PMK 172/2023 Reorganizes VAT on Related-Party Transactions, DGT Authorized to Adjust Selling Price

Through Minister of Finance Regulation (PMK) Number 172 Year 2023, the Directorate General of Taxes (DGT) is now authorized to make adjustments to the selling price or replacement value, as the basis for imposing Value Added Tax (VAT), in transactions affected by special relationships.

This provision applies since the regulation on the application of the Arm's Length Principle in Transactions Affected by Special Relationships (PKKU) was stipulated on 29 December 2023.

In making the adjustment, DGT will compare it with the fair market price when the taxable goods or taxable services are transferred. If the selling or replacement price is lower than the market price, an adjustment will be made.

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In fact, the obligation to use market prices as the determination of selling or replacement prices has actually been regulated in Article 2 of Law Number 8 of 1983 on VAT which has been amended several times, most recently by Law Number 7 of 2021 on Harmonization of Tax Regulations (HPP).

Thus, the existence of PMK 172/2023 is only an affirmation, that the tax authority can make adjustments if the price used does not refer to the market price.

Input Tax Not Adjusted

However, the adjustment of the selling price or transfer of taxable goods and services conducted by DGT will not have an impact on the input tax credited by the counterparty taxpayer.

Thus, VAt-registered persons who make purchases can still credit VAT as stated in the tax invoice issued by the Vat-registered person who are seller or the one who transfers the taxable goods and services.

With a note, the input tax crediting carried out is under the statutory provisions on VAT.

Notes for Taxpayers

With the existence of PMK Number 172/2023, several things must be considered by taxpayers, to avoid tax risks in the future. Taxpayers must ensure that VAT crediting can still be done according to applicable statutory provisions.

Then, taxpayers are required to be vigilant in determining the selling or replacement price, so that it is in accordance with the applicable provisions, in this case referring to the market price at the time the transaction is carried out.

For this reason, taxpayers need to prepare an appropriate market pricing mechanism specifically for transactions related to special relationships.

Meanwhile, the government expects that PMK 172 Year 2023 will create better fairness and transparency in taxation practices. Therefore, the government's goal to improve efficiency and compliance in the national tax system can be realized. (ASP/KEN)