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Jakarta, Ideatax -- At the end of 2023, the government issued several new tax provisions. One of them is related to the application of the Arm’s Length principle. Through Minister of Finance (MoF) Regulation No. 172 of 2023, the government re-regulates the application of the arms-length principle in Indonesian taxation, such as correspondence adjustment, secondary adjustment, Transfer Pricing Documentation, Mutual Agreement Procedures (MAP), Advance Pricing Agreement (APA) and several other arrangements.
Related to transfer pricing documentation, the MoF Regulation regulates it separately in the fourth chapter, entitled Documentation on the Application of the Arm’s Length Principle. In the provision, among others, it is stated that taxpayers who apply the Arm’s Length Principle in the implementation of their taxation rights and obligations that are affected by special relationships are obliged to organize and keep documents containing fund data or information to prove that transactions conducted with affiliated parties are by the principles of fairness and business practices.
Taxpayers with special relationships must create three types of transfer pricing documents: master-file, local-file, and country-by-country report (CbCR). Taxpayers who in the previous year had a gross turnover of more than 50 billion rupiahs, conduct affiliated transactions with a value of more than 20 billion rupiah for tangible goods transactions, or 5 billion rupiah for the provision of services, interest payments, utilization of taxable assets, and other transactions, or the affiliated party is located in a country or jurisdiction with a lower income tax rate than in Indonesia must create the master-file and local-file.
On the other hand, taxpayers who are the parent company of a business group that has a consolidated gross turnover of at least 11 trillion rupiah before the reporting tax year must create a country-by report. Thus, if in 2023 the taxpayer, as the parent company, has a consolidated turnover of $12 trillion, then the taxpayer has the obligation to submit CbCR. This provision is often referred to as the primary filling mechanism, which is illustrated by the following chart:
Based on the figure above, it can be understood that a domestic taxpayer acting as the parent entity of a business group with a consolidated gross turnover of at least $11 trillion is obliged to create CbCR, master-file, and local-file if it has affiliated transactions. If the taxpayer does not have affiliated transactions, then the taxpayer only has the obligation to create CbCR.
In addition to the Primary Filling Mechanism, there is also a Secondary Filling Mechanism, namely the obligation to create CbCR for domestic taxpayers if the parent entity is a foreign tax subject and the jurisdiction of the parent entity abroad does not require the submission of CbCR, does not have a tax treaty with Indonesia, or has an information exchange agreement with the Indonesian government, but CbCR cannot be obtained.
It is necessary to know that prior to PMK 172 of 2023, transfer pricing documentation was regulated in PMK 213 of 2016 on Types of Documents and/or Additional Information Required to be Delivered by Taxpayers Conducting Transactions with Related Parties. Basically, what has been regulated in PMK 213 Year 2016 is adopted by PMK 172 Year 2023. However, there are some substantial differences, one of which is that the previous MoF Regulation did not stipulate a one-month compliance period in the event of a TP document request from the taxation authority in the context of supervision or audit. In addition, MoF Regulation 213/2016 also stipulates that the consolidated transaction threshold of $11 trillion only applies to the relevant fiscal year and not to the year before the reporting year. It is different from PMK 217 of 2023, which stipulates that the mandatory threshold of consolidated circulation of $11 trillion applies to the tax year before the reporting year.
That is a brief overview of the obligation to document the application of the arm's length principle before and after the enactment of PMK 217 of 2023. If you need handling or assistance in preparing the TP Doc, you can contact Ideatax.
