It is very common for a foreign investor to provide a capital loan to its subsidiary company in Indonesia. Pursuant to the tax issues on such transactions, Action Plan 13 has been implemented as a regulation in Indonesia. It is part of the Base Erosion and Profit Shifting (BEPS) Action Plans. In order to make investment to Indonesia easier, the Ministry of Finance has enacted Minister of Finance (PMK) Regulation Number 213/PMK.03 / 2016 concerning Types of Documents and Additional Information That Must Be Stored By Taxpayer (“TP DOC Regulation”). The TP DOC Regulation is a law in Indonesia that stipulates that every transaction – whether local or international –must to provide documentation known as a TP Doc.
Definition of Transfer Pricing
Based on Article 1 (5) of the TP DOC Regulation, Transfer Pricing is the pricing in an Affiliate Transaction. Further, according to Article 1 (6) of the TP DOC Regulation, the Transfer Price Determination Document is a document organized by the Taxpayer as the basis for the application of the Principles of Fairness and Normality of Business in determining the Transfer Price carried out by the Taxpayer.
Who is subject to performing TP Doc Regulation?
The object in Transfer Pricing is an Affiliate Transaction. Based on Article 1 (3) of the TP DOC Regulation, an Affiliate Transaction is a transaction carried out by a Taxpayer with an Affiliated Party. Thus, the subjects of TP Doc are Taxpayers and Affiliated Parties.
Based on Article 1 (2) of TP DOC Regulation, an Affiliated Party is a party that has a Special Relationship with a Taxpayer. According to Article 18 paragraph (4) of Law Number 36 of 2008 concerning the Fourth Amendment to Law Number 7 of 1983 concerning Income Tax, a Special Relationship is considered to exist if:
- Taxpayers have direct or indirect capital participation of at least 25% in other Taxpayers; the relationship between Taxpayers with participation of at least 25% in two or more Taxpayers; or the relationship between two or more Taxpayers referred to last;
- The Taxpayer controls another Taxpayer or two or more Taxpayers are under the same control either directly or indirectly; or
- There are family relationships both inbred and cemented in a straight lineage and/or to the side of one degree.
TP Doc Obligation
Taxpayers are required to keep three types of documentation: a Master File, a Local File (which must be available within four months after the end of the fiscal year), and a Country-by-Country Report (CbCR). They must all be submitted in Bahasa Indonesia. Taxpayers must also prepare a statement letter signed by the individual who prepared Transfer Pricing Documentation to declare when the Transfer Pricing Reports will be available. The statement letter does not have to be filed with tax returns, but it should be attached to the Master File and Local File for submission to the Tax Authorities if requested. In general, transactions that satisfy any of the following criteria must have a TP Doc:
- Gross Revenue (revenue from main business activities before deducting sales discounts, etc.) in the preceding year exceeding IDR 50 billion
- Tangible goods transactions in the preceding year exceeding IDR 20 billion
- Related party transactions with an affiliated entity located in a jurisdiction with a tax rate lower than Indonesia with no threshold applicable
- Taxpayers that qualify as a parent entity of a business group (a parent entity is defined as the entity directly or indirectly controlling the business group and is required to prepare consolidated financial statements under the Indonesian Financial Accounting Standards), with consolidated gross revenue of at least IDR 11 trillion.
Risk of Non-compliance
Failure to comply with Indonesian transfer pricing policies and procedures, as well as failing to provide the necessary documentation, may result in costly transfer pricing audits and significant additional tax liabilities or penalties.
How Schinder can Help
Schinder Law Firm is a leading corporate law firm in Indonesia, practicing Indonesian Company Law and Indonesian Investment Law. Our team of corporate lawyers in Indonesia and investment lawyers has forged a reputation for assisting various clients across the globe. As Indonesian business lawyers, we have extensive experience providing services in company registration, obtaining a mandatory business license and providing legal consultancy services. Following the TP DOC obligation, we have been entrusted by a dozen multinational companies to assist them with compliance and have been appointed as a permanent legal consultant to help them deal with daily legal matters. To learn more, contact us at firstname.lastname@example.org for further consultation.
Author: Budhi Satya Makmur