Royalty payments and management service fees paid to overseas affiliates may come under scrutiny during tax audits, particularly when the Indonesian company reports losses while its related-party counterparty is subject to a lower tax rate than that applicable in Indonesia.
During an audit, the review is not limited to whether the transaction value is reasonable. Under transfer pricing rules, taxpayers must also demonstrate that the transactions actually took place and provided economic benefits to the recipient.
These requirements are stipulated, among other regulations, in Minister of Finance Regulation (PMK) No. 172 of 2023 on the Application of the Arm’s Length Principle in Transactions Affected by Special Relationships. Specifically, Article 13(1) of PMK 172/2023 sets out preliminary steps for testing service transactions, including demonstrating that the services were actually rendered, were needed, and provided economic benefits to the recipient.
Existence Test
PMK 172/2023 establishes preliminary requirements that must be met before certain transactions are tested for compliance with the arm’s length principle. These include services, the use of intangible assets or royalties, loans, asset transfers, and business restructurings.
For service transactions, including management services, taxpayers must demonstrate that the services were actually provided by the service provider and received by the recipient. They must also establish that the services were necessary and generated economic benefits for the recipient.
The evidence must further demonstrate that the services did not constitute activities undertaken for the benefit of shareholders (shareholder activities), benefits arising solely from a company’s membership in a corporate group (passive association), or incidental benefits.
For on-call services, taxpayers must also demonstrate that the services could not have been obtained promptly from an independent party without first entering into an on-call contract, as stipulated in PMK 172/2023.
Accordingly, contracts, invoices, and payment records represent only part of the overall assessment. Tax auditors generally first examine whether the services actually existed, including the activities performed, the parties providing them, the work delivered, and the benefits received by the company.
For royalty payments involving the use of intangible assets, an additional aspect requires attention: the DEMPE functions, which cover Development, Enhancement, Maintenance, Protection, and Exploitation.
In this context, companies must be able to explain which parties perform the functions related to developing, enhancing, maintaining, protecting, and exploiting the intangible assets.
Questions during an audit may concern which party makes decisions on asset development, which party bears the costs and risks, and what evidence demonstrates that these functions were performed. Legal ownership of an intangible asset, therefore, does not by itself resolve all questions concerning the substance of a royalty transaction.
If the preliminary requirements cannot be substantiated, PMK 172/2023 authorizes the Directorate General of Taxes (DGT) to redetermine taxable income in accordance with the applicable regulations. The risk for taxpayers is therefore not limited to disputes over the amount of the transfer price but may also extend to whether the transaction itself is recognized as having taken place.
Deadlines Matter
Timing is another important consideration. Minister of Finance Regulation No. 15 of 2025 (PMK 15/2025) on Tax Audits establishes several deadlines relevant to taxpayers preparing and submitting data requested by tax auditors.
Tax returns reporting losses fall within the criteria for tax audits. Audits may also be extended under certain circumstances, including cases involving taxpayers within the same corporate group or those suspected of engaging in transfer pricing transactions.
During an audit, requested data must be submitted within one month at the latest. Meanwhile, taxpayers have five working days to respond to a notification of audit findings (Surat Pemberitahuan Hasil Pemeriksaan/SPHP), with no extension permitted.
For companies paying management service fees to affiliates, these deadlines are particularly important because transaction evidence is often scattered across multiple sources. Supporting documents may include correspondence, activity reports, work deliverables, meeting minutes, timesheets, presentations, and project documentation.
Unlike goods transactions, which generally generate more structured transaction records, evidence of services may be dispersed across a company's operational activities. This can make compliance more difficult if the documentation is only assembled after an audit has begun.
Dispute Risks
Further risks arise when a dispute proceeds to the objection stage or the Tax Court. Supreme Court Circular Letter (SEMA) No. 2 of 2024 essentially provides that evidence specifically requested by the DGT during the audit or objection stage but not submitted generally cannot be considered again at the appeal or judicial review stage. Its application remains subject to the facts and assessment of each individual case.
This provision makes it increasingly risky for companies to postpone collecting documents until a dispute reaches the Tax Court. Evidence supporting the benefit test and DEMPE functions should therefore be prepared as transactions take place and submitted when requested during the audit or objection process.
Taken together, the regulations governing related-party transactions, tax audits, and dispute resolution form a sequence of requirements that taxpayers need to consider. PMK 172/2023 establishes the aspects that must be substantiated for certain transactions, including services and royalties.
PMK 15/2025 sets out the tax audit framework and deadlines for submitting data. Meanwhile, SEMA 2/2024 establishes consequences for evidence that was not submitted at earlier stages.
For companies making royalty payments or paying management service fees to overseas affiliates, documentation must therefore go beyond agreements and invoices. It should explain the activities performed, the need for the services or use of intangible assets, the benefits received, and the substance of the functions and risks undertaken by each party.
Such preparation is particularly important for companies that fall within the criteria for tax audits, including those reporting losses or engaging in related-party transactions that may attract transfer pricing scrutiny. By maintaining contemporaneous documentation, taxpayers can establish a stronger basis for explaining their transactions when auditors request supporting evidence, without having to reconstruct the entire course of activities after an audit has begun.
Also Read:
Audit Readiness: Preparing Local Files for Tax Scrutiny
Secondary Adjustments and Double Taxation Risks in Affiliated Transactions
Transfer Pricing: Testing the Arm’s Length Principle in Related-Party Transactions
Writer: Yunianto Kurniawan | Editor: Thomas Rizal