The authority of the Directorate General of Taxes (DGT) in carrying out benchmarking, in the context of recalculating the amount of tax payable, has been changed.
Previously, in Law (UU) Number 7 of 2021 concerning Harmonization of Tax Regulations (HPP), this authority only applies to companies that have made commercial sales for five years.
However, in Article 32 paragraph (2) letter f of Government Regulation (PP) Number 55 of 2022, this authority also applies to companies that record fiscal losses for three consecutive years.
Then in Article 41 of the same regulation, in conducting benchmarking, DGT will compare financial performance in similar businesses. The comparison is made to determine the tax that should be payable to taxpayers.
Related to this, there are two things that DGT must consider as a policy maker and corporations that have made commercial sales for five years and recorded fiscal losses for three consecutive years. First, the company's industry characteristics. Second, the company's financial performance.
Each industry has characteristics that may differ from other industries. Therefore, taxpayers and tax authorities conducting benchmarking must understand the characteristics of the company being analyzed.
Because it could be, the losses experienced by a company occur due to the business strategy that must be carried out, not because of affiliate transactions. For example, losses experienced by startups.
For start-ups, the five-year period is not a time to make profits, but a momentum to drive business growth, using investment funds from venture capital.
During this period, the company is willing to make losses and allocate most of its capital to investment in order to increase the value of the company.
In this regard, we can reflect on the example of an American technology company, Amazon. The company, founded by Jeff Bezos, suffered losses in the first five years of its existence because it had to focus on investing in IT systems and expanding its business.
Another example is a startup company with Unicorn status from Indonesia, Gojek Tokopedia (GOTO), which has been losing money since its inception in 2015. The minus record occurred because the company focused on investment activities.
In fact, throughout 2021 alone, GOTO poured funds of IDR 92 trillion to expand its business through Mergers and Acquisitions even though it still made a loss.
Thus, taxpayers who still experience losses after 5 years of commercial operations need to prepare data and studies. This will be useful if the company has to prove that the losses experienced are not due to affiliated transaction factors.
Benchmarking of financial performance is usually represented by the condition of a company's operating profit. While in practice, profit comparison can be done with the Transactional Net Margin Method (TNMM) transfer pricing method.
Meanwhile, TNMM is a transfer pricing method that compares the percentage of net operating income to costs, sales, assets, or other transactions between affiliates, with other parties that do not have a Special Relationship.
According to The Organization for Economic Co-operation and Development (OECD), as stated in the OECD Transfer Pricing (TP) Guidelines 2022 paragraph 2.77, in assessing the company's profit performance using the TNMM Transfer Pricing method, there are several factors that affect the profit performance of a company, such as:
- Threat of newcomers
- The competitive level of the company
- Management efficiency and individual strategy
- The threat of substitute products
- Variable cost structure
- Differences in cost of capital, and
- The level of the company's business cycle.
The problem is, the factors that affect the profits of each company aforementioned, are not the same. Thus, not all affiliated transactions can be analyzed using TNMM because in some cases this method is not reliable enough when compared to other methods.
For example, suppose a company has a large capital structure that can produce goods with a large capacity and already has a strong brand in the market. In that case, it will not be comparable to a company whose capital structure is small, and difficult to increase production capacity.
Rules in Other Countries
Unlike the rules in Indonesia, the transfer pricing provisions in Singapore are more detailed as they cover categories of companies that have high transfer pricing risks.
Quoted in Inland Revenue Authority of Singapore (IRAS) Number 7.5, Singapore tax authorities will conduct transfer pricing audits on taxpayers based on risk indicators. For instance, the number of significant cross-border related party transactions, the company's business performance over time, and the possibility of understating taxable profits through inappropriate transfer pricing.
If a company experiences recurring losses, IRAS will first categorize it as a risky company. So, the company will not be audited or corrected to transfer pricing immediately.
There are several other additional indicators that IRAS will use, to assess whether a company needs an audit or not.
In line with IRAS, The Australian Tax Office (ATO) or the Australian tax authority will also classify companies based on transfer pricing risk. The companies that have a high transfer pricing risk according to the ATO are those that meet the three indicators.
First, cross-border transactions with a significant number of affiliated parties. Second, companies that pay less tax than the industry standard. Third, companies that have just restructured their business which affects cross-border transactions.
Need for Affirmation
Actually, the comparison of a company's performance with other companies in similar industries can be used as an initial screening by DGT, in finding indications of tax avoidance practices. As for the proof, other criteria and assessments are needed.
In addition, in the implementing rules, it needs to be emphasized that companies with domestic affiliated transactions that do not utilize losses of Corporate Income Tax (CIT), Final Income Tax, and Sales Tax on Luxury Goods (STLG) are excluded from this provision. This is because the affiliated transactions carried out only between affiliated parties in the country have the same tax rate. Only the audit area is different.
Therefore, it is interesting to wait to see what kind of benchmarking technical regulations that will be issued by the government in the future. (ASP/KEN)