Indonesia: A light at the end of the tunnel for Indonesia?
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Indonesia: A light at the end of the tunnel for Indonesia?

Iwan Hoo and Wara Kertiningrum of KPMG in Indonesia present an overview of the Indonesian transfer pricing regulations, examine the current Indonesian transfer pricing landscape and identify critical points that may further change the shape of the transfer pricing landscape in Indonesia.

Indonesian taxpayers have witnessed dramatic changes over the past few years to the local transfer pricing landscape. The enforcement of transfer pricing regulations in Indonesia has been the frequent issue of transfer pricing regulations, combined with pressure to fulfill the country's annual revenue targets. The significance of potential transfer pricing adjustments has diverted the tax authority's attention from the central transfer pricing issues and created an incentive for the tax auditors in the field to place more scrutiny on taxpayers' transfer pricing arrangements.

Most recently, the Indonesian Tax Office (ITO) issued revised tax audit guidelines in mid and late 2013.

History of Indonesian TP regulations

The ITO has had the authority to impose transfer pricing adjustments since the Income Tax Law was introduced in 1983; however, transfer pricing issues were not the main focus of the ITO at that time. However, the guidelines issued by the ITO in 1993 on the determination of transfer pricing adjustments and the requirement introduced in 2002, which mandate a disclosure of related-party transactions in corporate income tax returns have slowly caused changes. In 2007, specific ITO references were made to transfer pricing documentation even though no details of the requirements were provided.

Starting from 2009, taxpayers have been required to disclose additional details of related-party transactions in their annual tax returns and declare whether transfer pricing documentation is available. This includes a declaration on whether 15 specific areas have been addressed in the transfer pricing documentation.

The year 2010 became a turning point for the transfer pricing practice in Indonesia, with the ITO's issuance of detailed transfer pricing regulations, which provided clear guidance on transfer pricing issues, including the applicability of the arm's-length principle, basic requirements to determine whether the prices are in compliance with the arm's-length principle and documentation requirements. In the same year the ITO also issued guidelines on the mutual agreement procedure (MAP) and advance pricing agreement (APA). In 2010, taxpayers witnessed that the ITO started to implement the regulations more aggressively in practice during tax audits, objections and in the tax courts.

Recent transfer pricing scrutiny

Tax and transfer pricing audits are often triggered automatically, rather than determined based on a risk assessment. This is because under the Indonesian tax system, taxpayers are required to make significant income tax pre-payments and significant amounts may be withheld on payments to taxpayers in the form of domestic withholding taxes. The actual tax liability is only determined at the end of the year when taxpayers file their annual corporate income tax returns. If the prepayments and tax credits exceed the actual tax liability, the taxpayer should, at least in theory, be entitled to a tax refund. However, a request for a corporate tax refund will automatically result in an immediate tax audit for all taxes. A tax audit can also be triggered under other circumstances, although this is somewhat rare in practice because of severe constraints to ITO resources.

Obviously, many areas of taxation are scrutinised by the ITO during a tax audit, but the auditors' attention to transfer pricing-related matters has been increasing greatly.

Following are some examples of challenging positions by the ITO in recent years:

  • Disallowance of expenses incurred by Indonesian taxpayers relating to the payment of royalties and intra-group services without properly taking into account the taxpayer's business or economic circumstances. Often rejections were made because of a trivial administrative matter such as the lack of a patent certificate.

  • Disallowance of using multiple-year data for benchmarking purposes and basing the conclusions on the results of the year under audit only, or using a two- or three-year analysis to achieve a desired outcome, while not taking into account the companies' business cycles.

  • Insistence of using public market data that may not be comparable to the terms of the transactions being reviewed.

  • Greater emphasis on product comparability as a criterion for the selection of comparables under the transactional net margin method.

  • Selection/application of a transfer pricing method based on a very generic understanding of the company's business under review.

  • Oversimplification of a company's business characteristics. Generally, the ITO categorises the characteristics of a company as toll manufacturing, contract manufacturing or fully fledged manufacturing. Other business setups are often simply placed into one of these three aforementioned groups.

Over the years the ITO's knowledge and understanding of transfer pricing has increased, although its interest in transfer pricing issues is still driven by the intention to fulfill the country's target tax revenue. This focus has made the ITO auditors target the taxpayers with the same scrutiny and adjustments in subsequent years. In some cases, the ITO has opened up previous years for transfer pricing audits.

Moreover, the efforts of the ITO to strengthen the examination of transfer pricing issues often impose further administrative burdens on taxpayers. Its latest issuance of tax audit guidelines includes templates requiring detailed information, which must be provided during a transfer pricing audit. The regulation does indicate that the forms can be customised to taxpayer's line of business although the same forms are used for all types of industries, which poses significant complications as the forms are very much geared towards manufacturing activities.

The development of dispute resolution

Traditionally, taxpayers who disagree with adjustments made during tax audits could follow a process of filing an objection and, if unsuccessful, lodging an appeal with the Tax Court. At the moment, many transfer pricing-related cases are under review by the Tax Court.

Early in the implementation of the transfer pricing regulations, there were some delays in receiving a verdict from the Tax Court. Some assumed that this was because the Tax Court was not ready or familiar with the transfer pricing issues to make a conclusion. This has begun to change. Now we observe that the Tax Court is completing transfer pricing disputes at its ordinary pace, although the results of transfer pricing appeals are still less predictable than other types of tax disputes. Another complication has been recently added as the ITO appeals have lost transfer pricing verdicts to the Supreme Court, causing further delays and uncertainty for the taxpayers.

In view of all of these, Indonesian taxpayers are now considering alternatives to the domestic dispute resolution process, such as MAPs for which amended regulations were recently issued.

Taxpayers may also ensure that the pricing of related-party transactions will not be adjusted in the future by applying for an APA, which may involve the Indonesian authorities (unilateral APA) only or two or more authorities (bilateral or multilateral APA).

No official information is available on the number of MAPs or APAs submitted, but based on informal discussions, several have been already initiated and some are on the brink of conclusion. Although the outcomes of the MAP or APA processes are not yet proven in Indonesia, an Indonesian taxpayer may want to consider these resolutions to avoid potential double taxation.

Enforcement trends

In light of the current trends we hope and believe that the following developments could be anticipated in the Indonesian transfer pricing arena:

More adherence to international trends and practices

Up to now, the Indonesian transfer pricing regulations have been largely derived from the OECD Guidelines and the latest guidance to the tax auditors is in line with commonly accepted principles. Thus, it would be beneficial for multinational corporations to monitor the OECD guideline trends on transfer pricing structures for its Indonesian entities.

Recently, the ITO has been actively participating in discussions on BEPS. Although for the time being the majority of Indonesian taxpayers should not be directly affected by the BEPS initiatives, it is prudent that the BEPS initiatives and the potential implications should be taken into account when conducting related-party transactions with Indonesian entities. Global enforcement of more extensive transfer pricing disclosures will affect the transfer pricing in Indonesia.

Because of the tendency of the ITO to request detailed information in a short time frame during an audit or dispute resolution, it is recommended that Indonesian taxpayers ensure that transfer pricing documentation and, perhaps even more important, the underlying documents, are in place.

It is also important to note that any drop in the profitability levels of an Indonesian entity, regardless whether it was caused by economic circumstances or by changes to the company's transfer pricing policies, may likely trigger a tax audit.

The importance of a contemporaneous transfer pricing report

In the past we have observed that tax officers have often challenged a taxpayer's transfer pricing position with a completely different method or approach (often using information they regard as meeting the comparability standards of the CUP method). This situation is also beginning to change. The ITO is now giving more consideration to a taxpayer's position as documented in its transfer pricing report, although that does not prevent it from performing its own economic analyses. Thus, taxpayers, without contemporaneous transfer pricing reports, are losing an opportunity to manage the information and ITO's interpretation of the company's business at an early stage.

The challenges for dispute resolution remain

Although there have been some very positive developments in the dispute resolution area, such as taxpayers winning appeals at the Tax Court, the unpredictability of results remains and is still expected to exist in the short term. Furthermore, dispute resolutions in Indonesia are generally an exhaustive process, even more so for transfer pricing issues. Companies facing large tax adjustments or incurring this risk may want to consider taking an alternative resolution process through the use of an MAP or APA. A commercial decision needs to be taken among the available dispute alternatives in view that the ITO is also in its early stage of implementing the MAP and APA. A positive sign is that the ITO is actively encouraging taxpayers to consider these procedures so that Indonesia can start building a positive track record.

Opportunity to review Indonesian entity's transfer pricing structure

Considering Indonesia's early and changing transfer pricing regulatory environment, as well as the ITO's constant focus on transfer pricing issues, now is the time for multinational groups to review their transfer pricing structure, not only for Indonesia, but also for the group as a whole and, to plan ahead considering the wide impact of this issue. Changes in Indonesian transfer prices affect not only corporate income tax, but also withholding tax, VAT, luxury goods tax and even customs duties, all of which have interaction with the prices charged between the parties involved.

Changes in regulations

Taxpayers should anticipate more changes to the Indonesian regulations. While no formal announcements have been made, changes can be expected with regard to transfer pricing documentation requirements for smaller taxpayers. Also safe harbour provisions could possibly be considered, while changes to the MAP process and formalities also are expected.

Continuing developments

Developments in transfer pricing in Indonesia over the past few years have been swift and they are expected to continue. This creates both opportunities and challenges for multinational companies with business operations in Indonesia. While the current climate is still very challenging, there are some positive trends and a more level playing field may be on the horizon.



Iwan Hoo

KPMG in Indonesia

33rd floor Wisma GKBI

28 Jl Jend Sudirman

Jakarta 10210


Tel: +62 21 5799 5540

Fax: +62 21 570 5888


Iwan heads KPMG's Indonesian transfer pricing practice.

He spent his career working in international tax and transfer pricing, starting in Amsterdam, the Netherlands. This was followed by a three-year stint in Jakarta, Indonesia. After his return to Amsterdam where he was with KPMG's transfer pricing team he transferred to KPMG in Singapore where he also joined the transfer pricing team.

Starting from 2009 he assisted the Indonesian transfer pricing group which he eventually joined in 2010.

Iwan graduated in tax law from the university of Leiden, the Netherlands.



Wara Kertiningrum

KPMG in Indonesia

33rd floor Wisma GKBI

28 Jl Jend Sudirman

Jakarta 10210


Tel: +62 21 570 4888

Fax: +62 21 570 5888


Wara is a manager in the transfer pricing team of KPMG Indonesia. She has experience with various projects such as transfer pricing disputes, planning and documentation.

Before specializing in transfer pricing, Wara provided tax consulting and tax compliance services to a wide range of multinational and domestic companies in a variety of industry sectors.

Wara has nine years of experience and consulting practice and has in-depth knowledge of the full range of Indonesian tax issues, including VAT, corporate, employee and withholding taxes.

Wara also has extensive experience in cross-border transactions. Her clients cover variety of industry sectors, including: manufacturing, distribution, financial services, automotive, industrial markets and commodities.

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