Having a local file prepared in accordance with transfer pricing regulations does not automatically mean that a taxpayer is ready for a tax audit. Companies must also ensure that all data and supporting documents related to related-party transactions can be provided promptly, completely, and consistently when requested by tax auditors.
This preparedness is known as audit readiness, or a taxpayer’s ability to substantiate the contents and conclusions of its local file with relevant supporting data, documents, and information. In practice, transfer pricing audits may involve requests for documents beyond the local file itself, including additional evidence used to support, justify, and supplement the information presented in the file.
Such documents may include intercompany agreements, invoices, proof of payment, transaction implementation records, correspondence, and the basis for pricing decisions. Companies that focus solely on having a local file available may therefore encounter difficulties when tax auditors request supporting evidence for reported transactions.
PER-22 Guidelines
In the context of related-party transaction audits, taxpayers should distinguish between transfer pricing documentation requirements and guidelines governing tax auditors. This distinction is relevant to Director General of Taxes Regulation No. PER-22/PJ/2013 on Guidelines for Auditing Taxpayers with Special Relationships.
PER-22 does not require taxpayers to prepare or maintain a separate “PER-22 document.” Taxpayers’ transfer pricing documentation obligations are currently governed by applicable regulations, including Minister of Finance Regulation No. 172 of 2023 on the Application of the Arm’s Length Principle to Transactions Affected by Special Relationships (PMK 172/2023).
PER-22 was issued in 2013, before PMK 172/2023. It should therefore not be treated as establishing new documentation requirements for taxpayers.
Although PER-22 serves as technical guidance for tax auditors rather than a legal basis for imposing additional documentation obligations on taxpayers, it provides a clear picture of the evidentiary aspects of related-party transactions that are likely to be examined by the tax authorities. As part of audit readiness, conducting a self-assessment against the criteria outlined in these guidelines is one practical way to identify potential dispute risks at an early stage. Understanding audit procedures can therefore help taxpayers prepare supporting evidence for related-party transactions.
Limited Time
Document readiness is particularly important because tax audits impose deadlines for responding to requests for information. Under Article 34(2) of PMK 172/2023, transfer pricing documentation must be submitted no later than one month from the date of the request in the context of an audit, as stipulated under the regulation.
Article 18(2) of PMK 15/2025 provides five working days to respond to a notification of tax audit findings (surat pemberitahuan hasil pemeriksaan/SPHP). These time constraints make it impractical to begin collecting and validating data only after an audit has commenced.
Supporting documents for related-party transactions are generally distributed across different corporate functions. Contracts may be held by the legal department, invoices and accounting records by finance, proof of payment by treasury, and documentation of services rendered or other activities by the relevant business units.
Without prior preparation, collecting documents within the available timeframe can increase the risk of delays and inconsistencies in the information provided.
Data Reconciliation
In addition to document availability, information consistency is a key component of audit readiness. Transaction values reported in the local file should be reconcilable with accounting records, financial statements, and related-party transaction disclosures in the tax return.
Companies should also ensure that the terms of intercompany agreements reflect the transactions actually carried out. Discrepancies between contractual terms and the actual circumstances of a transaction may prompt further questions during an audit.
The same applies to other transfer pricing documents. Where relevant, tax auditors may compare information in the local file with the master file, financial statements, and related-party transaction disclosures in the tax return.
Differences in figures or information do not necessarily indicate a transfer pricing error. However, any discrepancies should be explainable based on the facts of the transaction and the relevant accounting and tax treatment.
Intra-Group Services
Intra-group services, including management fees and other support services, are another area where documentation readiness is essential. Companies should be able to explain the nature of the services provided, the parties receiving them, how the services were performed, and the benefits obtained.
An invoice or contract alone may not adequately demonstrate that the services were actually rendered. Companies should therefore consider retaining supporting evidence such as reports, deliverables, correspondence, records of activities performed, and other documents relevant to the transactions.
Similar preparation is necessary for financing and other transactions. The basis for determining interest rates, pricing methodologies, comparable data, and other documents supporting the transfer pricing analysis should be traceable and readily available upon request.
Audit Simulation
To improve preparedness, companies can conduct periodic transfer pricing readiness reviews. These reviews can begin by identifying material related-party transactions or those presenting transfer pricing risks, then tracing the figures reported in the local file back to the accounting records and tax returns.
Companies can subsequently check the availability of contracts, invoices, proof of payment, evidence of transaction implementation, pricing documentation, and analytical materials supporting their transfer pricing conclusions. They can also conduct simulations in which they respond as though they had received an information request from a tax auditor.
These simulations enable companies to measure how long it takes to collect the required documents and determine whether information provided by the tax, finance, legal, operations, and management functions is consistent. This process helps identify missing documents, unreconciled data, and transaction explanations that need further substantiation before an audit begins.
Other Instruments
Audit readiness does not replace other transfer pricing risk management instruments. For certain transactions, taxpayers may consider an advance pricing agreement (APA) to obtain advance certainty regarding the application of the arm’s length principle.
Meanwhile, where a transfer pricing adjustment creates a risk of double taxation, the mutual agreement procedure (MAP) may provide a relevant mechanism for resolving the issue. Accordingly, the local file, audit readiness, APA, and MAP serve distinct purposes in transfer pricing risk management.
Transfer pricing documentation compliance involves more than simply having a local file available. Companies must also ensure that the conclusions presented in the document are supported by relevant data and evidence. The question taxpayers need to answer is not merely whether the local file is ready, but whether they can substantiate every figure, transaction, and conclusion it contains when an audit takes place.
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Writer: Yunianto Kurniawan | Editor: Thomas Rizal
