Government Regulation (PP) Number 55 of 2022 on Adjustment of Regulations in the Income Tax (PPh) Sector is the latest legitimization for the state to "interfere" in the special relationship of taxpayers, as well as supervise affiliated transactions influenced by these relationships. The regulation issued at the end of 2022 is a mandate from Law Number 7 of 2021 on Harmonization of Tax Regulations (HPP Law).
For common people, they may ask, what is the need for the state to interfere in the special relationship of its citizens?
The context of this regulation does not mean that the state can arbitrarily enter the private space or interfere in the personal affairs of its citizens, but rather to encourage transparency and information disclosure related to transactions between related parties that have tax obligations. The reason is that related parties can influence the determination of transaction prices (transfer pricing) or business agreements for certain purposes, the impact of which can be beneficial or detrimental to the related parties (stakeholders).
Stakeholders who need disclosure of transaction information are not only investors, creditors, and shareholders, but also tax authorities. This is because the disclosure of information related to transactions between parties affected by special relationships can be the basis for tax determination according to applicable regulations.
Definition of Special Relationship
In Government Regulation Number 55 of 2022, specifically in Article 33 paragraph (1), the government defines a special relationship as follows:
A special relationship is a state of dependence or attachment of one party to another party caused by ownership or capital participation, control, or blood or marital family relationships that result in one party being able to control the other party or not stand free in running a business or carrying out activities.
Special relationship due to ownership or capital participation is deemed to exist in the case of:
- A taxpayer has direct or indirect capital participation of at least 25% in another Taxpayer; or
- Relationship between Taxpayers with capital participation of at least 25% in 2 (two) Taxpayers or more or relationship between 2 (two) Taxpayers or more last mentioned.
Meanwhile, special relationship due to control includes:
- One party controls another party or one party is controlled by another party, directly and/or indirectly;
- Two or more parties are under the control of the same party directly and/or indirectly;
- One party controls another party or one party is controlled by another party through management or the use of technology;
- The same person is directly and/or indirectly involved or participates in the managerial or operational decision-making of two or more parties;
- The parties who are known commercially or financially or claim to be in the same business group; or
- One party claims to have a special relationship with the other party.
Then, what is meant by a special relationship because of a family relationship by blood or marriage is a relationship that is in a straight line and/or to the side of one degree.
Provisions regarding special relations in Government Relation number 55 year 2022 are actually nothing new. This is more about affirming as well as expanding the scope of a special relationship—which was previously described in Minister of Finance Regulation (PMK) Number 22/PMK.03/2020 on Procedures for Implementing Advance Pricing Agreements.
However, in PP 55/2022, there is an additional point of the provision regarding "special relationship due to control, if one party controls the other party or one party is controlled by the other party through management or use of technology."
Types of Transactions
Government Regulation Number 55 Year 2022 also rearranges transactions affected by special relationships, as a reconstruction of the concept of affiliated transactions or transactions conducted with parties that have special relationships. In essence, tax subjects conducting transactions affected by special relationships are required to apply the Arm's Length Principle (ALP).
Article 35 paragraph (2) explains that transactions affected by special relationships include:
- Affiliated transactions; and/or
- Transactions conducted between parties that are not related but an affiliated party of one or both parties to the transaction determines the counterparty and transaction price.
This means that the scope of transactions is not only those carried out by parties who have a special relationship but can also involve independent parties (not having a special relationship).
In essence, a transaction is considered to be affected by a special relationship if one or the transacting parties can determine the counterparty and the price of the transaction. Therefore, the arm's length principle is absolutely applied.
In general, the arrangements regarding transactions affected by special relationships and the obligation to apply the arm's length principle in Government Regulation Number 55 of 2022 do not differ much from the previous provisions in PMK Number 22/PMK.03/2020. However, Government Regulation Number 55 of 2022 does not specifically describe certain types of transactions that are affected by special relationships, as follows:
- service transactions;
- transactions related to the use or right to use intangible assets;
- transactions related to borrowing costs;
- asset transfer transactions;
- business restructuring; and
- cost contribution agreements.
Transfer Pricing Issue
Then, there is an issue with how to interpret the provisions on transactions affected by special relationships in transfer pricing analysis. Taxpayers will find it more difficult to identify transactions that are affected by special relationships. This is because the scope of transactions that must be included in the transfer pricing document becomes broader-not only affiliated transactions.
The next problem is to identify transactions with independent parties where the counterparty and the transaction price are determined by an affiliated party. The evidence is either by agreement between the parties or simply by attaching more specific supporting documents.
What if the tax subject determines the transaction counterparty based on references or recommendations from affiliates? And, what if the transaction price refers to the price that has been obtained by the affiliate concerned? Is this condition included in the definition of a transaction that is affected by a special relationship or not?
To provide legal certainty, the government needs to clarify the definition of transactions affected by special relationships and the factors that affect them. In addition, regulators should also outline steps to identify transactions affected by special relationships, especially those involving independent parties. This is important to minimize potential disputes between taxpayers and tax authorities.
Indonesia is just one of the many countries in the world highlighting transactions affected by special relationships.
Australia, for example, requires taxpayers to fill out an International Dealing Schedule (IDS) form when planning to conduct transactions with entities, individuals or parties abroad who have special relations (international related parties).
The IDS is then reported together with the annual tax return. An offshore party is considered to have a special relationship if it participates directly or indirectly in the management, control, and capital of the taxpayer - and vice versa. For domestic transactions, Australia does not specify the definition of a special relationship.
This is different in Singapore. The definition of the special relationship is explained in Section 34D of the Income Tax Act 1947. However, to minimize compliance costs, the Singapore Tax Authority only requires transfer pricing documentation to include a list of related parties, as presented in the financial statements in accordance with accounting standards.
The author realizes that each country or jurisdiction has its own sovereignty to implement its own policies. However, what Australia and Singapore do may be a reference for Indonesia in implementing taxation rules related to special relationships. All parties certainly hope that compliance costs can be reduced and the risk of disputes can be minimized. (AGS/KEN)