The Overregulation of Arm’s-Length Principle

The Overregulation of Arm’s-Length Principle

PPN - 10 Feb, 2024 05:02 WIB

Jakarta, Ideatax -- The provisions regarding the arm's length principle (ALP) in Indonesia have been updated. Through Minister of Finance Regulation No. 172 of 2023 on the Application of the Arm's Length Principle in Transactions Affected by Special Relationships, the government re-regulates some of the implementing provisions of the arm's length principle applicable in Indonesia, which were previously regulated in Directorate General of Taxes Regulation No. PER-32/PJ/2011.


It is stated in the consideration that one of the objectives of the issuance of PMK 172 of 2023 is to provide justice, legal certainty, and convenience in the implementation of taxation rights and obligations related to transactions affected by special relationships. However, this seems to be far from the truth. Some provisions make it more difficult for taxpayers to fulfill their taxation rights and obligations.


For example, the provision in Article 13 of PMK 172 of 2023 states that the preliminary stage for loan transactions includes proving that the loan is by the actual substance needed by the borrower and used to obtain, collect, and maintain income under the provisions of the applicable laws and regulations in the field of income tax.

Furthermore, PMK 172 of 2023 also stipulates that loans that meet the arm’s-length principle must meet several characteristics, including that the creditor recognizes the loan economically and legally, there is a maturity date for the loan, there is an obligation to repay the principal of the loan, and there are payments by a predetermined payment schedule for both the principal and the return on the loan. In addition, loans that meet ALP rules are also required so that, at the time the loan is obtained, the borrower can obtain a loan from an independent creditor and repay the principal and yield of the loan.

The author argues that the loan characteristics as stipulated in Article 13 paragraph (4) of PMK 172 of 2023 are too much to regulate the loan business process carried out by taxpayers. Article 1754 of the Civil Code stipulates that borrowing and lending is an agreement by which one party gives the other party a certain amount of goods that are consumed due to use, with the condition that the latter party will return the same amount of the same kind and condition.

The provisions of Article 1760 of the Civil Code stipulate that if the loan period is not specified, then if the lender demands the return of the borrowed item, the court may grant a mere concession to the borrower after considering the circumstances. From this article, it can be seen that in loan transactions, the repayment period is not an absolute requirement that must be fulfilled in the loan agreement.

In general, the law of association, including debt and credit agreements, adheres to the principle of freedom of contract, which is commonly called contractvrijheid or partijautonomie. The principle of freedom of contract stipulates that legal subjects are given the freedom to enter into or implement contracts and agreements according to their wishes in determining the contents and requirements based on requirements, as long as they do not conflict with laws, decency, or public order.

Article 1320 of the Civil Code stipulates that there are four legal requirements for an agreement, including a debt and credit agreement, the agreement of the parties binding themselves, the capacity to make an agreement, a certain subject matter, and a cause that is not prohibited. Furthermore, Article 1338 of the Civil Code also stipulates that all agreements made by the law shall apply as laws to those who make them. The agreement cannot be withdrawn other than by agreement of both parties or for reasons determined by law.

Considering the above, it can be concluded that the provisions of Article 13 of MoF Regulation 172 of 2023 go too far in regulating loans. Although the requirement is intended to test the principle of reasonableness and prevalence of business between taxpayers, it does not mean that loan agreements that do not meet the provisions of Article 13 of PMK 172 are unreasonable and unusual.

The application of Article 13 of PMK 172 in 2023 is feared to provide difficulties for taxpayers in conducting transactions, especially with foreign parties, which will ultimately harm the ease of doing business in Indonesia. For information, in 2023, Indonesia's ease of doing business ranking will be 73 out of 190 countries (PanRB 2023). This ranking has not moved much since 2019. In 2019 and 2020, Indonesia's EODB ranking was 73 out of 190 countries (PanRB 2021).

Therefore, to harmonize the rules of the arm’s-length principle while improving the ease of doing business index in Indonesia, there are several things that the government should do, especially in providing arrangements related to loans. First, the government needs to rearrange the loan characteristics, as referred to in paragraph (4) of PMK 172 of 2023, which should be an alternative rather than a limitation. This means that if the taxpayer has fulfilled several of the eight loan characteristics, then the loan can be said to fulfill the arm’s-length principle. Second, the government needs to immediately make a derivative regulation in the form of a tax director general regulation to regulate more detailed criteria regarding loans that meet the arm's-length principle.


Third, the government also needs to regulate transitional provisions for agreements or contracts that have been signed by taxpayers.
If these three things can be fulfilled, it will not only make the ALP provisions easier to implement but will also increase public trust and participation in realizing the arm's length and fairness of the business.

PanRB. 2023. Gencarkan Peningkatan Investasi, Kementerian PANRB Susun Model Inovasi Pelayanan Publik . December 18. Accessed January 27, 2024.
—. 2021. Menggenjot Peringkat Kemudahan Berusaha di Indonesia. April 6. Accessed January 27, 2024.

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