Taxpayers who have missed the deadline for preparing a local file as part of their transfer pricing documentation are still advised to complete the document, even after the required submission period has passed. Although documentation prepared after the deadline does not erase the delay, it can serve as supporting evidence when taxpayers face a tax audit.
Transfer pricing documentation requirements are governed by Minister of Finance Regulation (PMK) No. 172 of 2023 concerning the Application of the Arm’s Length Principle in Transactions Affected by Special Relationships.
Under the regulation, the master file and local file must be available no later than four months after the end of the tax year. For corporate taxpayers whose fiscal year runs from January to December, this means the documents must be available by April 30 of the following year, in line with the deadline for filing the tax return.
The documents must be submitted to the Directorate General of Taxes (DGT) when requested as part of tax compliance supervision or an audit. In such cases, taxpayers are required to provide the documents no later than one month after the date of the request.
The distinction between the obligation to prepare documentation and the obligation to submit it is important for taxpayers who have yet to complete their local files. Missing the deadline for preparing the documentation should not be a reason for companies to forgo preparing it altogether.
Once completed, the document can help companies explain their related-party transactions, including the basis for determining prices, functional, asset, and risk analyses, the transfer pricing methods applied, and benchmarking analyses.
By contrast, if a company has no documentation when an audit takes place, it may have to prepare its transfer pricing analysis only after the tax auditor has requested explanations and supporting documents.
This can create difficulties, particularly when the required data and information are scattered across different business units or must be traced back to the parent company and/or other affiliated entities.
Risks Associated with Related-Party Transactions
A local file essentially provides an overview of the related-party transactions conducted by a taxpayer during a tax year. It typically contains information on business activities, corporate structure and ownership, transactions affected by special relationships, and the application of the arm’s length principle (ALP).
In practice, preparing transfer pricing documentation can also help companies identify issues that have not previously been documented. These may include intercompany agreements that have not been updated, discrepancies between contractual terms and actual transaction practices, price changes that lack supporting documentation, or transfer pricing policies that have not been adequately formalized.
Identifying these issues is important because related-party transactions can be an area of focus during tax audits. Certain types of transactions also warrant closer attention, particularly intra-group services, management fees, royalties or transactions involving intangible assets, and financing arrangements with affiliated parties.
Do Not Wait for an Audit
For companies with outstanding local files covering several tax years, preparation can be prioritized based on specific criteria. One consideration is whether the relevant tax years remain within the scope of potential tax audits.
Companies can then prioritize material transactions and those that carry higher transfer pricing risks. This approach allows them to build their documentation progressively rather than waiting until the DGT requests the documents during an audit.
Moreover, PMK No. 172/2023 sets a maximum period of one month for submitting the documents after a request from the DGT. This is a relatively short timeframe if a company has to start the entire documentation process from scratch.
Preparing a local file after the deadline also does not mean the company can treat the document as having been available by the original due date. The delay remains a fact that must be acknowledged. Documentation prepared after the deadline should therefore be based on actual transaction facts and data and must not be intended to create the impression that it was available earlier.
For taxpayers who have missed the deadline for preparing their local files, completing the documentation still provides a stronger basis for explaining related-party transactions than having no documentation at all. A local file cannot change the fact that the deadline has passed.
Nevertheless, complete documentation can help companies develop arguments supporting their application of the ALP if the tax authorities subsequently request explanations regarding their related-party transactions.
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Writer: Yunianto Kurniawan | Editor: Thomas Rizal