This content is from: Indonesia

Indonesia’s rapid transfer pricing evolution

Indonesia issued rules covering the master file, local file and country-by-country reporting in 2016, but the implementing regulations for CbCR were not completed until late December 2017. Iwan Hoo, Aaron Brunier and Fachrur Rifqi Nugroho of KPMG review the final transfer pricing regulations.

Local transfer pricing legislation changes

The only change from a regulatory point of view was the introduction of implementing regulations for country-by-country reporting (CbCR):

  • If a qualifying competent authority agreement is available and the country of residence of the parent entity requires the filing of a country-by-country (CbC) report, the Indonesian subsidiary is only required to file a notification;
  • A list of qualifying agreements is available on the website of the Director General of Taxation (DGT) and the list is still growing;
  • The regulations do allow for surrogate filing;
  • The threshold for filing the CbC report is a consolidated revenue of IDR 11 trillion ($765 million) for a domestic group or €750 million ($874 million) for an overseas group, or the local threshold in the country of residence of the parent entity;
  • The filing deadline for financial year 2016 is 16 months after the financial year end;
  • For subsequent years, the deadline is 12 months after the financial year end;
  • The online notification report and the CbC report must be submitted online in XML, unless that is not possible;
  • The deadline for US-based groups was extended until May 31 2018, at the last moment; and
  • The DGT issued a template for the preparation of the CbC report. There are not many differences with internationally accepted standards, although some parts have to be translated into Indonesian.

The local file and master file regulations have remained unchanged since they were first issued in 2016 and no additional guidance has been issued. The general TP guidance was last updated in 2011 and has not changed since.

Release of new administrative guidance by local tax administration

Indonesia has already implemented regulations covering debt-to-equity ratios, allowing a maximum ratio of four to one. Other than that, there have been few developments in this field. It is rare for the DGT to issue public rulings.

The DGT, during public presentations, announced that it intends to raise matters related to business restructuring and exit charges, but nothing has been formalised yet.

BEPS-related developments

There have been no official announcements on any regulatory changes, although the DGT on a few occasions has mentioned it intends to tax global trade and internet commerce, either by deeming them a permanent establishment or requiring the foreign entity to incorporate a local subsidiary in Indonesia. However, no details are available as yet.

Developments in relation to country-by-country reporting

Master file and local file

The local file/master file concept is now in its second year after its introduction in late 2015. The master file requirements are generally in line with international standards, although more information must be provided, such as a list of shareholders, business activities and management of each entity in the group. Also information on which entities in the group contribute to the development of intellectual property should be disclosed.

One other major difference is the emphasis the regulators put on the application of the ex-ante concept in the setting of the transfer prices. This is based on Article 5.27 of the OECD guidelines. However, as a practical matter, auditors in the field tend to concentrate on actual numbers (and thus taxes paid) rather than following theoretical approaches. This leads to many disputes, in particular when budgets and actual numbers differ substantially.

Although not a new development, an important matter to consider is the deadline involved, this being four months after the end of the financial year. This is particularly important for the master file, bearing in mind that the master file and local file must be prepared in the local language.

Country-by-country reporting

As noted above, the relevant notification must be submitted online. However, what many taxpayers have discovered to their surprise is that the format in practice is very different from the published form. Instead of completing the form and uploading it, the online notification consists of a number of yes/no questions which guide the taxpayer through the process. An added complication is that the CbC report must be in the local language.

There were also some practical issues during the filing process of the CbC reports, with tax office servers going down and last-minute regulatory changes, but overall we encountered few issues.

Indonesia is also one of the 68 signatories to the CbC multilateral competent authority agreement. At the time of writing, Indonesia has 49 activated exchange of information arrangements in place, although the effective date of some of the agreements is after 2016, so taxpayers with parent entities in for example Malaysia, Singapore and Switzerland cannot yet enjoy the filing exemption. In mid-June, the US and Indonesia announced the completion of the negotiations on a bilateral competent authority agreement. The exchange of information regarding the CbC reports will apply for fiscal years commencing on or after January 1 2015.

US tax reform

The Indonesian regulations contain various thresholds for related-party transactions, and if the transactions do not exceed a certain amount, neither a master file nor a local file need to be prepared by the taxpayer. However, based on the prevailing guidance, the Indonesian Tax Office (ITO) is still able to question those transactions.

Under the new US tax reform, the corporate income tax rate is reduced to 21%. As this rate is lower than the Indonesian rate of 25%, this means that the TP documentation thresholds do not apply and the taxpayer needs to document each transaction with related parties in the US, regardless of materiality.

Transfer pricing compliance activities by local tax administration

A review of the TP policies and practices is almost always included in tax audits and many Indonesian taxpayers are subject to an annual tax audit due to the peculiarities of the Indonesian tax system. The main focus is often on services, with the tax auditors arguing that services have not been rendered or that they provide no benefits. In this respect it is very important to collect contemporaneous documents to provide proof that the services were indeed rendered and beneficial. Any reports, memos, training records, and so on, will be invaluable to substantiate the service charges. The level of any mark-up on costs is often not so much under discussion.

A second issue that arises in many audits is licensing transactions, which are often frowned upon. The issues raised often concentrate on the duration of the transaction if the contract has already continued for many years. In particular, royalties for know-how can come under such scrutiny. Again the most effective focus for defence is often in providing tangible evidence of the existence of the know-how through patents and registrations.

Finally, benchmarking analyses are also often subject to scrutiny, with the ITO either performing its own benchmarking analysis or rejecting selected (high-margin) comparables in the taxpayer's benchmarking study. Adjustments based on single-year data are frequently imposed, although the regulations indicate that multiple-year data should be used.

Dispute resolution

There are no important developments in dispute resolution, although the DGT is actively negotiating advance pricing agreements (APAs) and mutual agreement procedures (MAPs) with various jurisdictions, both within the region and outside.


The knowledge and understanding of the tax court judges is increasing. However, one of the main complications with the litigation process is that it is very time-consuming. Having to attend ten or more hearings is the norm. The most commonly used strategy is to provide as much tangible evidence as possible to the judges.

In a number of TP-related cases, taxpayers have succeeded in convincing the judges that the pricing was correct. However, if the taxpayer successfully appeals its case in the tax court, the ITO now more often than not appeals to the Supreme Court, adding more time to the dispute resolution process.

Other relevant updates

There have been no other TP-related updates or notes from the DGT other than the CbC reporting in the past year. The Indonesian TP regulations are already quite extensive and cover various topics, such as technical guidance, audit instructions, MAPs, APAs and regulations on the master file, local file and CbC reporting. Hence, no further formal guidance on existing regulations is needed. However, if the DGT holds true to its intention to introduce exit taxes, or would want to introduce other issues, more regulations will be required.


The TP landscape has been evolving rapidly since the publication of the first TP regulations in 2010. It now seems that the ITO, DGT and taxpayers understand the importance of implementing correct TP policies and how to address many technical issues. The judiciary also seems to be coming along, and Indonesia is falling more closely in line with nations with more advanced TP practices. However, frequent tax audits and related issues still make Indonesia a complicated jurisdiction in which to operate.

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