Indonesia: New TP implementation rules and a revised WHT framework
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Indonesia: New TP implementation rules and a revised WHT framework

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Fabian Abi Cakra and Danang Syailendra of GNV Consulting explain how several Indonesian transfer pricing regulations have been combined into new legislation, and summarise changes to employee income tax under a withholding tax regulation

The Indonesian minister of finance (MoF) has issued a new regulation, No. 172 of 2023 (PMK-172), concerning the implementation of the arm’s-length principle in related-party transactions. The regulation revokes several MoF regulations – i.e., MoF Regulation No. 213/PMK.03/2016, MoF Regulation No. 49/PMK.03/2019, and MoF Regulation No. 22/PMK.03/2020 – and combines the transfer pricing (TP) principles stipulated therein to provide legal certainty on TP regulations.

Although most TP principles remain the same as under the previous MoF regulations, PMK-172 emphasises and clarifies several principles/treatments, such as the following:

  • An introduction of the term “independent transactions influenced by related parties”, with such parties required to comply with the TP rules.

  • Related-party transactions (RPT) can also be described as transactions involving attachment and dependency. Attachment and dependency are deemed to occur if one or more parties control each other, or if one or more parties are not independent.

  • Control is deemed to exist if, among other conditions, there are parties that are commercially or financially known, or declare themselves, to be in the same business group or if a party declares that it has a special relationship with another party.

  • If the Directorate General of Taxes (DGT) imposes a TP adjustment on transactions conducted between parties located in Indonesia during a tax audit that leads to double taxation, the counterparty involved in the RPT has the option to implement a corresponding adjustment, provided that the adjusted taxpayer agrees to the adjustment and refrains from pursuing any legal action.

  • Secondary adjustments and constructive dividends will apply the tax treaty rate, if relevant. The auditor will eliminate the secondary adjustment if funds are returned by the counterparty to the taxpayer (auditee) and/or if the taxpayer agrees to the primary TP adjustment.

  • As a TP adjustment is also applicable to the selling prices when calculating the VAT payable on the seller’s side, the input VAT credit on the buyer's side can still be recognised according to the facts of the VAT invoice.

  • The introduction of new requirements for intercompany loan transactions whereby such transactions shall meet certain criteria stipulated within Article 13(4).

PMK-172 also explains further the administrative guidelines for the above, including for mutual agreement procedures (MAPs) and advance pricing agreement (APA) procedures.

The regulation became effective on December 29 2023. However, it is applicable to ongoing MAP and APA processes for which the decision letter has not been issued. The compliance obligations concerning TP documentation for FY 2024 onwards shall also be conducted based on PMK-172.

New effective tax rates for employee income tax

The MoF has issued Regulation No. 168 of 2023 (PMK-168) as a supplement to Government Regulation No. 58 of 2023 (PP-58) concerning Article 21 withholding tax (WHT) rates on incomes related to the work, services, or activities of individual taxpayers, which has been in effect since January 1 2024.

The regulation, which comprises nine chapters, revokes and replaces the framework of the previous regulations; i.e., MoF Regulation No. 250 of 2008, MoF Regulation No. 252 of 2008, and MoF Regulation No. 102 of 2016.

Through PMK-168, the MoF introduces new effective WHT rates (TER) that shall be applicable to employees, pensioners, and commissioners/supervisory boards. Accordingly, taxpayers should apply the TER in imposing WHT during the periods January to November, except when the employee resigns. The employee income tax calculation for December, or the resignation period, remains the same.

As prescribed by Appendix of PP-58, there are 125 TER rates, which are divided into three major categories: TER A, TER B, and TER C. These rates apply based on the marital status of the employee and the amount of gross income earned during the relevant period. In determining the taxable object, PMK-168 also now allows religious donations such as zakat paid through the employer to be considered as a deductible component in calculating the amount of taxable income. The component would be a new deduction element apart from an occupational allowance and a pension cost paid by the employee, whenever applicable.

Similar to the previous regulations, PMK-168 also defines the WHT calculation method for each type of employment, which is summarised as follows.

Income recipient

WHT calculation method

Permanent employee

TER is applicable on the monthly gross income for the periods January to November. For December, or when the employee resigns, the normal WHT regime shall be applicable and the tax credit paid during the TER periods will be offset against the tax payable arising therefrom.

Pensioners

Commissioner or supervisory board member who earns irregular income

TER is applicable on the gross income received during the month.

Non-permanent employees

TER is applicable for those who receive (i) income on a non-monthly basis with a daily wage, or an average daily wage, of IDR 2.5 million per day or below, and/or (ii) income on a monthly basis.

The normal WHT regime will be applicable for those who receive income on a non-monthly basis with a daily wage, or an average daily wage, greater than IDR 2.5 million per day.

Non-employees

Similar to the previous regulations, the normal WHT regime is applicable to the gross income received during the month.

 

Participants in activities

Employee participants in pension programmes

Former employees

PMK-168 also stipulates that if there is a tax overpayment in a tax period, the overpayment can be taken into account in the following month’s tax due. Under the regulation, if the tax overpayment occurs during a revision of a tax return, the overpayment can be taken into account in a tax return in the subsequent tax periods without having to be a consecutive month.

There have been questions on how the implementation of TER will affect the year-end WHT payable since it applies a deemed effective rate during the January to November periods, the administration procedure for amending the WHT return prior to the TER regime, etc. Therefore, further administrative guidelines from the DGT on the implementation of this new regime are expected.

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