TRANSFER PRICING

Transfer Pricing
- FAQ
kpmg.com/id
Proud recipient of
Indonesia Transfer Pricing Firm
of the Year Award - 2010 from the
International Tax Review Asia
1 | Transfer Pricing - FAQ
Transfer Pricing - FAQ

This document is intended to provide a brief introduction to
Transfer Pricing (TP) in the Indonesian context and equip you
with the knowledge to consider whether your business is not
only compliant in this eld but sufciently prepared to withstand
scrutiny. It is hoped that, by way of concise and insightful
answers to some frequently asked questions, the document
will put you in a position to assess your companys potential
exposure to adjustments and any need for planning or adaptation
of arrangements.
We recommend that you ensure that your overseas afliates
and shareholders are aware of the content and that you contact
a transfer pricing professional if you feel that any matters need
attention.
What is Transfer Pricing?
An unofcial translation of the
straightforward denition provided in
the 2010 Indonesian Transfer Pricing
Regulations
1
is:
The determination of price in a
transaction between parties having
Special Relations.
It is essentially the price related
entities charge each other for goods,
services or any other transactions (for
example licensing of intangibles and
intercompany loans). Commercial
dealings between unrelated entities
are generally subject to market forces
and a mutually agreeable price is
negotiated. However, within a Multi
National Enterprise (MNE) or a group of
entities under common ownership or
control, conditions may differ and this
may inuence the pricing and the level
of prots.
Tax systems in most countries apply
the separate entity approach within
a multinational group each entity is
treated (taxed) as a separate entity.
In order for the tax to apply on the
appropriate tax base, group entities
must be taxed as if they were dealing
with independent parties, free from
the conditions arising from their special
relationship which may lead to the
distortion of prices.
The OECD and member countries
recognize the potential impact and
the effect it may have on global trade
and investment. In efforts to reach a
standardized approach to the problem
the OECD has issued transfer pricing
guidelines
2
, most recently updated in
July 2010, which state that Transfer
prices are signicant for both taxpayers
and tax administrations because they
determine in large part the income and
expenses, and therefore taxable prots,
of associated enterprises in different tax
jurisdictions.
The almost universally accepted
standard to determine these prices
between related parties is the arms
length principle, under which related
parties essentially should set their
prices as if they were unrelated. If
prices or conditions differ from those
in comparable transactions between
independent parties, tax authorities may
adjust the prots accordingly.
As MNEs become increasingly global
in their outlook, they attract increased
attention from tax authorities around
the world. However, please note that
in the Indonesian context transactions
between Indonesian entities are also
covered by the Indonesian Transfer
Pricing Regulations.
What are special relations?
In Indonesia, Article 18 (4) of the
Income Tax Law 7/1983, as amended
by Law 36/2008 (ITL) denes a special
relationship as:
Capital participation > 25% (direct,
indirect or shared);
Control through management or
technology; or
Family relationships.
The denition differs from that in the
OECD Model Tax Convention, that
used in other countries and that used
for nancial statements disclosure
under accounting standards. This can
potentially cause issues on the other
side of the transaction (the overseas
counterparty the Indonesian taxpayer
is transacting with) and with the
scope of and approach taken to local
documentation coverage.
What are the common
misperceptions about transfer
pricing?
Consider this quote from a US Senator:
a technique known as transfer
pricing carves an estimated $60
billion a year from the US Treasury as
it combines tax planning and alchemy.
Transfer pricing is the corporate
equivalent of the secret offshore
accounts of individual tax dodgers.
Or consider this quote from Agus
Martowardojo - Indonesian Minister of
Finance in August 2010:

.....transfer pricing costs the state
budget 127 trillion per annum....
It seems transfer pricing is perceived
as a powerful tool which is used to
produce unsavory results. The truth is
that transfer pricing IS powerful and
increasingly important but, despite
the reference to alchemy, no magic is
involved in the determination of transfer
prices. Transfer prices are determined
on the basis of the economics involved
in the transaction - the functions
performed, assets used and risks
incurred by the related parties.
Prots are not shifted offshore illegally
through transfer pricing. Prots can
only be siphoned off illegally through
inappropriate transfer pricing. Many
offshore jurisdictions have highly
developed transfer pricing regimes and,
with increased globalization and a huge
surge in double tax treaty networks and
Exchange of Information agreements,
there is less scope for such inappropriate
arrangements and more need for robust
and reliable policies and supporting
documentation.
How to mirror arms length price
methodologies
In reality it is of course impossible
to replicate exactly what would have
happened if parties would have been
unrelated. Hence the OECD Guidelines
prescribe ve transfer pricing methods
to be considered for use as appropriate
in particular cases. These are the:
Comparable Uncontrolled Price (CUP);
Resale Price (RPM); Cost Plus (CPLM);
1
Directorate General of Taxation (DGT) Regulation No. PER 43/
PJ/2010
2
OECD Transfer Pricing Guidelines for Multinational Enterprises
and Tax Administrations
3 | Transfer Pricing - FAQ
Prot Split (PSM); and Transactional
Net Margin (TNMM) Methods. In the
Indonesian context, each of these
methods should be considered in this
particular hierarchical order, despite the
OECD advocating that the approach
should be to use the most appropriate
method in the circumstances. The
OECD and the ITL also permit taxpayers
to apply methods other than the above
ve methods, whereas the Indonesian
Transfer Pricing Regulations do not
contain such a provision.
Although virtually all jurisdictions
embrace the OECD transfer pricing
guidelines, there may be local
differences in the practical approach.
Therefore, taxpayers cannot rely
on a one size ts all approach - the
requirements of tax authorities in
different countries need to be met.
What are the obligations for
Indonesian taxpayers?
Ever since the introduction of the ITL
in 1983 the Indonesian Tax Ofce (ITO)
has been entitled to make transfer
pricing adjustments
3
. Guidelines on
the determination of such adjustments
were issued to tax auditors in 1993 and
disclosure of related party transactions
has been required in the corporate
income tax return since 2002 but it
was not until 2007 that any specic
reference was made to documentation,
though no details of the requirements
were provided. Since 2009 taxpayers
have not only been obliged to disclose
additional details of their related party
transactions in their annual tax returns,
but also to declare that certain transfer
pricing documentation is available.
The clearest guidance yet can be
found in the 2010 Indonesian Transfer
Pricing Regulations, in which the ITO:
conrms the applicability of the arms
length principle; outlines the basic
requirements to determine that prices
comply with this and conrms the
documentary requirements.
Note that no specic industry
exemptions are mentioned in these
regulations, although it may be argued
that where special tax arrangements are
in place (such as for PSC contractors)
these regulations need not apply.
Why does the transfer pricing need to
be controlled and monitored?
Transfer prices should be based on
the economic circumstances and the
accepted way to analyse these is to
consider functions performed, risks
assumed and assets used. Businesses
change and these changes should be
reected in the transfer pricing policies.
Be it an expansion of a distributor
into manufacturing activities or the
outsourcing of certain functions to
related parties, the transfer pricing
policies should follow the changes in the
circumstances.
It is prudent to plan ahead. Decreasing
prot levels could attract the attention
of the tax authorities, or even to
automatic tax audits should the taxpayer
be in a refund position. And it is not
only corporate income tax that can be
affected by changes in transfer prices.
Consider the various withholding taxes,
value added tax, luxury goods sales
tax and even customs duties. All have
their interaction with the prices charged
between the parties involved.
How do the Indonesian Tax
Authorities detect defective transfer
pricing policies?
The reporting of continuous losses or
low levels of corporate taxation and
evidence of signicant transactions
with related parties are likely to attract
the attention of the ITO and lead them
to question a taxpayers transfer pricing
arrangements. Attention to such matters
is now fairly widespread and many
taxpayers have received questions from
ITO Account Representatives or from
tax auditors.
In addition to scrutiny of the disclosure
information and declarations in the
corporate income tax return the ITO
issued benchmarking ratios for a range
of different industries (currently 117).
Whilst these ratios may not be used as
a basis to make adjustments, reporting
prot and other ratios below these
industry norms may raise red ags.
How do I determine that an
intercompany transaction is at arms
length?
There is no universal roadmap to arms
length pricing. Usually, the rst step
is to analyze the transaction, including
the functions, assets and risks. Next,
the most appropriate transfer pricing
method should be determined. Finally,
that method should be applied to the
transaction so that an economic analysis
can be conrmed. These three steps are
the basic building blocks to prepare the
transfer pricing documentation.
How can I use transfer pricing to add
value to my business?
Designing and applying robust transfer
pricing policies and preparing transfer
pricing documentation will in the long
run save time and money. Having proper
transfer pricing documentation available
will put the taxpayer in a much stronger
position to defend its transfer pricing
policies, potentially avoiding additional
taxes and penalties. Moreover, less
management time is usually required in
the case of tax audits.
And why not use the transfer pricing
documentation process as a scal
health check on the company? During
the process other tax issues can be
identied and addressed accordingly.
Or even opportunities for cost savings
or process improvements could be
discovered.
How often do I need to review
my transfer pricing policies and
documentation?
In transfer pricing nothing is black or
white and this is no exception. Taxpayers
make this decision based on a number
of considerations, usually including their
risk appetite, materiality and complexity
of the transactions and the (perceived)
attitude of the tax authorities on either
side of the transaction. A prudent
strategy is to at least review and update
the transfer pricing documentation
on an annual basis. Depending on a
number of factors, economic analyses
could be updated or redone.
Section or Brochure name | f
How can KPMG Indonesia assist the
taxpayer?
KPMG Indonesia has a well-established
team of dedicated professionals who
can, acting alone or in cooperation with
global and regional colleagues, assist
businesses across the full range of
transfer pricing issues, including:
Compliance: assisting with the
preparation of transfer pricing
documentation, including functional
and economic analyses;
Dispute resolution: assistance with
transfer pricing audits, objections,
appeals as well as mutual agreement
and advance pricing agreement
procedures
4
;
Planning: assistance with the setting
of transfer prices or transfer pricing
policies; and
Restructurings: providing the
economic rationale for any changes in
prot levels.
3
Article 18 Paragraph (3) of the ITL
4
Administrative guidance with regard to Mutual Agreement
Procedures (MAP) and Advance Pricing Arrangements (APAs)
was issued by the DGT in late 2010.
2011 PT KPMG Hadibroto, and Indonesian limited liability company and a member rm of the KPMG network of independent
member rms afliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in
Indonesia
The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International
Cooperative (KPMG International).
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual
or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information
is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information
without appropriate professional advice after a thorough examination of the particular situation.
Contact us
Graham Garven
Head of Transfer Pricing
T: + 62 (0) 21 570 4888
E: Graham.Garven@kpmg.co.id
www.kpmg.com/id
TRANSFER PRICING
Transfer Pricing
- FAQ
kpmg.com/id
Proud recipient of
Indonesia Transfer Pricing Firm
of the Year Award - 2010 from the
International Tax Review Asia