An international tax dispute is one of the risks frequently faced by taxpayers when having transactions with companies from different countries or jurisdictions. This dispute offers a different type of difficulties compared to tax disputes in general (domestic). To settle it, taxpayers need not only an extra effort but also to be ready to bear high-cost risks and be patient as the Tax Court process cannot be completed in a day, but even a month.
Various tax disputes are commonly completed after taxpayers go through a long process of an objection and appeal in the Tax Court. However, other than those two options, there are other solvable approaches that may be used by the taxpayers having international tax disputes, either those related to transfer pricing or the implementation of the Tax Treaty. They are Mutual Agreement Procedure (MAP) and Advance Pricing Agreement (APA), dispute resolution approaches initiated by Organization for Economic Co-operation and Development (OECD). Even though Indonesia has adopted both solutions since 2010, until now the number of taxpayers utilizing them is still very low.
The Directorate General of Taxes (DGT) as the authority indirectly realizes the lack of dissemination of APA and MAP policies to the public. The Director of International Taxation of DGT, Prof. Poltak Maruli John Liberty Hutagaol stated it when having a conversation with the editorial staff of MUC TaxGuide in his room recently. To find out what is the policy direction and the DGT’s response to the APA and MAP issues, here is the summary of our discussion:
Other than an objection and appeal, is there any option to prevent or settle an international tax dispute?
Yes, there is, namely by applying for an Advance Pricing Agreement (APA) and/or a Mutual Agreement Procedure (MAP). MAP and APA are facilities for taxpayers. It is in line with the DGT’s spirit in serving taxpayers.
What makes APA and MAP different?
An APA or Advance Pricing Agreement is 100% (risk mitigation) about transfer pricing matters. In other words, the pricing of transactions for several years ahead can be mutually agreed (between the authority and the taxpayers). Thus, if it has been agreed upon, the transfer pricing will no longer be corrected. APA is a facility to prevent any international tax disputes and has become an international best practice.
To ensure that an APA runs well, taxpayers should be transparent. On the other side, the tax authority should also guarantee legal certainty to the taxpayers, including a risk resolution. Thus, the unlimited access is open to the taxpayers to obtain the legal certainty, including to face an appeal and MAP.
Meanwhile, an MAP is used to settle ongoing disputes. The disputes may be in the form of transfer pricing disputes or other forms as long as they are international tax cases. The international tax cases are usually classified into: (1) transfer pricing disputes; (2) tax treaty disputes or those related to the implementation of articles in the Tax Treaty that is inappropriate.
Would you explain the APA in more detail?
There are two types of APA, namely unilateral and bilateral APAs. In the unilateral APA, the parties involved are the DGT and taxpayers. For example, PT A has an affiliated transaction with PT B in X country. The, PT A wants to agree with DGT on the value of transaction with PT B for the next three years. PT A may apply for an APA to DGT, who will receive and discuss it with PT B without involving the Tax Authority in its origin country.
On the other hand, the bilateral APA may involve two or more tax authorities. For instance, PT A and PT B in X country jointly file an APA. PT A requests the APA to the DGT, while PT B files the APA to the tax authority in X country. If it is the case, the parties who will have a discussion are not the taxpayers and the DGT, but the local Tax Office and the Tax Office in the overseas country with the assistance and support from the respective taxpayers.
Which one is better for taxpayers, applying for the unilateral or bilateral APA?
For the unilateral APA, the parties negotiating are the taxpayers and the DGT. Thus, if any agreement is reached, the Tax Office in X country will not automatically receive it. The Tax Office in the other country may still make a correction to the transaction between PT A and PT B. However, if the two tax authorities have agreed (the bilateral APA), there will be no correction either made here or in the other country.
What are the requirements if taxpayers intend to use the APA?
They must meet the administrative requirements, submit an application, complete information on their finance condition, and on the profitability projection during the year that will be applied for. But, the main requirement is the willingness to be open. It would be difficult if there is no transparency. Therefore, there should be voluntary openness of the taxpayers since the ones who know the actual information are the taxpayers. The purpose itself is to anticipate any asymmetric information.
What is the risk if taxpayers are inaccessible?
If they are inaccessible, the DGT will most likely mistake a position during the negotiation. Or maybe, if we know that taxpayers are not open and we realize it, there will be no agreement reached.
How long is the process of completing APA negotiation?
Referring to the prevailing regulations, the process is three years at the longest (since the application is submitted) for the unilateral APA. For the bilateral APA, it is four years at the longest. Nonetheless, soon we will issue the updated regulations revising the prevailing Minister of Finance (MoF) Regulation Number 7/PMK.03/2015.
Which APA provisions that will change?
In MoF Regulation Number 7/PMK.03/2015 on APA, there is no rollback clause. Meanwhile, the rollback is one of the minimum standards of OECD that should be implemented. Therefore, the Draft of the Regulation should contain a rollback clause (the APA can be used for the transfer pricing in the previous fiscal years).
Next is about the period of the APA process. The difference is that if previously there were two stages of APA application, namely pre-lodgment or initial request or initial discussion. The sample of an initial request is like when taxpayers tell the DGT, “I want to apply for an APA”. Then the DGT will call them and say “Yes, you can.” Later, the taxpayers submit their formal application. In the updated regulation, it will be only the formal application (without pre-lodgment).
Another difference is that if formerly the APA application shall be submitted to the Directorate of International Taxation and Directorate of II Taxation Regulation. In the Draft, the application can be submitted to the Tax Office. Thus, the Tax Office will be fully aware since it is direct. Now, the Tax Office is still likely not aware when taxpayers are applying for an APA.
The APA application will be made similar to the objection application. Even though the party processing it is a Regional Tax Office, the application is via the Tax Office. It is aimed at making the Tax Office aware in case that their taxpayers whose Tax Assessment Notice has been issued file an objection now.
How is the process of disputes settlement through an MAP?
As I have explained earlier. An MAP is used for solving a dispute that has occurred. The dispute may be in the form of transfer pricing dispute or other forms as long as it is an international tax case. It may also relate to tax objects, e.g. dividends. According to us, the dividend is subject to 15%, but according to the other (party/tax authority), it should not be taxed or should be taxed of 10%. Or for example, this service is not categorized as royalty, but for them it is. Or we state, “You cannot use the benefits of the Tax Treaty, in the form of rate deduction.” The other party says, “I can use it”.
Is there any cost that shall be borne by taxpayers when choosing to take an APA and MAP?
The administrative cost is zero, but there will be a cost incurred by them in case they request assistance from consultants. However, in the United States, if you want to file an APA, the taxpayers should pay to the authority because the authority will negotiate with the authority of partner countries, and there will be a cost for that. It is not free. However, in Indonesia, it is always free since the beginning.
Even though the service is free, is it still efficient, Sir?
Let’s make a comparison using the previous case between PT A and PT B. Assume that PT B in the United States. For the tax authority in that country, in case that PT B files for an APA or MAP, IRS will request a payment. Meanwhile, PT A, when applying for an APA or MAP, will not incur anything. Then, Indonesia will negotiate with IRS.
If an agreement is achieved, PT A and PT B will enjoy the benefits. It is charged in the other country, not in Indonesia. We still have an obligation to serve because if we don’t, there will be a complaint from the United States considering that Indonesia does not run the inclusive framework commitment.
(Source: Directorate of International Taxation)
Can an MAP be implemented together with other dispute resolution processes e.g. an objection and appeal?
It has been always like that. If taxpayers propose two processes (a dispute resolution) simultaneously, based on Government Regulation Number 274 Year 2011 in the event that they are only in the objection stage and do not proceed to the appeal stage, the MAP process still runs. However, if the MAP has been approved and if the agreement is different from the objection decision, the decision will be corrected pursuant to the MAP decision. In other words, the MAP is more powerful.
But, if they file for an appeal and the MAP is completed earlier, the agreement will be presented in the Tax Court as a consideration. The Judges may not be forced because they should be independent and (the legal proceeding) cannot stop. The point is that the agreement will be presented in the Court and given to the Panel of Judges. They decide whether to use it or not.
If the court hearing session is finished earlier, we can inform the other country that this case has been resolved in the Tax Court so that the options are only two—either you accept the decision of the Tax Court since it is final and binding or we cease the MAP since we cannot have a different result from that of the Tax Court.
It means that even though the MAP is completed earlier, the court decision may be dissimilar?
It may be similar, so long as the taxpayers revoke their appeal application. Also, it is as long as they still have rooms for it. But, sometimes there is a requirement that in case that the court sessions are considered sufficient to resolve the case, the appeal cannot be revoked again. Therefore, if the session has not been terminated and the taxpayers still think that “the MAP is enough” then they should revoke their application.
So far, are there many taxpayers applying for and utilizing the APA and MAP in Indonesia?
The trend tends to increase. We cannot talk further back because in the international scope or in many countries, the MAP and APA are still new things. Even, last month we held SGATAR (Study Group on Asian Taxation Administration and Research) in Jogja consisting of 17 jurisdictions of members. Many jurisdictions have not owned the infrastructures for the MAP and APA.
In the Association of Southeast Asian Nations (ASEAN) area, Indonesia is still leading (in terms of the implementation of the APA and MAP). Perhaps, the jurisdiction that is not quite different from us is Singapore. I can say that we may not be at the top, but we are clearly not below them.
What are the referred infrastructures?
For instance, there are units (special for APAs and MAPs), regulations, human resources (HR), the readiness of the system and procedures used. In the Philippines, they have not had any regulation on MAPs nor any unit handling it. Meanwhile, Thailand is still in the process of development. On the other side, Malaysia still has no case. In the level of Asia and even world, we are not left behind. Even in the settlement stage for 2016, we are better than Japan.
So, how much is the percentage of the APA and MAP settlement level in Indonesia?
Since the MAP and APA are still considered new things, the available data are only for the year of 2016. Until now, if we check the data after 2015 or the period of 2016 to 2018, our completion rate is around 55%. Japan’s is 54%, while South Korea’s is even below as MAP and APA are still new things.
What factors affecting the settlement rate of an MAP and APA?
It can be split by country because only with certain countries we frequently have it [the settlement]. With other countries, they are transparent to each other. All cases are resolved with 100% agreement. I can give a good example, like the Netherlands. But for the difficult cases, we do not need to mention it.
I think the negotiation process with the Netherlands run really well. They were very fair and open during the discussion. The openness was sometimes like when they had information about us but we did not have theirs. The issue of information gap could be a problem. Usually, the tax authority in the Netherlands provided more complete information on their taxpayers.
When does Indonesia provide the APA and MAP facilities?
Indonesia has owned its regulation in the form of MoF Regulation Number 240/PMK.03/2014 since 2014. Previously, there was DGT Regulation Number PER-25/PJ/2010 in 2010. In practice, we have implemented the MAP since 2009. For the APA, I am still uncertain. But, after 2010, there have been cases coming in.
In the international scope, there was only BEPS (Based Erosion Profit Shifting) Action Plan 14 in 2015. Thus, when we see how OECD calculate the statistic of MAP, they will always separate the cases before 2016 and after 2015. The cut-off is on 31 December 2015 and 1 January 2016. They always distinguish the statistics, since the cases occurring after 2016 are considered those after the global consensus.
Until now, how many cases of the APA and MAP handled by DGT?
For the amount, there are 85 cases now, which are still being handled, including the MAP and APA.
It has been effective for a long time, why the number of cases is still low? What factors make the taxpayers hesitate using the APA and MAP facilities?
I have no idea about the main reason. Perhaps since the taxpayers have not been well-informed (about the MAP and APA). Because the facilities have not been a habit so they hesitate. Or, maybe they just don’t know the ins and outs of it. I cannot answer it with the exact reasons since it is from the perspective of the taxpayers.