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Will BEPS be a major game changer?

Iwan Hoo, a partner at KPMG in Indonesia, examines significant changes in the tax landscape and in transfer pricing practices.

General introduction

The taxation landscape in Indonesia has been subject to significant changes over the past few years. Budgetary pressures have forced the tax auditors to be extremely thorough in their investigations and significant corrections have been made.

Transfer pricing – general

The Income Tax Law (ITL) was introduced in 1983. Interestingly, the ITL back then already contained a provision that allowed for an adjustment to a commercial transaction (ie the transaction must be arm's length). This provision includes adjustments to income and expenses, and re-characterisation of debt as equity.

  • The ITL defines a special relationship as:

  • Capital participation of 25% or greater (direct or indirect);

  • Control through management or technology; or

  • Through close family relationships.

On September 6 2010, the Directorate General of Taxation (DGT) released guidance to taxpayers for the first time, with respect to their transfer pricing practices and related-party transactions. This regulation provides a general outline of the approach to be taken in determining whether the pricing of related-party transactions follows the arm's-length principle. The regulation covers the steps to be performed in demonstrating whether the pricing of transactions between related parties are in line with fair and common principles. These steps are:

  • Performing a comparability analysis, including consideration of a functional analysis, contractual agreements, economic conditions, and business strategy;

  • Determining the pricing methodology to be applied;

  • Determining the 'arm's-length' price or range; and

  • Documenting the process, satisfying minimum documentary requirements set forth.

The most recent guidance on transfer pricing was issued late 2011. These principles and concepts in these regulations are generally in line with the OECD Guidelines.


Indonesia is not a member of the OECD. However, it is a member of G20 and as such has been involved in the BEPS discussions. The Indonesian DGT has been active in socialising the concepts of BEPS by organising seminars with the consulting community, one being organised together with the OECD. Another indication of the relevance of BEPS was evident when Indonesia co-hosted a seminar late 2015 with tax policy and administration experts from 14 nations around the region in attendance. The Indonesian DGT has also stated on occasion that Indonesia intends to implement the country-by-country reporting concept. Moreover, the Indonesian Ministry of Finance has on several occasions mentioned that it intends to tax e-commerce by requiring these businesses to register as a permanent establishment, to incorporate a local entity or to enter into a joint venture with a local partner. However, no (draft) regulations on these topics, nor any of the other BEPS Action Items, has yet been released and it is not yet clear if and when the regulations will be introduced.

That said, Indonesian tax and transfer pricing regulations already include provisions regarding a number of the Action Items. However, these are not necessarily triggered by the BEPS initiative.

Controlled Foreign Companies

Indonesia has strict Controlled Foreign Companies (CFC) rules for capital participations of 50% or more (with an exception for listed companies). The CFC regulations also apply when a dividend is deemed to be distributed and do not contain exemptions for subsidiaries with an active business or those who are not domiciled in a tax haven.

Thin capitalisation

As recently as September 2015 Indonesia introduced thin capitalisation regulations which entered into effect on January 1 2016. The maximum debt to equity ratio is 4:1. Any borrowing costs relating to debts exceeding this ratio will not be deductible. The borrowing costs encompass not only interest, but also discounts and premiums associated with loans, additional fees incurred related to borrowing (eg arrangement fees), interest related to lease financing, guarantee fees related to debt, and foreign exchange differences.

Counter harmful tax practices

Effective September 2018 Indonesia joined the Multilateral Competent Authority Agreement.


In early 2015 the Ministry of Finance issued updated guidance on APAs. The guidance includes many formal requirements although these are generally in line with commonly accepted practices.

The application procedure starts with an initial meeting. In this meeting the full details on the taxpayer must be disclosed. It is therefore not possible to apply on a no-names basis to "test the waters". This initial meeting can become a series of meetings if the DGT requires more information. After the meeting the DGT will decide whether the taxpayer is eligible for the APA programme. If so, a full application must be submitted. If the APA application is successful, the taxpayer must submit annual compliance reports.

At this stage there are APA negotiations with a number of countries, both in the region and further afield. However, none have been concluded to date.


The tax authorities are under immense political pressure to achieve revenue targets and even more so as in 2015 this target was missed by a wide margin. The tax auditors usually reserve most scrutiny for services and royalties.

For the intra-group services the discussion mostly focuses on the question whether services have been rendered and whether they were beneficial for the taxpayer. It is therefore detrimental to keep sufficient records of the receipt of the services and the benefit to be able to provide tangible evidence to the tax auditors. If a cost-based remuneration system is used any mark-up is not often the focus of the challenge.

Royalties, both for trademarks and know how, are also often under fire and even payments well-known brands of consumer goods are challenged and often end up in tax court. The main contentious issue is often the value of the brand and/or know how.

Closing remarks

The transfer pricing landscape is still evolving in Indonesia since detailed guidance was only issued fairly recently and also the challenges by the tax auditors started just a few years ago. However, certainly at the level of the DGT there is awareness of the developments with regard to transfer pricing and BEPS and various foreign advisors are assisting the DGT in taking the appropriate steps, although no tangible results are available as yet. However, we would expect that the DGT will soon issue guidance and regulations. The first topic to be addressed will quite certainly be the CbCR, but other Action Items may also be on the agenda.

Given the many challenges during tax audits, it is very important that taxpayers are able to defend their transfer pricing policies and having tangible evidence available is a must. And even if it is available it cannot be excluded that the tax auditors will impose significant adjustments which will take a lot of time and effort to challenge.



Iwan Hoo


KPMG in Indonesia

Tel: +62 21 570 4888

Iwan Hoo is a Partner in KPMG Indonesia's Transfer Pricing Practice in Jakarta. Iwan has managed numerous projects for multinational companies across a broad spectrum of industries in Indonesia, Singapore and the Netherlands.

Prior to joining KPMG Indonesia, he was with the KPMG Global Transfer Pricing Services group in Singapore for close to four years and the Netherlands for more than a year. Prior to that, Iwan was with the international tax group of another firm in Amsterdam and Jakarta for more than 20 years in total.

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