Minister of Finance Regulation Number 172 of 2023 (PMK 172/2023) regulates two instruments to prevent and resolve transfer pricing disputes, namely the Advance Pricing Agreement (APA) and the Mutual Agreement Procedure (MAP). These two mechanisms aim to provide certainty regarding the tax treatment of affiliated transactions and reduce the risk of double taxation in cross-border transactions.
APA is a written agreement between a taxpayer and the Directorate General of Taxes (DGT), or between the tax authorities of two or more countries. This agreement establishes the transfer pricing method for affiliated transactions along with the underlying critical assumptions for a specific period. Under PMK 172/2023, there are three types of APAs: unilateral, which involves a single tax authority; bilateral, which involves two countries; and multilateral, which involves more than two countries.
An APA is valid for a maximum of five tax years. To apply, taxpayers must submit a formal application containing information on affiliated transactions, business conditions, the proposed transfer pricing method, and supporting documentation.
PMK 172/2023 also allows for the roll-back of an APA, which applies the agreement to tax years prior to the start of the APA period. This facility does not apply automatically and must be specifically requested in the APA application.
Its application requires three conditions to be met. First, there are no material differences between the facts and circumstances of the transactions in the tax year proposed for the roll-back and the APA period. Second, the DGT has not issued a tax assessment letter (SKP) for that tax year. Third, the proposed tax year is still within the time limit stipulated by prevailing laws and regulations.
In addition to the APA, PMK 172/2023 regulates the MAP as a cross-border tax dispute resolution mechanism. MAP can be used to address double taxation, including that arising from transfer pricing corrections by a country's tax authority. Through this mechanism, the tax authorities of the involved countries conduct negotiations based on the provisions of the Double Taxation Avoidance Agreement (DTAA).
The MAP application and process can occur concurrently with domestic objection or appeal procedures, provided it is allowed by the applicable regulations. However, the implementation of a MAP must still observe domestic procedural provisions, including the consequences of legally binding court decisions. The outcome of the negotiations between tax authorities is outlined in a mutual agreement document, which serves as the basis for adjusting tax obligations or issuing tax refunds.
Taxpayers should consider APA from the planning stage of affiliated transactions to obtain certainty regarding the transfer pricing method. If a cross-border dispute occurs, MAP can serve as an alternative resolution to mitigate double taxation risks. Taxpayers also need to consider the potential for a roll-back application and adequately prepare transfer pricing documentation. Transfer pricing experts can help ensure the documentation and dispute resolution strategies comply with applicable regulations.
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