COVID-19 transforms Indonesia’s digital economy and TP landscape
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COVID-19 transforms Indonesia’s digital economy and TP landscape

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Charles Setia Oetomo and Felic Setiawan of GNV Consulting Services explore the effect of COVID-19 on the growth of the digital economy and transfer pricing in Indonesia.

While COVID-19 has led to unprecedented social and economic challenges for many businesses and governments worldwide, it has brought about the adoption of digital technologies and transformation quicker than expected and many of these changes are here to stay.

Beginning of a new era

Like many other countries, Indonesia has not been spared from the impact of the pandemic as the country struggles to recover from the economic damage that the pandemic has caused.

While regulatory framework and guidance have been developed to help tax authorities and taxpayers navigate around the transfer pricing (TP) challenges arising from the pandemic, they will serve as a means to an end. Taxpayers will still need to be prepared for various potential TP issues that are likely to arise.

As the pandemic jeopardises the Indonesia’s economy, it has also, without doubt, brought significant progress to the country’s digital economy. Indonesia has joined the race in taxing the digital economy amid the rapidly evolving and highly uncertain digital taxation environment, further complicated by the pandemic.

Impact of COVID-19

The pandemic has affected businesses across industries in many ways, from temporary business closure, travel restrictions to cash-flow problems. This has led to many businesses changing how to conduct business, including relocating certain functions and renegotiating existing contracts.

Similarly, government responses have varied across countries with many opting to introduce assistance programmes/stimulus packages in the form of grants, subsidies, etc. aimed at supporting businesses as well as individuals to survive financial hardship.

For these businesses, the impact of the pandemic will be most felt on the bottom line as many are likely to record a decline in profitability or in most cases, negative financial performance. Some businesses may see this continuing for years to come as the impact of the pandemic lingers. This will undoubtedly give rise to numerous TP issues for both Indonesian taxpayers and the Directorate General of Taxes (DGT).

The lack of reliable comparable data, particularly with the transactional net margin method (TNMM), is also expected to make an already dire situation even worse as comparable data for FY2020 is not likely to be available within the relevant commercial database until mid-FY2021, when delays are expected given the late filing of financial statements caused by the pandemic.

This may, however, be less of an issue for most Indonesian taxpayers in preparing their TP documentation given how the current TP regulations have been built around an ex-ante approach (i.e. the arm’s-length price-setting approach that uses information available at the time the controlled transaction was entered into).

While the overall economy recedes, it is not all doom and gloom. As one of the few winners of the pandemic, many technology-based businesses have found business booming. A lot of businesses have also started focussing on technologies in response to the pandemic and the consequential shift in consumer behaviour. This has spurred the growth of the digital economy as it takes centre stage.

Guidance issued

Being fully aware of the potential hurdles that await most taxpayers and tax authorities, the OECD issued ‘Guidance on the transfer pricing implications of the COVID-19 pandemic’ (OECD guidance on COVID-19).

While the report focusses on how COVID-19 pandemic-related issues should be viewed and considered in light of the arm’s-length principle, it remains in line with the provisions within the ‘OECD transfer pricing guidelines for multinational enterprises and tax administrations 2017’ (OECD TP Guidelines).

The OECD guidance on COVID-19 prioritises four main issues:

  • Comparability analysis;

  • Allocation of losses and the allocation of COVID-19 specific costs;

  • Government assistance programmes; and

  • Advance pricing arrangements (APAs).

In terms of comparability analysis, the report considers the appropriateness of using publicly available (both macroeconomic and microeconomic) information on the impact of COVID-19, utilising budgeted financial information to evaluate how the pandemic has impacted the taxpayer under review as well as making use of contemporaneous comparable data (with internal uncontrolled comparable the preferred option, noting issues of potential delays mentioned previously).

Several other items are considered in the report relating to the use of more than one TP method, multiple-year approach and fresh benchmarking search rather than a roll-forward approach.

While certain approaches such as the use of contemporaneous data (specifically FY2020 comparable data in applying the TNMM) are not in line with the prevailing regulations, taxpayers should not immediately rule out the use of such approaches. To the extent that they provide useful analysis into the arm’s-length nature of taxpayers’ related party transactions considering the impact of the pandemic, their use as a corroborative approach should not be dismissed. Similarly, other approaches recommended within the report or a combination thereof should also be considered, as and when appropriate.

The report also provides guidance on an arm’s-length allocation of losses as well as operational and/or exceptional COVID-19 specific costs between business group members, through an accurate delineation of the transaction, an analysis of the function and risk profile of the parties to the inter-company transaction, an understanding of how such costs are factored in arm’s-length pricing. Notable emphasis is placed on the likelihood that limited risk entities may incur losses, existing inter-company arrangements or agreements are renegotiated as well as invocation of force majeure clauses, in an arm’s-length arrangement.

Further guidance is also provided with respect to government assistance to determine economic relevance in analysing the arm’s-length nature of the controlled transaction(s) and their effects on comparability.

While this may not have significant economic relevance for most business sectors in Indonesia from a TP point of view, it may likely affect comparability of the comparable data used, especially in FY2020 (as well as subsequent years) where the degree and type of government assistance provided to businesses operating in the comparable countries will need to be considered for comparability purposes.

The report also addresses the challenges faced by taxpayers and tax authorities in applying the existing APAs in light of the pandemic. The report specifically looks at what constitutes a breach of a critical assumptions and/or non-compliance under the APA, the extent of such breach and/or non-compliance as well as the appropriate taxpayer and tax authority responses considering the domestic laws in place or in the absence of such domestic laws.

The report recommends that taxpayers and tax authorities adopt a flexible approach when negotiating APAs. The DGT published PER-17/PJ/2020 (PER-17) on ‘The Procedures of the Completion of Application, Implementation, and Evaluation of Advance Pricing Agreements,’ which requires taxpayers to provide projected financial information, as a result of the pandemic, and adjusted financial information showing normal operating conditions.

This strongly indicates the DGT’s willingness to account for the impact of the pandemic affecting taxpayers applying for an APA and to facilitate the process. This intention was verbally reiterated in a webinar by the DGT in early 2021, where the DGT received one request, to date, for APA reconsideration, due to the impact of COVID-19.

The DGT has yet to release TP guidance (apart from guidance relating to the APA) to provide clarity for taxpayers affected by the pandemic and how to best document the impact for TP purposes. Looking further afield, the Australian Taxation Office has released ‘COVID-19 economic impacts on transfer pricing arrangements’ guidance, and the Inland Revenue Authority of Singapore has also published ‘COVID-19 support measures and tax guidance.’

Looking ahead

As expected, Indonesia recorded a tax revenue shortfall in 2020 where realised tax revenue in 2020 is 20% less than 2019. This was further exacerbated by increased government spending in a bid to tackle the pandemic. As such, tax audits are expected to increase not only to make up for such a budget deficit but also to avoid greater shortfalls.

The lack of local TP guidance relating to COVID-19 may also pose an issue. Indonesia’s active participation as a member of the OECD/G20 Inclusive Framework may mean that the DGT will likely look to the OECD guidance on COVID-19 for guidance in the absence of local parameters. Taxpayers will need to be mindful that it is not binding and should certainly anticipate technical and practical potential challenges ahead.

Given the TP audit environment in Indonesia where TP documentation is required by taxpayers to defend their position in the event of TP disputes, the need for robust TP documentation has never been greater.

Acceleration of the digital economy

As the pandemic unleashes the potential of the digital economy, digitalisation is becoming a common feature of the economy, and it is almost impossible to set it apart from the rest of the economy for tax purposes.

To address the tax challenges of the digital economy and its interaction with the existing international tax rules, the OECD/G20 Inclusive Framework published Action 1 as part of the final BEPS package comprising of 15 Action Plans in 2015.

This was followed by the release of the ‘Tax challenges arising from digitalisation – report on pillar one and pillar two blueprint’ in October 2020 as part of the BEPS 2.0 initiative, which was viewed by many as an attempt to change the currently known international tax and TP rules.

While pillar one seeks to adapt the international income tax system to new business models by placing a huge emphasis on the importance of economic presence, pillar two is focused on addressing the remaining BEPS issues. Pillar two ensures that large international businesses pay a minimum level of tax regardless of where they are headquartered or the jurisdictions they operate in, with the aim of reducing the incentive for taxpayers to engage in profit shifting.

Pillar one, in particular, may notably shape the future TP landscape. Globalisation and digitalisation have rendered the concept of physical presence, upon which current taxing rights are largely based on, irrelevant as businesses can, with or without local physical presence, participate actively and sustainably in the economic life of a market jurisdiction.

Under the framework of Amount A, pillar one introduces a new nexus rule unconstrained by physical presence and new profit allocation rules, which provides new taxing rights to market/user jurisdiction where large international businesses sell their products or services or, in the case of highly digitalised businesses, provides services to users or gathers data or content contributions from them.

While automated digital services (ADS) are defined as activities within the scope of Amount A, the inclusion of consumer facing business (CFB), which includes conventional businesses that have so far been subject to a lesser degree of disruption by digitalisation, seems to indicate an expectation that most businesses will eventually become digital.

As Amount A under pillar one will likely go beyond the arm’s-length principle, the introduction of Amount B (i.e. a fixed return for certain baseline marketing and distribution activities performed physically in a market jurisdiction) is intended to ensure that the framework can co-exist with the arm’s-length principle so as to limit disruption to the traditional TP principles that apply to routine activities.

With the goal of achieving a conclusion by mid-2021, the BEPS 2.0 initiative was expected to be implemented by changes in domestic law and through tax treaties. As countries begin to adopt unilateral measures, Indonesia has also issued ‘Government Regulation in Lieu of Law No. 1 Year 2020’ (Perppu-1) followed by the publication of Law No. 2 Year 2020 (Law No. 2) in early 2020, whose agenda also includes the taxation of the digital economy.

Along with the implementing Minister of Finance (MoF) regulation as well as DGT regulation, Indonesia mandates the imposition of VAT on Trading Through Electronic System (Perdagangan Melalui Sistem Elektronik or PMSE) activities.

Income tax obligation will also apply to foreign traders, service providers and/or organisers of PMSE with significant economic presence although implementing regulations have yet to be issued as many are curious to find out how it will line up along the framework prescribed within the BEPS 2.0 blueprints issued by the OECD/G20 Inclusive Framework.


Click here to read the 2021 TP Special Focus guide


Charles Setia Oetomo



GNV Consulting Services

T: +62 816 786 811


Charles Setia Oetomo is a partner and advisor at GNV Consulting Services. He provides various tax and customs consultations, as well as advice on TP and trade regulatory issues, to a broad range of clients from different backgrounds and industries.

Charles worked at Deloitte as a partner in its Southeast Asia team leading multiple lines of functions. He has extensive knowledge in financial accounting having served the Big Four firms as an external auditor.

Felic Setiawan



GNV Consulting Services

T: +62 21 2988 0681


Felic Setiawan is a TP director at GNV Consulting Services. He specialises in advising multinational enterprises on designing and implementing their TP policies, assisting with documentation, as well as attending TP audits and dispute resolutions. Felic also owns a professional TP certification issued by Chartered Institute of Taxation (CIOT).

Felic has served in two of the Big Four firms in Indonesia. As a transfer specialist, he regularly delivers TP seminars and contributes to the firm’s publications.

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