Through Minister of Finance Regulation (PMK) Number 172 of 2023, the Indonesian government emphasizes the use of the Ex-Ante approach in the preparation of the Local File and Master File, as part of the Transfer Pricing Documentation (TP Doc) report.
With the issuance of this regulation on the Application of Arm's Length Principle in Transactions Affected by Special Relationships, several other previous provisions, such as PMK 213/PMK.03/2016, PMK 49/PMK.032019, and PMK 22/PMK.03/2020, are revoked and declared invalid.
As for the Ex-Ante approach, the preparation of the TP Doc must be based on the data and information available when the transaction is carried out. This is as stated in Article 17 paragraph (1) of PMK Number 172 of 2023, which reads:
"The Transfer Pricing Document as referred to in Article 16 paragraph (2) letter a and letter b, must be organized based on data and information available at the time of the Related-party Transaction."
For information, previously the Ex-Ante approach was regulated in Article 3 paragraph (1) of PMK 213/PMK.03/2016 and Article 9 paragraph (1) letter b of PMK 22/PMK.03/2020 which has been revoked through PMK 172 of 2023.
Consequences of Administrative Sanctions
The consequences that occur if the Ex-Ante provisions are not fulfilled following PMK 172/2023, the Taxpayer will be subject to sanctions according to the provisions of laws and regulations in the field of taxation as stipulated in Article 28 of PMK 172/2023.
With these consequences, Taxpayers need to ensure the use of the Ex-Ante approach or price-setting approach as a formal provision that must be fulfilled, in analyzing related-party transactions under the principles of Arm's Length Principle.
Indeed, the Ex-Ante approach adopted in Indonesian regulations refers to the OECD Transfer Pricing Guidelines 2022 paragraph 5.27 which reads:
“Each taxpayer should endeavor to determine transfer prices for tax purposes in accordance with the arm’s length principle, based upon information reasonably available at the time of the transaction. Thus, a taxpayer ordinarily should consider whether its transfer pricing is appropriate for tax purposes before the pricing is established and should confirm the arm’s length nature of its financial results at the time of filing its tax return”
The paragraph indicates that each taxpayer should endeavor to determine the transfer price for tax purposes in accordance with the arm's length principle, based on information available at the time of the related-party transaction.
This means that taxpayers must consider whether the transfer pricing is appropriate for tax purposes before the related-party transaction is executed.
The use of comparable data at the time or before the related-party transaction is conducted does cause polemics. Paragraph 3.69 of the OECD TP Guidelines 2022 clearly states that there are issues in determining comparability at the time of the transaction, information on comparability factors, comparable transactions used in the comparability analysis.
Information relating to the conditions under which the independent transaction was conducted or was conducted during the same time period as the related-party transaction. This is expected to be the most reliable information in the comparability analysis because it reflects how the independent party has the same economic behavior as the related party transaction.
However, in practice, the author sees that the application of Ex-Ante often still causes debate. Thus, more detailed regulatory guidance is needed to apply the Ex-Ante approach to provide certainty for taxpayers.
*The writer is a Junior Associate Transfer Pricing at MUC Consulting