JAKARTA. Directorate General of Taxes (DGT) simplifies and strengthens procedures for the implementation of transfer price agreements on affiliated transactions or Advance Pricing Agreements (APAs), and also provides special treatment for Taxpayers affected by the Covid-19 pandemic.
This policy is contained in Director General of Taxes (DGT) Regulation Number PER-17/PJ/2020, which is an implementing regulation of Minister of Finance (MoF) Regulation Number 22/PMK.03/2020 on Procedures for Implementation of Advance Pricing Agreements.
APA is an initial agreement between multinational companies and tax authorities in connection with the determination of fair transaction prices between parties that have a special relationship. The aims are to avoid the risk of double taxation, provide legal certainty regarding transfer prices, avoid recurring tax corrections, and make financial planning more definitive.
APA is not only unilateral, where formed relationships involve only taxpayers with one tax authority. APA can also be bilateral/multilateral which in practice can involve two or more tax authorities (different jurisdictions).
Taxpayers can apply for APA in writing to the DGT through the Tax Office where it is registered. Based on PER-17/PJ/2020, Taxpayers can change the application for a bilateral APA to a unilateral APA within 10 days from the date of receipt of the written notification.
There are a few things that Taxpayers should consider when applying for APA.?First, the application for a transfer price agreement should refer to the arm's length principle.
Second, APA being applied does not result in making the company's operating profit smaller than the operating profit reported in the Annual Corporate Income Tax (CIT) Return three years before the filing.
Third, APA's application is fulfilled as long as the lowest profit level in the projected financial statements during the APA period is greater or equal to the lowest profit level in the Annual CIT Return for three tax years before the filing. The profit rate is the ratio between profit before tax or commercial net income and revenue or the ratio between profit before tax or commercial net income and total expenses.
DGT will consider the Taxpayer's application based on the criteria that form the basis for setting the transfer price, including: the identity of affiliated parties, affiliated transactions included in APA, the transfer pricing method used and how it is applied, as well as critical assumptions that affect the transfer price.
In the process, DGT can monitor and evaluate the compliance of the Taxpayer in implementing the agreement based on the conformity of the criteria agreed in the APA. In the end, the DGT may conduct a review or cancellation of APA if there is non-conformity with the APA.
Disrupted by Pandemic
Through PER-17/PJ/2020, the tax authorities also provide opportunities for Taxpayers whose businesses are affected by Covid-19 to adjust the profit level in the projected financial statements, accompanied by an explanation according to the predetermined attachment format.
Information that must be disclosed by Taxpayers in the projected financial report form affected by Covid-19 is: components of revenue, Cost of Goods Sold (COGS), gross profit, operating cost, operating profit, other incomes/expenses, and net income.
Also, there are financial ratios that need to be completed, including: ratio of gross profit to revenue, ratio of gross profit to COGS, ratio of operating profit to revenue, and ratio of operating profit to COGS plus operating expenses.
For an explanation of the projected financial statements affected by Covid-19, Taxpayers must explain the normal conditions adjustments related to revenue, COGS, operating expenses, and other incomes/expenses.
The enactment of the Regulation of the Director General of Taxes at the same time revokes PER-69/PJ/2010 on Transfer Price Agreements. This regulation comes into force on the date of the stipulation, which is 17 September 2020.
These provisions refer to the draft of the Job Creation Law the official text of which is still in the finalization process at the House of Representatives (DPR) Legislation Body. All new policies mentioned may still change considering that the Constitutional Court has opened the possibility of review for the Job Creation Law.?