More than 80 countries are committed to apply the Country by Country Report (CBCR). So far, more than 50 countries have adopted it, including Indonesia. With the issuance of PMK Number 213 Year 2016, the provisions of Transfer Pricing Documentation (TP Doc) for business groups making affiliated transactions in Indonesia are changed significantly. Starting from tax year 2016, not only local file but also master file and CBCR are mandatory for business groups to prepare in a relatively short time.
To get a clearer picture of this policy, MUC Tax Guide interviews Achmad Amin, Deputy Director of International Tax Dispute Prevention and Handling of the Directorate General of Taxes. Here is the interview:
What is the background of the policy of Master File and CBCR submission?
In 2013, G20 endorsed Base Erosion and Profit Shifting (BEPS) Action Plan and promoted international transparency to tackle tax avoidance. OECD, based on the endorsement of G20 initiated BEPS project or BEPS action plan, with the main message for G20 country members and other countries in the world that is to handle BEPS in terms of mobilizing domestic resources jointly and under the same standard as well as at the same level of playing field. BEPS action plan is specifically to overcome unfair double non taxation. The point is that preventing tax planning from causing Taxpayers not to be taxed everywhere. It is unfair since the Country does not acquire anything while profit is all for Taxpayers. This is a hazard. Both from the morale perspective and the legal perspective, it cannot be justified.
For example, a company (Taxpayer) in Indonesia pays an interest or a management fee to its affiliate in another country. The interest or the management fee paid definitely reduces revenue. As a cost, it is treated as deductible expense in. But in the other country that does not tax income from abroad, it cannot be a taxable object. So, the interest or the management fee is not taxed everywhere and it is only beneficial for that Taxpayer, there is no contribution at all for the Country and for the World.
Later, the 15 action plans in the BEPS project were born, one of which is the Action No.13, CBCR. Indonesia as a G20 member and a BEPS Assosiate will surely strive to be committed to the CBCR application as part of a minimum standard of the BEPS action plan to perform. Once we are committed to CBCR exchange, the format and the threshold should be the same, even though the submission timeline and the procedure can vary according to the domestic provisions prevailing in each country. However, the obligation of CBCR preparation is not for all companies, only those meeting the certain criterion, namely parent companies with consolidated revenue value more than 750 million Euro or IDR11 trillion.
How is CBCR application in Indonesia?
The Indonesian Government has issued PMK Number 213 Year 2016 to regulate the obligation to prepare TP Doc. It is a package of TP Doc consisting of master file, local file and CBCR. All of which shall be made in Indonesian Language.
The content of CBCR covers data of group’s profit in each country, tax paid, and number of employees, to represent information of the group’s activity or functions performed by each business group in each country. And, this is going to be transmitted automatically, but only to countries having the same commitment and signing the CBC exchange agreement bilaterally or multilaterally. The CBC exchange agreement multilaterally is called CBC Multilateral Competent Authority Agreement (CBC-MCAA).
What is the urgency of CBCR?
Indirectly, we want to give some kind of alert: “You cannot play around again using group scheme!” There is already a mechanism to monitor it for achieving fairness. That is the first reason.
The second, we also require working paper for CBCR. The objective is to make sure that Taxpayers do not prepare CBCR carelessly, the sources should be clear. The use of CBCR is limited to risk management, thus it cannot be used as a base of tax audit correction. Later, only CBCR form is exchanged with the other country, not the working paper.
Basically, all types of unfairness, tax avoidance, can be mitigated well from the very beginning. Do not make Taxpayers unaware of arm’s length principle and later punish them. Since the first start, they should be well informed about what they are supposed to do. Incompliance should not be given any chance but later sanctions are charged.
Does it mean that DGT’s approach to Taxpayers is changed?
Our message contained in PMK 213 is basically our hope that Taxpayers applies the Arm’s Length Principle (ALP) since they set up prices. This is known as price setting approach or ex-ante basis. Based on this PMK, Taxpayers are expected to no longer apply ex-post basis for it is more fair from both Taxpayers’ side and DGT’s side. So, a Taxpayer should set a price based on the arm’s length principle. For example, when a Taxpayer sets profit = total cost + 5%. The 5% should have a clear base. It should be based on the ALP and documented in TP Doc (Master File and Local File).
Our bigger message is that we hope that transactions with prices already based on ALP will not be subject to potential corrections. It is unfair if affiliated transactions under ALP from the beginning of the year are still corrected. By contrast, Taxpayers who do not set prices under ALP are surely exposed to risks of correction by tax auditors. This will not happen if they set their prices under ALP. Even if at the year-end deviation occurs on the pricing set earlier, Taxpayers are welcomed to explain it in the TP Docs to make all fair and transparent.
Is transfer pricing something normal?
Transfer pricing is pricing set for transactions between affiliates. Pricing of sales, purchase, royalty, fee and any other form is categorized as transfer pricing when it is done with affiliates. Until this phase, there is no problem since affiliated transactions are basically normal and not prohibited by law. It becomes a problem only when there is a transfer pricing abuse. Abuse what for? It is for minimizing taxes in Indonesia.
So, the problem is not on the transfer pricing, but on the transfer pricing abuse. If tax planning is set for tax avoidance, it surely will become an issue. If it is done not under ALP, DGT has the authority to make corrections.
It is ironic when the business is running in Indonesia, using energy resources and labors at cheap costs, huge amount of waste discarded in Indonesia, trucks destroying streets, but the profit is transferred to overseas. The issue is when the profit is transferred. So, it is not transfer pricing that is prohibited. Transfer pricing is allowed so long that it is fair (ALP).
Please also remember that CBCR cannot be used to correct transfer pricing. It is only for risk analysis on transfer pricing to get the picture of which aspects transfer pricing risks arising within a company. The risk analysis result will provide recommendation or indication that the company should be audited or examined further regarding its transfer pricing
This acts as a diagnostic tool to spot the transfer pricing risks. If there is no risk, it will not be transfer pricing audit’s main priority. If there is, we will examine which transaction has the most optimum target of audits.
Does it burden Taxpayers even more?
It actually creates an easier condition for Taxpayers, encouraging them to comply with ALP. Those that comply will be seen as they do, and vice versa. So, we treat TP doc in a fair position to endorse a fair treatment. Compliant taxpayers will earn benefits and incompliant ones will get disincentives in the form of punishment.
What type of sanction for Taxpayers not complying with TP Doc Reporting?
In the past, the sanctions charged on Taxpayers’ incompliance with ALP or on failure of TP Doc preparation were the same, 2% per month under Article 13 paragraph (2) of KUP Law.
Now, it is different. For taxpayers not maintaining TP documents, the sanction under Article 13 paragraph 3 of KUP Law shall be 50% from the unpaid or underpaid tax.
For Taxpayers with late submission or even not having submitted their TP Docs until the timeline elapses, there will be discretion for Tax Auditors whether their TP Docs will be considered or not. In other words, it is an authorized discretion. If it is unfair based on the test result, the tax auditor will charge 2% per month sanction.
Meanwhile, for Taxpayers manipulating their TP Docs by using untrue information, criminal sanctions can be imposed. So, we treat everything fairly. Taxpayers who do not prepare TP Docs will be treated similarly as those not performing the bookkeeping obligation.
What if the information given in the Master File is incomplete for not obtaining data from the parent company?
This is the same as the provisions of bookkeeping. Bookkeeping shall at least cover financial report, profit-loss report, statement of changes in equity, etc. If a company prepares its financial statements not meeting the provisions, just go ahead. There will be legal consequences to bear by not fulfilling the bookkeeping obligation. The tax auditor will use their discretion on whether to consider it or not.In other words, TP Docs obligation fulfillment is similar to bookkeeping obligation fulfillment, as we are giving the ball to the Taxpayers as according to the self assessment principle.
We hope that companies have an adequately systemized and standardized TP documentation. All are prepared since the first start and made available at the right time so that they do not get puzzled upon tax auditors’ inquiries.