Transfer pricing audits in Indonesia likely to get more aggressive
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Transfer pricing audits in Indonesia likely to get more aggressive

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Sri Wahyuni Sujono and Gandi Siregar of SF Consulting/Crowe Indonesia summarise the tax audit procedure in Indonesia, while explaining why pressure to achieve tax revenue targets in 2020 may stimulate an aggressive approach.

Situated in Southeast Asia, Indonesia is the fourth most populous country in the world. Owing to its vast population, Indonesia offers a huge market for multinational corporations (MNCs) to invest and operate in. For the period between January and March 2019, the Capital Investment Coordinator Board (BKPM) reported that there were more than 9,800 foreign direct investment (FDI) projects with a total investment value of up to $6.08 billion. Considering the large FDI in the country, the Indonesian government has a growing concern on the country's transfer pricing issues.

In 2020, the Indonesian state budget (APBN) set a high tax revenue target of IDR 1,865.7 trillion ($114.1 billion), a value that has increased approximately 20% from the previous year's tax revenue target of IDR 1,577.56 trillion. However, considering the historical data, it will be very challenging for the Indonesian Tax Office (ITO) to achieve this target, as the historic average realisation of the tax revenue is approximately 84% of the targeted amount (see Figure 1).

In order to achieve the high target, the ITO is required to improve its tax services to encourage taxpayers to pay and report its tax returns appropriately and to conduct more tax audits to ensure that taxpayers are compliant.

Figure 1: Comparison of the Indonesian tax revenue target and realisation (2014-2019) Remarks FY2019 FY2018 FY2017 FY2016 FY2015 FY2014 Average Tax revenue target (IDR) 1,577.65 1,424.00 1,283.57 1,355.20 1,294.26 1,072.38 1,334.51 Tax revenue realisation (IDR) TBD 1,312.32 1,151.03 1,105.97 1,060.86 985.13 1,123.06 % Realisation N/A 92.16% 89.67% 81.61% 81.97% 91.86% 84.16% Year-on-year target growth 10.79% 10.94% -5.29% 4.71% 20.69% N/A 8.37%

To increase tax revenue from audits, the ITO issued Circular Letter No. SE-15/PJ/2018 (CL-15) on August 13 2018 in relation to tax audit policy, to improve the selection of taxpayers to be audited. This would be achieved by introducing the target priority list of tax audits and setting up a tax audit planning committee to determine the criteria in selecting the taxpayers who will be audited. The target priority list contains taxpayers who are alleged as being non-compliant that is determined based on several tax gap indicators that include:

  • Benchmarking within a similar industry, which shows more than a 10% difference in the financial result;

  • Related-party transactions with entities resident in lower tax jurisdictions;

  • Significant related-party transactions with a value of more than 50% of the total transactional value;

  • Related-party transactions with entities that have tax loss compensation;

  • Taxpayers who have never been tax audited for all taxes in the past three years;

  • Issuance of tax invoices with a tax ID number of 000 for more than 25% of the total tax invoice, and/or

  • The result of data analysis from the Centre for Tax Analysis.

Based on the tax gap indicators, it can be seen that the ITO is targeting taxpayers with related party transactions. Furthermore, in practice, the tax auditor usually takes an aggressive approach especially in making transfer pricing corrections. The aggressive approach may be derived from the pressure to achieve a high tax revenue target that may impact the tax auditor's interpretation of tax law and understanding of the taxpayers' tax position.

The tax audit procedure

In Indonesia, the taxpayer's request for a refund will trigger a tax audit by the ITO. The timeline for a tax audit initiated by a refund request is 12 months, starting from the filing date of the request. If the ITO fails to issue a tax assessment letter within 12 months, the tax refund request is deemed to be granted. For non-tax refund audits, while there is a procedural timeline, an audit exceeding such a timeline cannot be invalidated. The start of a tax audit is marked by the issuance of the tax audit instruction letter by the ITO.

Based on Circular Letter No. SE-50/PJ/2013 (CL-50), regarding the technical guidance for auditing a related party transaction, the tax auditor will conduct a preliminary tax assessment and review the taxpayer's related-party transactions section in its tax return and audited financial statement. The auditor will also review the taxpayer's website, commercial database and other sources to assess the significance of related-party transactions, identify transactions with related parties residing in lower tax jurisdictions, and review reasons of continuous losses that may indicate a profit shifting attempt.

When the tax auditor indicates a TP risk, they will initiate a transfer pricing audit and may request TP documents (including the local file and master file), related-party agreements and invoices, supporting documents, and written explanations. They may also invite the taxpayer's representative to provide an explanation, and visit the taxpayer's business premises to understand the company's profile and the related-party transactions' nature. During the process, a tax auditor may also request the taxpayer to fill and submit the PER-22 form that contains information regarding the taxpayer's function, asset and risk analysis. As such, taxpayers should have an appropriate tax risk management system by maintaining the filing of supporting documents.

Based on the information gathered and analysis done, the tax auditor will determine the taxpayer's business characteristics, select the TP method, and apply the economic analysis by imposing corrections on the taxpayer's related-party transactions.

Prior to finalising the audit, the tax auditor will issue a tax audit notification letter that explains their findings and corrections. Taxpayers are given the opportunity to respond to the tax audit notification letter within seven days and this can be extended for an additional three days. Afterwards, the taxpayer will be invited to attend a final audit closing conference to discuss the findings with the tax auditor prior to the issuance of the tax assessment letter.

However, prior to the issuance of the tax assessment letter, taxpayers may request a quality assurance review if there is an indication of tax law violation and its application by the tax auditor. The quality assurance team will issue a legally binding decision as a basis for the tax audit final findings and the tax assessment letter.

Common types of related-party transactions and their audit approaches

Generally, related-party transactions can be characterised into four types of transactions:

1) Goods/service sales or purchase transactions;

2) Intra-group services;

3) Intangible asset transactions; and

4) Interest on loan transactions.

Based on CL-50, the tax auditor may take the following approaches to test the arm's-length nature of the above-mentioned related-party transactions.

Goods/service sales or purchase transactions

To test the arm's-length principle for goods/service sales or purchase transactions, the tax auditor may select the most appropriate transfer pricing method. This could be the comparable uncontrolled price method (CUP method), resale price method (RPM), cost plus method (CPM), profit split method (PSM) or transactional net margin method (TNMM).

In implementing their analysis, the tax auditor may not consider the taxpayer's local file and may conduct its own economic analysis to apply a different approach and arrive at different conclusions.

In practice, TNMM is the most widely used transfer pricing method in Indonesian tax audits. When applying TNMM, the common dispute areas between a taxpayer and tax auditor are business characterisation, comparable companies, profit level indicators, periods of analysis and comparability adjustments.

Intra-group services transactions

Intra-group services are services provided by an entity within a group that will give a benefit to one or more entities in the group. Intra-group services include management services, administration services, technical services, support services, procurement services, marketing services, distribution services and other commercial services within the group.

According to CL-50, intra-group services will only be considered if these services provide economic benefit or commercial value to the service recipient.

As such, the tax auditor may apply various approaches to assess the existence of the intra-group services by reviewing the necessity of such services, reviewing the qualification of the service provider, reviewing the negotiation process through correspondences and minutes of meetings, reviewing the deliverables of the services, etc.

After passing the existence test, the tax auditor may also assess the economic benefit of intra-group services. To pass the economic benefit test, the tax auditor must ensure that the services are not only to the benefit of the parent company (e.g. parent company reporting requirements, parent company legal requirements, etc.). It must also be ensured that it is not a service that duplicates activities that have existed in the service recipient, nor a service that only provides incidental benefits that was not intended for a particular entity, etc.

After passing the existence and economic benefit test, then the tax auditor may assess the arm's-length principle of the intra-group services by reviewing the cost base, allocation method and applying the transfer pricing analysis. The transfer pricing method that can be used to assess the intra-group services are the CUP method, CPM and TNMM.

In practice, if the taxpayer cannot substantiate the existence or economic benefit test for the intra-group services, the tax auditor will automatically deny the intra-group services without conducting any transfer pricing analysis.

Intangible asset transaction

Intangible assets are characterised as manufacturing intangibles (e.g. know-how, business process, etc.) or marketing intangibles (e.g. trademark, brand, etc.). Intangible asset transactions usually take the form of a licensing arrangement with royalty payment as compensation.

During the tax audits for related-party intangible asset transactions, the tax auditors would identify the existence of intangible assets, identify the parties who contribute in the development of intangible assets, and determine the arm's-length compensation for the intangible asset transactions.

In practice, the tax auditors and taxpayers in Indonesia usually use the CUP method to test the arm's-length principle of intangible asset transactions. In conducting the analysis, tax auditors must consider several factors such as the protection and time period of an intangible, exclusivity, geographic location, useful life, right to improve, revise or fix, etc.

In addition, the tax auditor may also scrutinise the economic benefits of the intangible asset transactions to the licensee.

Interest on loan transaction

When auditing the interest on loan transactions, the tax auditor will assess the nature and necessity of loans, existence of loans, debt to equity ratio requirement, and apply an external CUP method by comparing the loan interest rate with independent parties such as the London Interbank Offered Rate (LIBOR), the Jakarta Interbank Offered Rate (JIBOR), etc.

Transfer pricing documentation as a defence in tax audits

Based on Indonesian Ministry of Finance Regulation No. 213/PMK.03/2016, transfer pricing documentation consists of the local file, master file and country-by-country reporting (CbCR).

According to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration (OECD Guidelines) issued in July 2017, there are three objectives of TP documentation, such as:

1) To ensure that taxpayers give appropriate consideration to transfer pricing requirements in establishing prices and other conditions for transactions between associated enterprises and in reporting the income derived from such transactions in their tax returns;

2) To provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment; and

3) To provide tax administrations with useful information to conduct a thorough audit of the transfer pricing practices of entities subject to tax in their jurisdiction, although it may be necessary to supplement the documentation with additional information as the audit progresses.

In a tax audit situation, transfer pricing documentation will serve as the first line of defence that allows the taxpayer to demonstrate that it has made reasonable efforts to determine that the related-party transactions entered are in compliance with the arm's-length principle. In addition, the transfer pricing documentation will also provide tax auditors with useful information to assess the arm's-length nature of related-party transactions. As such, having comprehensive and robust transfer pricing documentation can improve the taxpayer's position during a tax audit.

However, transfer pricing is not science and, therefore, it cannot be guaranteed that in an audit situation, the ITO will necessarily agree with the position taken by the taxpayers in the transfer pricing documentation.

Transfer pricing audits in digital companies

In principal, the approach taken by tax auditors for conducting TP audits in digital companies are similar with the conventional industry. However, there are several challenges that the tax auditor may face. For example, there is a lack of regulation and guidance issued by the ITO because the digital industry is relatively new in Indonesia.

Other challenges when conducting audits to test the arm's-length nature of digital companies in Indonesia are the limited comparable companies and limited publicly available information that can be used to analyse the transaction properly. In addition, the different business nature of digital companies, such as having large intangible transactions, huge loss positions and peculiar business strategies has become a huge challenge for the tax auditors.

The ITO is increasingly concerned about transfer pricing issues and, as a result, has issued tax audit regulations to select companies with related-party transactions that are being targeted for a tax audit. The pressure to achieve tax revenue targets in 2020 may stimulate the tax auditor to take an aggressive tax audit approach.

As such, taxpayers who have related-party transactions, should be prepared for tax audits by maintaining proper transfer pricing documentation and other supporting documents that can be used to defend their transfer pricing position during a tax audit.

Sri Wahyuni Sujono


Managing partner

SF Consulting/Crowe Indonesia

Tel: +62 21 57944548

Sri Wahyuni Sujono is the managing partner of SF Consulting/Crowe Indonesia. Prior to her work at the firm, she has had more than 26 years of experience as a tax consultant/lawyer with Arthur Andersen and Ernst and Young Indonesia. As the coordinator of the financial services group in Arthur Andersen, she has been involved in the restructuring and M&A deals of major banks and companies where she dealt almost exclusively with multinational corporations.

Her experience has led to her expertise in areas such as tax litigation, transfer pricing, tax planning and tax restructuring. She is experienced in serving a large variety of clients, both national and multinational.

Gandi Siregar


Transfer pricing manager

SF Consulting/Crowe Indonesia

Tel: +62 57944548

Gandi Siregar is a transfer pricing manager at SF Consulting, Indonesia.

He is a chartered accountant and member of the Indonesian Accounting Association. Prior to joining SF Consulting, he was the head of transfer pricing for Gojek Indonesia since January 2019. He helped in building the transfer pricing structure of the Gojek group in South East Asia.

Previously, he worked as a transfer pricing consultant at PwC Indonesia and advised Indonesian and foreign multinational groups on transfer pricing matters, tax litigation and other business transaction matters.

He attended Universitas Advent Indonesia in Bandung and has a bachelor's degree in accounting.

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