Application for Advance Pricing Agreements (APA) can now be made multilaterally. This is stated in Government Regulation (PP) Number 55 of 2022, which came into effect on 12 December 2022.
Thus, there are now three types of APA applications that apply in Indonesia. Previously, there were two types of valid APA applications, as stated in the Minister of Finance Regulation (PMK) Number 22/PMK.010/2020. The first is a bilateral APA application, and the second is a unilateral APA application.
Unilateral APA is a written agreement between the Directorate General of Taxes (DGT) and the Taxpayer.
Then the bilateral APA is a written agreement between the DGT and the tax authority of the state government or partner jurisdiction bound by a tax treaty (P3B) and involves taxpayers.
Meanwhile, what is meant by multilateral APA is a written agreement between the DGT and several tax authorities of government partner countries or tax treaty partner jurisdictions or tax treaties that involve taxpayers.
The DGT will negotiate directly with the taxpayer in the unilateral APA process. The agreement made will then be binding on both parties.
However, this agreement only applies to affiliate transactions in Indonesia. Meanwhile, there is still a risk of being exposed to double taxation for cross-border affiliated transactions.
This risk arises if the tax authority of the tax treaty partner country does not agree with the unilateral agreement on the cross-border affiliate transaction.
Bilateral and Multilateral APA
Bilateral and Multilateral APA agreements are made to close the double taxation loophole that still exists, even though unilateral APA has been implemented. This is because the negotiation process in bilateral or multilateral APA applications will involve the partner country's tax authorities.
Thus, the resulting agreement will be binding not only between taxpayers and DGT but also with the tax authorities of partner countries.
Read: Understanding Three New Transfer Pricing Methods in Government Regulation Number 55 of 2022
Referring to Government Regulation Number 55 of 2022 Article 45 paragraph (4), an APA agreement can cover all or part of affiliated transactions within a period.
The agreement may be made either for transactions that have not yet occurred or if necessary, may also apply to the tax year preceding the APA period throughout that tax year (roll-back).
In addition, APA applications can be submitted for affiliated transactions between domestic taxpayers or between domestic and foreign taxpayers.
Regarding roll-back, according to PMK Number 22/PMK.010/2020, it can only be done if the transaction meets the following criteria:
- Materially, the facts and conditions of affiliated transactions are not different from the facts and conditions of affiliated transactions agreed upon in the APA;
- The stipulation has not expired;
- An income Tax Assessment Letter (SKP) has not been issued;
- No criminal investigation is being conducted or is currently serving a criminal offence in the field of taxation.
In general, the criteria for determining the transfer price in an APA application shall at least contain the following:
- Identity of the affiliated party included in APA;
- Affiliate transactions covered by the APA;
- Transfer pricing method used;
- How to apply the agreed transfer pricing method; and
- Critical assumptions are affecting transfer pricing.
The critical assumptions that affect the determination of the intended transfer price include at least the following matters:
- Written and unwritten contractual provisions related to related party transactions;
- The functions performed by each party to the transaction, the assets used, and the risks assumed to occur and be borne by the parties;
- Characteristics of the transaction and the parties to the related party transaction; and
- Economic conditions affect the determination of the transfer price.
How to Apply for APA
APA can be implemented in two ways. First, the taxpayer takes the initiative to submit a request to the DGT.
Second, the DGT issues a notification letter to the DGT on the application submitted by foreign taxpayers or tax authority officials in partner countries. This method usually occurs in bilateral or multilateral APA applications.
After the APA application is submitted, the DGT will discuss and negotiate to determine the transfer pricing method to be used, along with the estimated arm's length range.
The determination of the transfer pricing method is carried out by considering facts and critical assumptions in order to match changes in market conditions.
For APA to continue to reflect arm's length conditions, APA adjustments must be flexible and adapt to market conditions.
If both parties have agreed, the DGT will follow up by issuing a decree regarding the implementation of the transfer price agreement. Then, after the APA process is complete, the DGT has the authority to oversee the implementation of the APA.
The Urgency of APA's Existence
The existence of APA is very important, especially for companies with affiliated transactions. This is because, through APA, taxpayers can determine the transfer price, fair price and/or fair profit in advance agreed by the DGT or tax authorities in the tax treaty partner country.
Referring to The Organization for Economic Co-operation and Development (OECD), the definition of APA is an arrangement that contains criteria in determining transfer prices between related parties in a certain period before the transaction occurs.
That way, taxpayers can avoid the risk of being subject to double taxation. Meanwhile, on the tax authorities' side, the existence of APA can minimize the risk of tax disputes caused by differences in the analysis of a transfer price.
Besides being able to prevent taxpayers from being subject to double taxation, there are several other benefits that can be obtained from implementing APA.
First, APA can minimize uncertainty due to its ability to predict the tax treatment of international transactions. This can make companies more comfortable when making investments.
Second, taxpayers will have the opportunity to discuss and cooperate with tax authorities. It can reduce costly and time-consuming tax audits.
However, in addition to several advantages offered, APA also has several risks that must be considered by both taxpayers and DGT.
For DGT, the implementation of APA will increase the administrative burden, especially due to the use of Human Resources (HR) that were previously allocated to the audit, advisory and litigation processes. Moreover, there is no guarantee that the APA process will result in an agreement.
For taxpayers, the APA process that does not result in an agreement may pose another risk. Namely, the information provided can be used by the tax authority to conduct an audit. (ASP/KEN)