The Indonesian government through the Minister of Finance on 29 December 2023 stipulated a new regulation related to transfer pricing, namely Minister of Finance Regulation (PMK) Number 172 Year 2023 on the application of the arm's length principle in transactions affected by special relationships (PMK 172/2023).
PMK 172/2023, which comes into effect for the preparation of Transfer Pricing Documentation (TP Doc) for the fiscal year 2024, is actually a compilation of transfer pricing regulations that were formerly made separately.
Previously, the provisions on transfer pricing were divided into three regulations including PMK Number 213/PMK.03/2016 related to the preparation of TP Doc, PMK Number 49/PMK.03/2019 related to Mutual Agreement Procedure (MAP), and PMK Number 22/PMK.03/2020 related to PKKU and Advance Pricing Agreement (APA).
In addition, it also includes provisions that are rearranged in PMK 172/2023, Director General of Taxes Regulation Number PER-29/PJ/2017 related to Country by Country Report (CbCR) notification.
Due to this amalgamation, it is reasonable to call this PMK 172/2023 as Indonesia's transfer pricing guide. Considering, only by reading this one regulation, taxpayers, tax authorities, and stakeholders can understand the transfer pricing rules in Indonesia.
The presence of PMK 172/2023 causes stakeholders, especially taxpayers, to adapt in carrying out obligations related to transfer pricing considering that there are new provisions that are not found in previous regulations and changes to several provisions.
Not only combining various provisions into one, PMK 172/2023 also contains a number of new provisions. Some of them are related to the application of PKKU for Domestic Taxpayers (WPDN) which fulfill the provisions of Permanent Establishment (BUT).
In addition, the provisions that are also amended are regarding the deadline for submitting TP Docs in the context of compliance monitoring and audit. Then related to VAT adjustment due to the correction of the PKKU application,
Other changes are related to industry analysis, the Profit Split Method (PSM), the use of single and multiple comparable data, criteria for determining the obligation to prepare CbCR, primary, secondary, and linkage adjustments, APA, and MAP.
To find out the substance of these changes, see the following description.
1. Application of PKKU for WPDN as a Permanent Establishment (BUT)
PMK 172/2023 stipulates that if a WPDN fulfills the provisions as a permanent establishment, the permanent establishment must submit all data and/or information related to transactions conducted by overseas affiliates related to the permanent establishment to be used in determining the profit of the permanent establishment. If the permanent establishment is unable to provide the requested data and/or information, the PKKU will be applied to determine the value of the BUT's transactions.
2. Deadline for Submission of TP Doc
In PMK 213/PMK.03/2016, it is stipulated that TP Docs in the form of Local Documents and Parent Documents must be available no later than 4 months after the end of the tax year. The regulation remains relevant in PMK 172/2023. However, there is an additional clause that TP Doc must be submitted a maximum of 1 month after a request from the tax authority in the context of compliance monitoring and tax audit.
3. VAT Adjustment in Correction of PKKU Implementation
PMK Number 172/2023 also regulates the impact of the correction of transactions affected by special relationships on corporate income tax audit to VAT. If a correction is made to the selling price in a related party transaction where the original selling price is lower than the fair market price, an adjustment will be made to the VAT output of the related party sale. However, the value of the VAT adjustment cannot be a tax credit for the counterparty.
4. Industry Analysis
In PMK 172/2023, the provisions regarding the explanation of industry analysis are regulated in more detail when compared to PMK 213/PMK.03/2016 and the Appendix to Director General of Taxes Regulation Number PER-22/PJ/2013.
The Appendix of PER-22/PJ/2013, only regulates that to identify the characteristics of related party transactions, it must pay attention to the conditions affecting the industry. While in PMK 172/2023 the industry analysis must fulfil 7 detailed factors. This aims to identify differences in the conditions of related party transactions with data that will be used as a comparison more comprehensively.
5. Affirmation of the Application of Profit Split Method (PSM)
The application of PSM is emphasised in PMK 172/2023, but still in line with the OECD Transfer Pricing Guidelines 2022. In this regulation, profit sharing can be done at the level of gross profit or net operating profit.
The determining factor for profit sharing is still based on the level of functional integration, use of assets, and/or sharing of economically significant business risks, of the transacting parties in transactions affected by special relationships. In the previous guidance on the application of PSM, profit sharing in this method is done at the level of operating profit.
6. Use of Single and Multiple Comparable Data
Based on PMK 172/2023, the endorsed comparable data in the application of PKKU is single-year comparable data. Multiple-year comparable data can be used as long as it can improve the comparability between transactions affected by special relationships and independent transactions.
7. Criteria for Determining the Obligation to Prepare CbCR
PMK 172/2023 changes the rules related to the determination of the obligation to prepare CbCR. If in PMK 213/PMK.03/2016, the determination of the obligation to prepare CbCR is based on the gross revenue of the tax year concerned, in PMK 172/2023 the determination of the obligation to prepare CbCR is determined based on the gross revenue of the previous tax year.
In addition, the currency exchange rate used to convert functional currency into Euro for the purpose of filling the CbCR notification and determining the CbCR preparation obligation is not based on the exchange rate as of 1 January 2015, but as of 1 January 2023.
8. Primary, Secondary, and Corresponding Adjustment
The secondary adjustment terminology for fiscal correction of related party transactions considered as constructive dividends has actually been introduced in the previous regulation, namely in the Appendix of PMK-22/2020.
However, PMK 172/2023 states that the secondary adjustment can be eliminated. With a condition, that the taxpayer agrees to the correction made by the DGT and/or returns cash or cash equivalents from the related party in the amount of the correction value determined by the DGT.
Further, there are rules regarding the corresponding adjustment, which is a material adjustment of transfer pricing in the calculation of Taxable Income (PKP) to avoid double taxation.
Corresponding adjustment is conducted on primary adjustment conducted through audit and can be conducted if the domestic taxpayer of the counterparty agrees to the Tax Assessment Letter (SKP) and does not take legal action against the SKP.
9. APA and MAP Arrangements
Regarding APA, there are new provisions in PMK 172/2023. Previously there was no mechanism that regulated the impact of an APA that was applied backward (rollback) in the tax year that had already occurred. This PMK provides clarity for taxpayers who can apply APA which applies backwards to be able to make corrections to their Annual Tax Returns without incurring sanctions if there are additional underpayments.
For MAP, in the previous regulation, the DGT could officially make corrections to the decision letter in accordance with article 16 of the KUP Law which was the basis for the follow-up to the MAP Decision Letter. Provided that the implementation of the MAP which results in mutual agreement occurs after the DGT issues an incorrect Decree on Reduction or Cancellation of a Tax Assessment Letter.
Meanwhile, in the latest PMK, the results of the MAP will be called a Joint Agreement Decree (SKPB) and will be the basis for tax collection and refunds by the DGT. (ASP/KEN)