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TP challenges related to comparability analysis: Impact of COVID-19

Susy Suryani of Suryani Suyanto & Associates discusses the transfer pricing challenges and issues faced by multinational corporations in relation to comparability analysis.

Since declared as a pandemic in March 2020 by the World Health Organisation (WHO), COVID-19 has not only threatened human health, but it has caused various restrictions on activities. The measures adopted to curb the spread of the disease, which isolated most of the world’s population, have had a significant impact in both social and economic arenas.

The pandemic has a serious impact on business operations due to many disruptions in the global supply chain. In this situation, loss-making companies are at risk of having a dispute with tax authorities. Therefore, companies with low profits, or even losses, need to conduct TP analysis with appropriate economic indicators related to the COVID-19 pandemic.

This condition is a challenge for both taxpayers and tax authorities to carry out the steps to verify the arm’s-length principle, especially with regard to comparability analysis.

Comparability analysis: a key element in implementing the arm’s-length principle

The issue of TP in Indonesia relates to the potential tax disputes that may arise between tax authorities and taxpayers. The issuance of several regulations related to TP in Indonesia shows that the issue of TP is increasingly emerging to the surface, catching the attention of both taxpayers and the tax authority.

These regulations are: PER-43/PJ/2010, PER-32/PJ/2011, SE-50/PJ/2013, PMK-213/2016, PER-29/PJ/2017 and PMK-22/2020.

In PER-43/PJ/2010 as already amended by PER-32/PJ/2011, the arm’s-length price or profit is defined as follows:

“Arm’s-length price or arm’s-length profit is the price or profit that occurs in transactions between parties who do not have a related party under comparable conditions, or prices or profits that are determined as prices or profits that meet the arm’s-length principles”.

Referring to this definition, one of the important factors that must be considered in the arm’s-length analysis is related to the comparability analysis. According to the relevant regulation PER-43/PJ/2010 jo. PER-32/PJ/2011, comparability analysis is defined as follows:

“Comparability analysis is an analysis carried out by a taxpayer or the Directorate General of Taxes on the conditions in transactions conducted between taxpayers and parties who have a special relationship to be compared with the conditions in transactions conducted between parties who do not have a special relationship, and identify on the difference in conditions in the two types of transactions”.

In the same regulation, PER-43/PJ/2010 jo. PER-32/PJ/2011 in Article 3 paragraph (2), it is explained that the application of the arm’s-length principle is carried out with the following steps:

  1. Perform comparability analysis and determine comparisons;
  2. Determine the appropriate TP method;
  3. Apply the arm’s-length principle based on the result of comparability analysis and transfer pricing methodology
  4. Prepare the documentation of every step in determining the arm’s length principle in accordance with applicable tax law.

This is in line with the concept in paragraph 1.6 of the OECD TP Guidelines, which states that a comparability analysis is at the heart of the application of the arm’s-length principle.

OECD TP Guidelines

The application of the arm’s-length principle is based on a comparison of the conditions in a controlled transaction with the conditions that would have been made, had the parties been independent and undertaking a comparable transaction under comparable circumstances.

Based on paragraph 1.36 of the OECD TP Guidelines, there are some economically relevant characteristics or comparability factors that need to be identified in the commercial or financial relations between the associated enterprises in order to accurately delineate the actual transaction. These can be broadly categorised as follows:

  • The contractual terms of the transaction;
  • The functions performed by each of the parties to the transaction (FAR analysis);
  • The characteristics of property transferred or services provided;
  • The economic circumstances of the parties and of the market in which the parties operate; and
  • The business strategies pursued by the parties.

An analysis of economic conditions is needed to obtain a level of comparability in the market in which the parties to the transaction operate. The economic conditions that must be identified to determine the level of market comparability include:

  • Geographic location;
  • Market size;
  • Level of competition in the market and competitive position between sellers and buyers;
  • Availability of substitute goods or services;
  • Level of demand and supply in the market, both as a whole and regionally;
  • Power consumer purchases;
  • Nature and scope of government regulations in the market;
  • Production costs including land costs, labor and capital costs, and transportation costs;
  • Market levels; and
  • Transaction dates and times.

Based on local TP regulations and the OECD TP Guidelines, comparability analysis is an important and mandatory thing in the context of applying the arm’s-length principle.

The impact of COVID-19 on TP and comparability analysis

The COVID-19 pandemic affects all countries in the world and has had an impact on business chain disruption, demand fluctuations, and changes in business patterns from multinational enterprises (MNEs). It may have also caused changes in agreements between affiliates as they adjusted for the impact of the pandemic on business patterns.

COVID-19 constitutes a hazard risk, and it has led to unusual outcomes of other risks for some taxpayers, including:

  • Marketplace risk, as demand for some products and services has collapsed;
  • Operational risk, as the pandemic has disrupted supply chains and inhibited production; and
  • Financial risks, as borrowing costs for some industries have spiked and customers have delayed or defaulted on payments.

The OECD has also issued specific guidance related to TP, namely its Guidance on the TP implications of the COVID-19 pandemic. This publication explains that the pandemic creates unique economic conditions in the application of the principles of fairness and business practice.

Therefore, the OECD TP Guidelines are expected to help tax authorities and MNEs to find the right solution related to TP issues, due to the current economic conditions as a result of the pandemic.

The impact of COVID-19 can be said to have caused an anomaly condition, thus creating new challenges for tax authorities and taxpayers in conducting comparability analysis. So, in this case it requires a practical approach that can be used to overcome the lack of information, for example by making comparability adjustments.

The challenges associated with performing a comparability analysis may vary depending on the impact of the pandemic on the economically relevant characteristics of the accurately delineated transaction. For instance, where the arm’s-length price of a controlled transaction is determined on an annual basis, it will be necessary to perform a comparability adjustment for Financial Year (FY) 2020.

However, if a controlled transaction is covered by a pre-existing intercompany agreement, there may be no need to perform a comparability analysis for FY 2020, provided that the facts and circumstances of the accurately delineated controlled transaction have not changed.

A comparability analysis using public information and projected outcomes

In principle, any form of publicly available information regarding the effect of COVID-19 on the business, industry, and controlled transaction may be relevant in ascertaining the arm’s-length nature of an enterprise’s TP policy implemented for FY 2020.


“Companies with low profits, or even losses, need to conduct TP analysis with appropriate economic indicators related to the COVID-19 pandemic.”


Another potential approach to utilise in setting transfer prices is to compare budgeted or forecast financial results to those actually achieved, to approximate the specific effects of COVID-19 on revenues, costs, and margins.

The financial outcomes that taxpayers within a controlled transaction would have achieved, but for the impact of COVID-19, may provide useful information. This is particularly the case when assessing the financial impacts of the pandemic, such as a reduced sales volume or increased operating expenses.

Projected financial outcomes can help to determine, in light of the contractual terms and risk assumption of the parties, any appropriate resulting impact on intercompany prices.

Benefits and drawbacks of using comparable uncontrolled transactions

Information relating to the conditions of comparable uncontrolled transactions undertaken during the same period as the controlled transaction (‘contemporaneous uncontrolled transactions’) is the most reliable information to use in a comparability analysis. Such information reflects how independent parties behave in an economic environment that is the same as, or substantially similar to, the economic environment of the controlled transaction

In some instances, a comparability analysis can be performed using contemporaneous (or near contemporaneous) uncontrolled transactions. For example, publicly available commercial databases typically have current or recent information on financial transactions between unrelated parties, which may provide reliable information on which to base comparability analyses under current economic conditions.

Similarly, taxpayers are likely to have contemporaneous information on comparable internal transactions, which can be used to price related party transactions.

In other instances, it may be more challenging to use contemporaneous uncontrolled transactions as part of a comparability analysis, notably in the application of the transactional net margin method (TNMM). When applying the TNMM, taxpayers and tax administrations typically rely on historical information from commercial databases to set and test prices.

FY 2020 information will typically not be available until mid-FY 2021 at the earliest, because commercial databases use publicly available information derived from financial statements, and these financial statements tend to be lodged several months after the period to which they relate.

This suggests that in these circumstances, taxpayers will need to perform a comparability analysis based on available prior year financial information. Depending on the facts and circumstances of the case, taxpayers could also utilise whatever current year information is available to support their transfer prices.

There are many other difficulties related to this comparability analysis, which need to be considered by taxpayers and tax authorities. These include:

  • Reasonable commercial judgment supplemented by contemporaneous information to set a reasonable estimate of the arm’s-length price;
  • The outcome testing approach to test the arm’s-length price;
  • Can data from other crises be used to support price setting?;
  • The period of data used to evaluate arm’s-length pricing be established to support a comparability analysis;
  • Would price adjustment mechanisms be appropriate?;
  • What actions may be taken to evaluate the set of comparable companies or transactions used; and
  • Can loss making comparable be used?

The risk of TP audits in Indonesia

In order to prevent tax evasion in affiliated transactions, the Directorate General of Taxes, as regulated in Article 18 paragraph (3) of the Income Tax Law, has the authority to re-determine the amount of income and deductions. In such case, the Director General of Taxes is authorised to re-determine the amount of income and/or expenses in accordance with the situation if there is no special relationship between the taxpayers by using the price comparable method between independent parties, the resale price method, the cost-plus method, or other methods.

Therefore, technical guidelines for audits related to TP have been regulated by the Ministry of Finance through SE-50/PJ/2013. The regulation states in detail the stages of preparation, implementation, and reporting of TP audits.

Comparability analysis is also mentioned in the regulation, albeit in reference to tax, rather than TP, audits. It may be possible for tax authorities to not fully carry out each stage of the TP audit or comparability analysis, in testing the arm’s-length of affiliate transactions.

Particularly in extraordinary economic conditions as a result of the COVID-19 pandemic, the comparability factor that needs more attention than normal business conditions is business strategy and economic analysis. These two factors are often overlooked in comparability analysis, but the impact of COVID-19 is incredibly broad, affecting all aspects of business and the economy as well as the global supply chain.

These changes require taxpayers to comprehensively explain the impact of the pandemic on their business sector. Therefore, the tax authority is also expected to carry out each stage of the TP audit comprehensively, especially related to the aspect of comparability analysis.

If comparability factors, especially those related to business strategy and economic conditions, market analysis, industry analysis, supply chain and so on, are not carefully considered in TP examinations, disputes related to TP could increase.

This is a challenge for taxpayers to create very detailed and comprehensive TP documentation. However, it is also a challenge for tax authorities to carry out each stage of the audit in accordance with the applicable tax provisions and guidelines issued by the OECD.

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Susy Suryani

Managing partner
Suryani Suyanto & Associates
T: +62 21 290 35 889
E: susy.suryani@ssas.co.id

Susy Suryani Suyanto is the managing partner of Suryani Suyanto & Associates. She has become a tax specialist in matters relating to dispute resolutions, with a proven track record in assisting multinational corporations listed in Indonesia and overseas stock exchanges.

Susy has more than 11 years of experience as a tax consultant with Arthur Andersen and EY and has attended various trainings, including tax manager training in Chicago. She serves as the chairperson and in various leadership roles across tax chambers and forums in Indonesia.

In addition to holding bachelor’s degrees in accounting and law, Susy holds a masters’ degree in law from Padjadjaran University, where she graduated with a summa cum laude.


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