The increasing involvement of Indonesia in international trade has brought about a significant volume of international transactions conducted by multinational corporations. As a result of the number of cross-border transactions, transfer pricing (TP) controversies in Indonesia are increasingly common, and have become a more significant concern for multinationals.
The emergence of the advance pricing agreement (APA) and the mutual agreement procedure (MAP) in recent years as possible dispute resolution mechanisms are seen as rays of hope for taxpayers. This article, which follows on from Part I, explores the regulatory background, progress, challenges and the anticipated future of APAs and MAPs in Indonesia.
One of the most recent astonishing developments of the Indonesian tax regime is the introduction of a new tax law.
In October 2021, the Indonesian House of Representatives ratified the harmonisation of tax law No.7/2021. While this brings about significant changes to the existing tax laws — among others, the general provisions and tax procedures law, income tax law, and VAT law — this new tax law also boldly included a specific provision on MAP.
Such a move by the Indonesian government shows that Indonesia is putting great importance in solving issues of double taxation among treaty countries, as this is the first-ever tax law in Indonesia that includes a specific provision on MAP.
“As a result of the number of cross-border transactions, transfer pricing (TP) controversies in Indonesia are increasingly common, and have become a more significant concern for multinationals.”
One of the most notable changes in the new law on MAP is that it provides greater flexibility in terms of how taxpayers can file a MAP application. The new law on MAP now provides an option for taxpayers to select disputed cases to be resolved either under MAP or under domestic dispute resolution, even if the said cases are under the same tax assessment letter. Such flexibility was not available in the previous Ministry of Finance Regulation No.49/PMK.03/2019 (PMK-49) which became effective on April 26, 2019.
Another notable change in the new law on MAP also includes the authority now granted to the Directorate General of Taxes to issue a MAP verdict, which acts as a legal ground to grant a tax refund to taxpayers. This process is proven to be much more effective and efficient than the previous tax refund process under PMK-49 where tax refunds were granted to taxpayers through a more tedious process of amending tax assessment letter.
While the initiative taken by the Indonesian government to solve issues on double taxation have shed light on bilateral negotiations and boosted the confidence of taxpayers, it is unfortunate that such an initiative is not paired with a quick response in terms of revising the existing regulations on MAP.
While the new provision stipulated within the new tax law provides an updated guideline on the MAP application, the existing and still active PMK-49 is yet to be legally revoked or amended. This causes confusion among taxpayers whose MAP application is still being processed, considering that PMK-49 provides conflicting guidance on some procedural requirements with the provisions stipulated within the new law on MAP. To date, no formal clarification has been made by the Directorate General of Taxes on this matter.
Further, despite all the perks within the new law on MAP, it still has not provided a much-needed solution to stop a tax administrator imposing TP correction on a taxpayer’s profit, without specifically indicating which related party transaction is not in accordance with the arm’s length principle. The imposition of a correction on such basis prohibits taxpayers from filing for a MAP, as taxpayers are not provided with any information on which treaty partner they should file a MAP to.
Parallel to the development of MAP, APA has also become increasingly appealing to taxpayers as a reliable solution to the ever-growing TP disputes and double taxation issues, even more with the recent introduction of the Ministry of Finance Regulation No.22/PMK.03/2020 (PMK-22) on guidelines for the establishment and implementation of the APA, which became effective on March 18, 2020. PMK-22 replaces the previous Ministry of Finance Regulation No.7/PMK.03/2015.
PMK-22 introduces a much simpler, and yet effective, APA application for taxpayers, where a tedious process of APA pre-filing has been omitted in the new regulation and replaced with a simpler application form. This way, taxpayers will not spend unnecessary time preparing pre-filing documents, only to find out that they are not legally eligible to apply for an APA application.
As part of an effort from the Directorate General of Taxes to reduce TP disputes and double taxation issues during the tax audit process, and to encourage taxpayers to comply with TP obligations in Indonesia, PMK-22 also allows domestic related party transactions to be filed for Unilateral APA. Further, PMK-22 also introduces a possible roll-back period on prior open years, on top of a maximum of covered period of five fiscal years.
While the development of APA in Indonesia is carefully designed to make it attractive to taxpayers and to offer a greater solution to TP disputes and double taxation issues, statistically speaking, it seems that only a handful of taxpayers in Indonesia are aware of this possible solution and are interested in utilising it.
It can be seen from statistical data published by the DGT on its website, the number of cases being requested from year-to-year are as shown in Table 1.
|Year||Number of cases requested||Total|
|Unilateral APA||Bilateral APA|
Despite the clarity of the regulations, as well as the cooperativeness of the DGT, the APA and MAP processes are not without their own challenges. Some of the challenges that taxpayers will have to note before deciding on whether to pursue APA and MAP processes are:
- While taxpayers may be able to exert a certain amount of control when it comes to a unilateral APA process and/or domestic remedy, bilaterally negotiated APA and MAP processes can keep taxpayers’ involvement to a minimum;
- There is always a likelihood or possibility that any bilaterally negotiated APA and MAP process results in a disagreement between tax authorities; and
- The profit split method (if not, other TP methods that provide entrepreneurial return for Indonesian taxpayers) is still the preferred TP method for Indonesian tax authorities in APA and MAP negotiations.
While no notable progress has been observed in the initial years of their introduction, the submission of APA and MAP applications have been picking up pace since 2016, following the release of the final reports on the 15-point action plan to address BEPS by the OECD/G20. The growth has also increased because of Indonesia’s active participation as a member of the OECD/G20 Inclusive Framework (IF) on BEPS. This is particularly in line with Action 14 of the BEPS Action Plan, which reflects a commitment by countries to make dispute resolution mechanisms more effective by implementing a minimum standard on dispute resolution (comprising of specific measures to remove obstacles) and an effective and efficient mutual agreement procedure. The plan also calls for the establishment of a monitoring mechanism to ensure that such commitments are being effectively satisfied.
In 2016, the DGT also began internal restructuring to cope with the demands of international tax. The organisation sought to increase its capacity and capability in handling international tax cases, particularly MAP and APA cases. The DGT consequently formed the Directorate of International Taxation, which was appointed as the competent authority (CA) that negotiates the APAs and MAPs.
The DGT has also been highly proactive in handling applications while maintaining transparency over the number of APA and MAP requests being made and closed over time. The 24-month timeline for MAP (and effectively also for bilateral APA) negotiations, as prescribed within PMK-49, has also sped up the process. However, the implementation of such a timeline is not as strict when it comes to the applications submitted before the regulation came into effect. Both APAs and MAPs, when they relate to the same taxpayers, may also be negotiated simultaneously.
Based on the APA and MAP statistics published by the DGT on its website, the number of cases being closed from year-to-year are as shown in Table 2.
The OECD website indicates that the average time needed to close MAP cases, relating to TP, is as shown in Table 3.
|Year||Number of cases closed||Total|
|Average time needed to close MAP cases relating to TP in 2016|
|Cases started before January 1, 2016||39.98 months|
|Cases started as from January 1, 2016||N/A|
|Average time needed to close MAP cases relating to TP in 2017|
|Cases started before January 1, 2016||42.21 months|
|Cases started as from January 1, 2016||29.67 months|
|Average time needed to close MAP cases relating to TP in 2018|
|Cases started before January 1, 2016||48.78 months|
|Cases started as from January 1, 2016||19.89 months|
|Average time needed to close MAP cases relating to TP in 2019|
|Cases started before January 1, 2016||63.12 months|
|Cases started as from January 1, 2016||31.33 months|
|Average time needed to close MAP cases relating to TP in 2020|
|Cases started before January 1, 2016||63.54 months|
|Cases started as from January 1, 2016||52.77 months|
The data published shows a notable number of MAP and APA cases being closed from the beginning of 2016. Similarly, the average time needed to close MAP cases (relating to TP) are evidently shorter now than when compared to the average time needed to close MAP cases (relating to TP), which had started prior to January 2016, except for 2020 where there was a COVID-19 pandemic. These statistics seem to imply that the progress of MAP and APA cases have seen significant improvements, as the number of cases being closed increases and the time required to complete a MAP decreases.
The closed cases may not necessarily result in favourable outcomes for taxpayers, as the majority of MAP cases being closed in 2016 eventually resulted in the Indonesian and partner country tax authorities agreeing to enforce decisions issued by the tax court. Closed MAP cases in 2017 represented an outcome with varying degrees of success, where a good number of closed cases resulted in the full or partial elimination of double taxation.
So far, the implementation of APAs and MAPs, which have been concluded, are observed to follow the steps prescribed within the prevailing regulations, portraying them as being quite clear. Nonetheless, where an APA has been concluded, taxpayers are expected to submit an annual compliance report within four months after the end of the fiscal year. APA renewals are also observed to take a shorter time to conclude when compared to new APA applications.
Some of these observations seem to imply that the DGT is treating both the APA and MAP process seriously, reflecting the spirit in which the regulations were drafted and enacted. This thereby brings down the myths that these efforts are merely gimmicks where realisations and tangible progress was unlikely.
Despite the progress made so far, taxpayers will need to take note of the potential issues that may arise when applying for APAs and MAPs. Understanding the timing and potential changes brought about by the upcoming regulations are just as crucial.
Like the available domestic remedy, APAs and MAPs may not necessarily address double taxation and still provide uncertainty in terms of outcome. Strategic considerations and cost-benefit analysis are still required in deciding if APA and MAP provides taxpayers with greater chances of obtaining the required tax relief. For better or worse, with careful planning and due care, there is no denying that APA and MAP may just be an appropriate dispute mechanism for taxpayers.
Charles Setia Oetomo is a partner and adviser at GNV Consulting. He provides tax and customs consultations, as well as advice on TP and trade regulatory issues, to a broad range of clients with different backgrounds and industries.
Previously, Charles worked at Deloitte as a partner in its Southeast Asia team, leading multiple lines of functions. He has also worked for the Big Four firms as an external auditor, which has given him expert knowledge of financial accounting.
Felic Setiawan is a director of TP services at GNV. He specialises in advising multinationals on designing and implementing their TP policies, assisting with documentation, as well as attending TP audits and dispute resolutions.
Before GNV, Felic worked at two of the Big Four firms in Indonesia. As a transfer specialist, he regularly delivers TP seminars and contributes to the firm’s publications.
Wirawan Sasongko is a senior manager for TP services at GNV.
Wirawan’s focus includes TP advisory services, TP compliance, MAPs, tax audit and domestic disputes resolutions (i.e. tax objections and appeals) involving TP subjects for national and multinational clients.
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