The issuance of Minister of Finance Regulation (PMK) Number 172 of 2023 (PMK 172/2023) provides clearer guidelines for Permanent Establishments (BUT) that conduct transactions with related parties or parties that have special relationships.
This is because the provisions regarding the application of the Arm's Length Principle (PKKU) have already been discussed in PMK Number 22/PMK.03/2020. In PMK 172/2023, which took effect on 29 December 2023, the provisions were then discussed again to emphasize the obligation of BUT in applying PKKU.
The regulation generally regulates the application of PKKU in transactions affected by special relationships.
BUT as a Domestic Tax Subject
Referring to Law Number 11 of 2020, BUT is defined as a business entity established and incorporated outside the territory of the Unitary State of the Republic of Indonesia but carries out activities in the territory of the Unitary State of the Republic of Indonesia (NKRI).
In addition, based on Article 2 of Law Number 36 of 2008 as last amended by Law Number 7 of 2021 on Harmonization of Tax Regulations, the tax treatment of a BUT as a tax subject is equated with a corporate tax subject. Therefore, the BUT is obliged to comply with the prevailing laws and regulations in the Republic of Indonesia.
Basically, the establishment of a BUT must be based on an agreement agreed by Indonesia with a partner country. The agreement is commonly referred to as a Double Tax Avoidance Agreement (DTAA) or known as a tax treaty. However, if there is no DTAA between Indonesia and a country, then the provisions regarding the establishment of a BUT refer to Indonesian tax regulations.
BUT and Domestic Taxpayer
In PMK 172/2023, if a domestic taxpayer conducts a transaction with a party affected by a special relationship, and the party fulfills the provisions related to the establishment of a BUT in Indonesia, the taxpayer is also designated as a BUT. In this case, the BUT entity and the domestic taxpayer are not allowed to be merged. This is because BUT is a separate entity that has its own tax obligations. This provision is explained in Article 15 paragraph (1) of PMK 172/2023 as follows:
"In the event that the domestic Taxpayer conducting the Transaction Affected by Special Relationship fulfills the provisions as a permanent establishment (BUT) as stipulated in the provisions of laws and regulations regarding the determination of permanent establishment, the domestic taxpayer shall also be determined as a permanent establishment."
Then, the transactions conducted with parties that have a special relationship and are related to the activities carried out by the BUT must be reported by the BUT, to calculate its tax obligations.
This obligation is in accordance with applicable laws and regulations in Indonesia, such as Article 5 of Law Number 36 of 2008 on Income Tax as last amended by Law Number 7 of 2021 on Harmonization of Tax Regulations.
This is as stated in Article 15 paragraphs (2) and (3) as follows:
(2) Permanent establishment as referred to in paragraph (1) must submit all data and/or information related to transactions conducted by overseas Related Parties related to the business or activities of the permanent establishment.
(3) The submission of all data and/or information related to transactions conducted by overseas Related Parties as referred to in paragraph (2) shall be conducted according to the provisions of laws and regulations in the field of taxation.
The implication is that if the BUT does not submit the data or information, then the value of the transaction will be determined based on the arm's length principle (PKKU) conducted by the Indonesian tax authority. This is as explained in Article 15 paragraph (5) of PMK 172/2023 as follows:
If the permanent establishment does not fulfill the provisions as referred to in paragraph (2), the transaction value shall be determined by applying the arm's length principle.
Relevance of the Regulation
Apart from that, in general, the issuance of PMK 172/2023 provides legal certainty to BUT regarding the obligations that need to be fulfilled if there are related party transactions carried out with related parties.
For information, in addition to regulating transactions related to BUT, PMK 172/2023 also regulates other matters related to PKKU. Some of them include qualifications related to the cancellation of secondary adjustment and the application of the Profit Split Method (PSM), the deadline for submitting transfer pricing documentation (TP Doc) reports, the Ex-Ante approach in preparing Local File and Master File, and others. (ASP/KEN)