Transfer pricing procedures and regulations have evolved quickly in Indonesia but restrictions put in place by the tax authorities have resulted in difficulties for taxpayers.
While taxpayers have won appeals in the Tax Court in Indonesia in recent years, results are still unpredictable when it comes to transfer pricing disputes.
“Some assumed that this was because the Tax Court was not ready or familiar with the transfer pricing issues to make a conclusion,” said Iwan Hoo of KPMG. “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 because the Indonesian Tax Office (ITO) appeals have lost transfer pricing verdicts to the Supreme Court, causing further delays and uncertainty for the taxpayers,” added Wara Kertiningrum, also of KPMG.
Because of the uncertainty surrounding litigation in the country, taxpayers are seeking alternative dispute resolution options, including mutual agreement procedures (MAP) and advance pricing agreements (APA).
However, there is no official information available on MAPs or APAs in Indonesia.
“Based on informal discussions, several [APAs] have been already initiated and some are on the brink of conclusion,” said Hoo.
The authorities’ stance
The Indonesian authorities have a tendency to ask for detailed information relating to dispute resolution or audit in a relatively short time frame.
This means taxpayers’ transfer pricing documentation is crucial for keeping tax payments down; and they should not disregard the underlying documents to their documentation either.
“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,” said Kertiningrum.
Transfer pricing audits in Indonesia are still considered to be an exhaustive process. As a result, companies may, more than ever, want to explore their APA or MAP options, despite the ITO only being in the early stages of implementing these programmes, because the authorities want to create a proven track record in this field.
Examples of recent challenging positions by the ITO
· 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.
How to take advantage of this information
Taxpayers looking to explore their options outside of litigation need to make sure that a MAP or APA is the right option for them in a business sense.
You should be aware that transfer pricing audits are often triggered automatically, instead of being determined based on a risk assessment.
The Indonesian tax system dictates that taxpayers should make significant income tax pre-payments and significant amounts may be withheld on payments to taxpayers in the form of domestic withholding taxes.
A company’s actual tax liability is not determined until the end of the year when it files its annual corporate income tax return. The company will then receive a rebate if its prepayments and tax credits exceed its actual liability.
Once more, taxpayers are warned that a request for a corporate tax refund will automatically result in audit.
