliated transaction.

The Residual Profit Sharing Method is a profit sharing method that first identifies the residual profit by subtracting the regular profit of each affiliated party from the joint profit then the residual profit is allocated based on the contribution of each affiliated party involved to the residual profit.

The application of the Residual Profit Split method is carried out with the following steps:

• Combining the net profit of operations of the parties as a single entity
• Determine the unique contribution of each party
• Identify routine functions (simple functions) without the unique contribution of each party
• Looking for comparators for routine functions without unique contributions
• Calculates each party's share of profits without unique contributions
• Determine the relative value of each party's unique contribution
• Dividing Residual Profits based on the relative value of each party's unique contribution
• Determine reasonable profit
• The most appropriate transfer pricing method is determined by considering:

The advantages and disadvantages of each transfer pricing method:

• Transaction character and business character of the parties conducting the transaction (based on FAR analysis);
• Availability of relevant and reliable comparison data (especially independent comparison data);
• The degree of comparability between affiliate transactions and comparison transactions.