Indonesia since 2016 has officially adopted Base Erosion and Profit Shifting (BEPS) Action 13 in order to encourage the disclosure of taxpayer’s information related to transactions of special relationships between companies within 1 (one) group. It is one of 15 anti-tax base erosion and corporate profit shifting projects initiated by the OECD and G20 countries.
The implementation is regulated under Regulation of the Minister of Finance (MoF) No. 213/PMK.03/2016, which requires companies that conduct affiliated transactions preparation and reporting documentation of transfer pricing in accordance with the arm's length principle. There are 3 (three) required files, namely: Master File, Local File, and Country by Country Report.
With the promulgation of MoF Regulation Number 213/PMK.03/2016, the analysis of affiliated transactions in the preparation of a transfer pricing documentation will use an arm's length price setting or an ex-ante approach. In other words, the testing of the arm’s length nature of an affiliated transaction shall use comparable data or information before or when the transaction is conducted.
For example, when preparing a Local File using the Transactional Net Margin Method (TNMM), the comparable data for the same tax year is not yet available. Thus, the test may use the data from one or two previous tax years.
Is this ex-ante approach only intended for taxpayers? That is not how it is supposed to be. Ideally, these guidelines also apply to tax officials.
Exception for Audit
However, in reality, the tax audit procedures related to transfer pricing still use the old guideline, namely Director General of Taxes Regulation Number PER-22/PJ/2013. This regulation, which has a level lower than MoF Regulation, confirms that the arm's length outcome-testing is a reference in the tax audit process related to transfer pricing. In other words, the analysis of transfer pricing in the audit process requires comparable data or information after an affiliated transaction has been carried out (an ex-post approach).
The difference in treatment creates legal uncertainty, particularly for taxpayers. This goes against the principles of proper tax collection. Adam Smith, in his book "An Inquiry into the Nature and Causes of the Wealth of Nations", outlines the principles of tax collection based on 4 (four) components: equality and equity, certainty, the convenience of payment, and economics of collection. These 4 (four) principles are supposed to be the spirit of all regulators, but apparently not in this case.
So, which is the correct transfer pricing analysis approach, is it ex-ante or ex-post? Which legal level is higher, MoF Regulation Number 213/PMK.03/2016 (ex-ante) or PER-22/PJ/2013 (ex post)
Also, who must comply with these 2 (two) regulations: taxpayers, tax authorities, or all of them? If the regulator is confused about the answer, so do the taxpayers.
On the Horns of Dilemma
This is the dilemma; taxpayers are required to include a statement letter in the Corporate Income Tax Return (CITR) stating that the Master File and Local File are available not more than 4 (four) months after the end of the tax year. On the other hand, the taxpayers are requested to use comparable data for the current tax year while being audited by tax authorities. However, the comparable data for the same year are not necessarily available in a commercial database.
Ideally, the ex-ante approach, which has become the spirit of MoF Regulation No. 213/PMK.03/2016, is an improvement in encouraging the transparency and openness of affiliated transactions. On the other hand, the ex-post approach is a setback in the tax audit process related to transfer pricing. Instead of providing legal certainty, the implementation of those two regulations leads to confusion.
This is because the transfer pricing documentation prepared by taxpayers uses an ex-ante approach as if it is only a requirement for reporting a CITR, which tends to be ignored by tax auditors who until now still adhere to the ex-post approach.
In fact, based on Article 1 paragraph 25 of the KUP Law, the purpose of a tax audit is to verify the compliance with tax obligations of taxpayers. In terms of transfer pricing, the taxpayer’s compliance is useless because the Master File and Local File that they prepare, have the potential to be ignored or not recognized by tax auditors. This is because of the different perspectives adopted by the tax auditor team and taxpayers, ex-ante versus ex-post.
The difference in the comparable data period in the audit process is very likely to raise findings of irregularity in affiliated transactions by the tax authorities, even though the taxpayer has made every effort to fulfill the arm’s length principles.
Need for Certainty
In principle, there are 4 (four) audit criteria that are effective when referring to Circular of the Director General of Taxes No. 15/PJ/2018 regarding Tax Audit Policy.
First, the audit is completed and the disbursement of the audit results is optimal. Therefore, an audit should be able to minimize tax arrears and its process is in accordance with a predetermined period of time.
Second, the tax audit should be able to ease legal efforts. This means that the quality of audits must be improved so that the results are optimal and acceptable to taxpayers so as to minimize further legal efforts that can drain energy, time, and cost.
Third, the tax audit should ideally control tax refunds. This is related to the provisions of the preliminary refund of tax overpayment for taxpayers who meet certain criteria. As regulated in Articles 17C and 17D of the KUP Law, as well as Article 9 paragraph (4c) of the VAT Law, taxpayers who have been given preliminary refunds can be subject to post-audit examinations. Thus, tax auditors can focus more on highlighting taxpayer’s compliance, aside from those who have been given preliminary refunds.
Fourth, tax audits should create sustainable tax compliance. Continuous compliance can be seen from the dynamic of Tax Returns for the years after the audits.
All the purposes of the tax audit are noble, but in practice, it is often the other way around. The policy inconsistencies and multiple interpretations of regulations often obscure the objectives. The example of a case in this paper is of course different approaches in transfer pricing analysis in the process of documentation (ex-ante) and tax audit (ex-post).
Let’s bring the 3 (three) values of law proposed by the German philosopher, Gustaf Radbruch to mind: (1) justice; (2) expediency; and (3) legal certainty. In essence, law without certainty will lose its meaning because it cannot be used as a guide. Therefore, it is important for regulators in making policies, not to cause doubts (multiple interpretations) that may lead to conflicts.
So, what is the solution? Well, just be clear, do not be in the grey area like now. Just issue regulations that emphasize a single approach to transfer pricing analysis, which applies uniformly in both the documentation process and tax audits. What is the big deal?