Regulation Update

PMK 172/2023 Updates Local Document Content in TP Documentation

Through Minister of Finance Regulation (PMK) No. 172/2023 on the Application of the Arm's Length Principle (PPKU), the Indonesian Government has updated the aspects that must be included in the preparation of the Local File, as part of the Transfer Pricing Documentation (TP Doc) report. 

In general, the provisions regarding the preparation of the Local File contained in Article 30 of PMK 172/2023 are no different from the provisions stipulated in the previous regulation, namely Article 10 of PMK 213/2016, which must contain some information, including the following: 

1. Identity and business activities carried out;
2. Information on related party transactions and independent transactions carried out;
3. Application of the Arm's length Principles;
4. Financial information; and
5. Events/occurrences/non-financial facts that affect price formation or profit levels.

The differences appear in the attachments of the two regulations. Especially in the appendix related to details or explanations of information on related party transactions and independent transactions carried out. In particular, in the information section in the table form that must be fulfilled.

Previously, in Appendix D of PMK 21/2016, it was stipulated that the information on related party transactions conducted by taxpayers that need to be submitted in the table is only transactions related to commodity products.

However, in Appendix E of PMK 172 of 2023, information in the form of a table is required not only for commodity-related transactions but for all related party transactions. Information that must be submitted in the table, at least contains:

1. The amount of transaction information detailed per type of transaction and per opposite type of transaction;
2. Information on counterparty in each type of transaction and explanation on the Taxpayer's relationship with each counterparty;
3. Country or jurisdiction of the counterparty;
4. Name of the product;
5. Number of units/quantity; and
6. Price per unit (the smallest size commonly used).

Read: Examining the Deadline of TP Doc Availability in PMK 172/2023

The Arm's Length Principle

Appendix E of MoF Regulation 172 Year 2023 also confirms the submission of transactions affected by special relationships conducted by taxpayers, parties involved in transactions affected by special relationships, and the form of special relationships.

Furthermore, this regulation also regulates more details regarding industry analysis and aspects related to industry analysis that need to be submitted in the Local Document. Also, an analysis on transaction conditions to identify the commercial and/or financial relationship between the Taxpayer and Related Party.

PMK 172 Year 2023 also elaborates more details on the explanations related to the comparability analysis that needs to be conducted in the Local Document preparation, including:

1. explanation of the characteristics of transactions affected by special relationships being tested based on the identification result of commercial and/or financial relationships between the Taxpayers and the business characteristics of each transacting party;
2. an explanation of the Independent Transactions that are candidates for reliable comparables, including a list and explanation of the internal and/or external comparable transactions selected, and a detailed explanation of the criteria used in the search for comparable data and the sources of information of the comparable data used;
3. an explanation of the party whose price indicators were tested, the reasons for their selection, and the financial ratios or net operating profit levels used in the application of the Transfer Pricing method, in the event that the method used is a profit-based method;
4. an explanation of the differences in conditions between the Transaction Affected by a Special Relationship being tested and the prospective comparables;
5. an explanation of reasonably accurate adjustments to the prospective comparables to eliminate the material impact of the differences in conditions on the transaction price indicator; and
6. an explanation of the Independent Transaction that is the selected comparable

Read: PMK 172/2023 Details Industry Analysis Provision on PKKU

Preliminary Stages

Appendix D of PMK 172 of 2023 also regulates the explanation of the preliminary stages carried out in analyzing transactions affected by certain special relationships, as stipulated in Article 13 of this regulation.

For information, the new provisions regarding PPKU will come into effect after this regulation is enacted, which is on 29 December 2023. However, new taxpayers can apply it for the preparation of TP Documentation for tax year 2024 onwards.

In addition, it should be noted that with the issuance of this regulation on PPKU, 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. (ASP/KEN)