Before the enactment of the Harmonization of Tax Laws in late 2021, Indonesia recognized five Transfer Pricing methods: (i) comparable uncontrolled price method, (ii) resale price method, (iii) cost-plus method, (iv) profit split method and (v) transactional net margin method. With the Harmonization of Tax Laws, there are three additional methods, which are: (i) comparable uncontrolled transaction method, (ii) tangible asset and intangible asset valuation and (iii) business valuation.
Further guidance of the above methods shall be stipulated in the implementing regulation. In view of current Transfer Pricing regulations, the comparable uncontrolled transaction method shall be applicable to determine the arm’s length price of interest rates, discounts, provisions, commissions and the royalty percentage for sales or operating profit. As for tangible asset and intangible asset valuation, it shall be applied in accordance with the applicable tax regulation concerning valuation, and shall be appropriate for the following transactions: transfer of tangible and/or intangible assets; rental of tangible assets; use or right to use of intangible assets; transfer of financial assets; transfer of the right with regarding to the mining business and/or other relevant rights; and transfer of right in relation to plantations, forestry business and/or other relevant rights. The business valuation shall be applied in accordance with the applicable tax regulation concerning valuation, and shall be appropriate for the following transactions: business restructuring including transfer of functions, assets and/or risks among related parties; transfer of assets other than cash to limited liability companies, partnerships and other types of corporations as paid-up capital in lieu of shares; and transfer of assets other than cash to shareholders, partners or members of limited liability companies, partnerships or other corporations.
Furthermore, the Harmonization of Tax Laws also indicates the use of local benchmarking. Although implementing regulations on this provision are expected, local benchmarking may be adopted for the taxpayer having lower operating profit than other taxpayers in comparable business or incurring unreasonable losses (although it has been carrying out commercial activities for five years). Benchmarking with other taxpayers in comparable businesses may be performed to determine the ‘should-be’ tax payable. This new provision may enable the tax office to assess arm’s length pricing based on their internal database.
In our view, the introduction of the above new methods signifies the government’s commitment to tackling Transfer Pricing risks and other base erosion and profit shifting risks by providing expanded method options to taxpayers, while at the same time promoting the legal basis for the preparation of Transfer Pricing documents. For example, the use of business valuation as a method to determine the arm’s length price of business restructuring among related parties corresponds with the current regulation where such transactions shall be carried out based on the market value.
Read the WTS Global Transfer Pricing Newsletter here.
