Indonesia's Vice President, Gibran Rakabuming, recently brought trade misinvoicing to the forefront and noted the risk of draining billions of rupiah from state finances. As defined by Global Financial Integrity, trade misinvoicing is the deliberate falsification of trade invoices to misrepresent the value, volume, or type of goods to shift capital across jurisdictions illicitly.
In practice, perpetrators use these maneuvers to evade taxes, avoid customs duties, and launder money. By manipulating invoice data, they disguise unlawful fund transfers as legitimate trade.
The Scale of Under-Invoicing and Over-Invoicing in Indonesia
The Vice President cited that under-invoicing data in Indonesia between 2014 and 2024 reached an estimated USD 401 billion, averaging USD 40 billion annually. Over-invoicing amounted to USD 252 billion, or roughly USD 25 billion per year, over the same period.
These figures indicate the significant fiscal impact of misinvoicing, particularly the erosion of tax revenue and customs duties. Manipulation of trade volumes and values deprives the government of tax and import duty revenue.
The Intersection of Misinvoicing and Transfer Pricing
From an international tax perspective, trade misinvoicing and transfer pricing are inextricably linked. Misinvoicing involves intentionally distorting invoice values, either by inflating them (over-invoicing) or deflating them (under-invoicing).
These practices are often used to facilitate tax avoidance, profit shifting, money laundering, or the circumvention of foreign exchange controls.
Transfer pricing, on the other hand, refers to the pricing of transactions between related parties, such as subsidiaries within a multinational enterprise. In principle, transfer pricing should reflect market conditions and adhere to the arm's-length principle.
The connection between misinvoicing and transfer pricing lies in the potential for abuse of transaction pricing. Transfer pricing that fails to comply with the arm's length principle can constitute disguised misinvoicing.
In such cases, trade invoices no longer reflect the true market value, leading to distorted financial reporting and inaccurate tax liabilities. Misinvoicing can practically become a vehicle to employ aggressive transfer pricing strategies.
Transfer Pricing Regulations in Indonesia
Article 18 of the Income Tax Law primarily governs transfer pricing in Indonesia. The law authorizes the Directorate General of Taxes (DGT) to recalculate taxable income and deductible expenses arising from related-party transactions to ensure they comply with the arm's-length principle.
More detailed guidance is provided under Minister of Finance Regulation (Peraturan Menteri Keuangan/PMK) Number 172/PMK.03/2023 concerning the Application of the Arm's Length Principle in Transactions Affected by Related Parties.
This regulation requires taxpayers to prepare transfer pricing documentation, including a local file, a master file, and a country-by-country report (CbCR). Indonesia also adopts international standards outlined in the OECD Transfer Pricing Guidelines. Commonly used methods include:
- comparable uncontrolled price (CUP);
- resale price method;
- cost plus method; and
- transactional net margin method (TNMM).
Practical Steps for Taxpayers
As the government intensifies its crackdown on misinvoicing, taxpayers must proactively manage their compliance profiles to mitigate audit risks. Essential measures include:
Conducting a transfer pricing self-assessment
Taxpayers should first assess whether they are required to prepare transfer pricing documentation. Under Article 16, Paragraph 3, of PMK Number 172 of 2023, this obligation arises if any of the following thresholds are met:
- gross revenue in the prior year exceeds IDR 50 billion;
- related-party transactions involving tangible goods exceed IDR 20 billion; or
related-party transactions involving intangible goods exceed IDR 5 billion.
In such cases, taxpayers must prepare both a master file and a local file.
Furthermore, under Article 16, Paragraph 4, of PMK Number 172 of 2023, resident taxpayers acting as the parent entity of a business group with consolidated gross revenue of at least IDR 11 trillion must prepare a CbCR.
Performing a comparability analysis
Taxpayers should also perform a comparability analysis to benchmark related-party transactions against comparable independent transactions.
By conducting the analysis, companies can demonstrate that their pricing complies with the arm's length principle. Although transfer pricing documentation does not fully eliminate the risk of misinvoicing allegations, it provides strong evidence that the arm's length principle underlies export and import values.
Trade misinvoicing and transfer pricing are closely intertwined in the context of cross-border tax potential abuse. Manipulated trade invoices can significantly erode state revenue, particularly from taxes and customs duties. Addressing these risks requires a combination of strong regulatory frameworks, effective enforcement, and international cooperation.
Also Read:
https://ideatax.id/articles/all-you-need-to-know-about-income-tax-on-bond-interest
https://ideatax.id/articles/navigating-tax-payments-in-the-new-coretax-system
https://ideatax.id/articles/article-26-withholding-tax-on-foreign-taxpayers
