Indonesian government has officially adopted Action 13 of Base Erosion and Profit Shifting (BEPS) on the Country-by-Country Report (CbCR). Starting Fiscal Year 2016, any affiliated transactions between companies, both inland and overseas, are obliged to prepare and submit a new concept of Transfer Pricing Document to the Directorate General of Tax.
Business and tax are interconnected inseparably. Business usually takes place where the potential of economic benefits exists. The same applies to tax in which it represents a country’s interest when a business activity runs. Globalization demands both things to improve in coping up with market and era development.
From business perspective, the spreading economic sources have encouraged many companies to widen their business wings by establishing affiliated companies or branches across nations. Further to win this tighter business competition, business expansion became the primary option to do for a company. It is not solely for profits, but an affiliated transaction may be useful for a business doer in spreading the cost and minimizing the tax through the transfer pricing policy.
Transfer pricing is a business practice commonly conducted in a business world, and is not something illegal in the eyes of law. However, it could be a problem if the transfer pricing is used to reduce the amount of tax, or even to avoid it. This business phenomenon is then becoming a concern of tax authorities around the world, following the affiliated transactions that are increasing from time to time.
Organization for Economic Cooperation and Development (OECD) has estimated that appx. 60% of the world trade total are the value from business intragroup affiliated transactions. Nevertheless, the amount of affiliated transactions is considered incomparable with the amount of tax that should be paid by the corporates. This is what eventually has pushed the G20 countries and OECD to curb the diminishment of tax revenue potential due to the Base Erosion and Profit Shifting (BEPS).
Accordingly, 15 anti-BEPS action plans are created, in which one of the recommendations (BEPS Action 13) obliges companies having affiliated transaction to prepare and report transfer pricing documentation with three standard approaches: Local file, Master file, and Country by Country Report (CbCR). Thus far, most of jurisdictions only require the preparation of local file as a form of transfer pricing documentation.
So far there have been 57 countries that have committed to adopt BEPS Action 13 and agreed on the CbCR exchange, even though some of them have not officially implemented it. Indonesia is one of the countries that has implemented the three approaches of transfer pricing documentation. The provision is stated in Minister of Finance Regulation (MoFR) Number 213/PMK.03/2016, issued and effective since December 30, 2016.
This MoFR 213 states that the taxpayers obliged to prepare and report CbCR are the parent companies with revenue more than IDR11 trillion or equivalent to EUR750 million (OECD recommendation). CbCR must be ready 12 months at the latest after the end of fiscal year, and it shall become the attachment of Corporate Income Tax Return (CITR) of the following year.
Meanwhile for master and local file, all companies that conduct affiliated transaction and have revenue more than IDR50 billion in the prior fiscal year are obliged to make and prepare both files. This obligation also applies for companies that in the prior fiscal year have affiliated transactions in the form of tangible goods in the amount of IDR20 billion or other transactions, such as service transaction, interest payment, dividend payment, and utilization of other intangible goods, amounting to more than IDR5 billion respectively. Both local and master file shall be available four months at the latest after the end of fiscal year. Even so, both documents are not necessary to be submitted to the tax office, since only the summaries that are required to be attached to the CITR of the related year. Local and master file shall only be submitted upon the request of the auditor.
The premiere objects of MoFR 213 are the affiliated transactions occurring during fiscal year 2016. Therefore, taxpayers whose book year ended on December 31, 2016, the local and master file must be available in April 2017 at the latest, and the summaries must be submitted along with the 2016 CITR. Meanwhile for CbCR, 12 month-period is given to prepare it. The parent companies still have more time until December 2017 to make sure its availability and to submit it to the tax office in April 2018 at the latest.
Secondary Filling Mechanism
Even though there are generally three types of transfer pricing documentations suggested by OECD and regulated in MoFR 213, Indonesia is actually not fully adopting BEPS Action 13. Directorate General of Taxes (DGT) states that appx. 70%-80% of BEPS Action 13 are accommodated in the MoFR 213. While, the remaining differs since it has to adjust with Indonesian business law condition.
As an example, there is no definition on ultimate parent company. As a matter of fact, DGT considered the necessity to request for CbCR from the subsidiaries under certain condition. Particularly for entities whose parent company is located in countries or jurisdiction that do not oblige the submission of CbCR. This is especially for subsidiaries whose parent entities are located in the country or the jurisdiction that does not require the preparation of CbCR.
The obligation to prepare for CbCR automatically becomes the responsibility of subsidiaries if DGT cannot obtain the document from the countries where the parent entities are domiciled, even though the domicile country’s government has executed the agreement on tax information exchange. This scheme is called Secondary Filling Mechanism.
DGT explains that it is not only Indonesia that implements the Secondary Filling Mechanism. The scheme is also applied by many countries because ideally BEPS Action 13 is adopted and CbCR is exchanged by countries across the world.
DGT also affirms that the obligation to prepare CbCR should only be borne by parent entities, regardless they conduct affiliated transaction or not. Therefore, it is possible if the parent entity is not required to prepare local and master file since they do not conduct affiliated transaction, but still obliged to report CbCR since the revenue has exceeded IDR11 trillion.
Speaking of the threshold of IDR11 trillion, it allows the requirement of several CbCRs in one business group. This condition occurs when there are some companies, in one business group, having consolidated revenue surpassing the threshold.
In doing so, the threshold of revenue of EUR750 million (equivalent to IDR11 trillion) as stated in BEPS Action 13 cannot be treated as basic standard. Because in practice in Indonesia, the companies that are not included in that qualification may still be obliged to prepare the transfer pricing documentation if referring to certain conditions stipulated by the government. To clarify this matter, within a short term, DGT will issue DGT Regulation to stipulate further the CbCR preparation and reporting procedure.
In addition, DGT will also launch a list of countries that have succeeded in conducting CbCR exchange. Therefore, the subsidiaries whose parent entity is domiciled in the country not in that list shall take initiative to prepare the CbCR. The problem is that CbCR is a policy newly applied globally in fiscal year 2016. Thus, the success of this exchange of CbCR across nations can be published by DGT next year, the soonest. In other words, while waiting for DGT’s releasing the technical regulation and the list of CbCR exchanger countries, the subsidiary in Indonesia is still mandatory to prepare the CbCR starting from now, in case of any urgent condition next year.
It is because, there is consequence for companies that are late in preparing the transfer pricing documentation, which is that the report will be deemed ex officio or become discretion of tax auditor whether to regard the document package or not. More serious sanction threatens the companies that do not prepare CbCR in spite of being obliged. Referring to Article 13 paragraph 13 of Taxation General Provision and Procedure Law (KUP Law), the taxpayers not complying with the reporting provision shall be subject to administration sanction such as an increase of 50% of the tax payable
Change of Basis
In compliance with the latest provision, the transfer pricing documentation must explain the transfer pricing process based on the condition at the time of the affiliated transaction (ex-ante basis). It is unlike the preceding provision which did not require it, thus the practice more focused on the transfer price test (ex-post basis).
The change in the approach is good to create a transfer pricing transparency culture in the corporates. Yet for the first year, the transfer pricing documentation with a new format becomes a big challenge for taxpayers. The cost of the compliance must be increasing to conform to this provision considering the duration given is limited, especially to prepare the master and local file.
As mentioned earlier, business and tax ideally should go hand in hand since both are considered strategic and affecting each other. However in reality, the business and the tax interest often contradicts in the area of law. The key is trust and transparency that should be maintained both by the authority and the taxpayers. If the tax provision is clear and the officer works professionally, the taxpayers’ trust to DGT will increase. The same applies to the taxpayers, if they comply with the tax provision and conduct their business transparently, this should lead to no need to be afraid in facing taxation problems.
