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Indonesia’s head of transfer pricing issues audit warning

Indonesia’s head of transfer pricing has told a seminar of tax professionals the criteria used for initiating an audit, amid increased scrutiny from the country’s tax authorities.

Bapak Edward Hamonangan Sianipar, the section head of the transfer pricing unit at the Indonesian Directorate General of Taxation (ITO), told the audience that there are five situations that are likely to lead to an audit.

Pak Edward explained that the declaration of consistent losses, payment of minimal taxes, significant related party transactions, variations from commercial norms, and a lack of appropriate supporting documentation would all likely lead to an audit.

It was also explained that the ITO has over 1,000 dedicated staff, of which about 60% are auditors. Therefore, the risk of being audited is very real for companies characterised by any of the above situations.

Pak Edward also mentioned that the ITO plans to select 10 taxpayers for review from each tax office, starting with the large and medium taxpayers offices and those dealing with foreign investors. Out of these companies reviewed, the ITO has set a target of four to be selected for a full transfer pricing audit.

“To reduce the risk of reviews and audits mentioned by the ITO, companies should implement practices which diminish the number of key audit exposure factors or prepare complete documentation to prove the arm's-length nature of their related party transactions,” said Steven Tseng, China & Asia-Pacific transfer pricing leader at KPMG.

The conference concluded by stating that taxpayers should take extra precautions to prevent an audit.

It was outlined that being able to demonstrate where differences in facts justify different price, demonstrating the ‘willingness to pay’ concept for services, providing rigorous determination of cost bases and allocations, and providing complete documentation during an audit all will help in reducing the risk of an audit.

This news comes after the ITO asked taxpayers to attend a training seminar conducted by its transfer pricing team.

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