The Indonesian government continues to refine tax regulations to enhance transparency and ensure taxpayer compliance. One of the latest updates is Minister of Finance Regulation (PMK) No. 172/2023, which introduces significant changes to the Arm’s Length Principle (PKKU) and Transfer Pricing Documentation (TP Doc).

A. Changes to the Arm’s Length Principle (PKKU)

PMK 172/2023 revises certain provisions of PMK 22/2020 and PMK 213/2016 regarding the application of the Arm’s Length Principle (ALP). This principle ensures that transactions between related parties mirror those conducted between independent entities.

1. Broader Definition of "Special Relationship"

PMK 172/2023 retains the broader definition of special relationships from PMK 22/2020, expanding its scope beyond direct related-party transactions. It now includes cases where unrelated parties engage in transactions influenced by an affiliated party on either or both sides.

This expanded definition is stated in Article 1, Clause 7 of PMK 172/2023, aligning with PMK 22/2020:

"… transactions conducted between parties without a direct special relationship but influenced by an affiliated party of either or both transacting entities in determining the counterparty and transaction price.”

2. Additional Criteria for Special Relationships

PMK 172/2023 harmonizes the definition of special relationships in terms of control, aligning with Article 18(4) of the Income Tax Law (UU PPh 36/2008). Unlike PMK 22/2020, which listed only five criteria, PMK 172/2023 incorporates an additional criterion from the Income Tax Law:

"One party controls another or is controlled by another through management or technology usage."

This adjustment ensures consistency between PMK regulations and the existing tax law.

3. Expanded Categories of Transactions Affected by Special Relationships

PMK 172/2023 adds a new category of related-party transactions: “other financial transactions.” Previously, PMK 22/2020 only recognized six types of related-party transactions. The revised list now includes:

1. Service transactions
2. Transactions involving intangible assets
3. Loan-related financial transactions
4. Other financial transactions (new category)
5. Asset transfers
6. Business restructuring transactions
7. Cost contribution arrangements

This expansion acknowledges a wider range of financial dealings influenced by related-party relationships.

4. Equal Treatment for Domestic and Cross-Border Transfer Pricing

PMK 172/2023 maintains the same application of the Arm’s Length Principle for both domestic and cross-border transfer pricing. A key addition in the regulation is the enhancement of corresponding adjustments for domestic transactions, improving consistency in transfer pricing regulations.

B. Changes to Transfer Pricing Documentation (TP Doc)

Apart from updates to PKKU, PMK 172/2023 introduces new requirements for the submission of Transfer Pricing Documentation.

1. Shorter Submission Deadline for TP Doc

A major change in PMK 172/2023 is the authority granted to the Directorate General of Taxes (DJP) to request TP Doc, requiring taxpayers to submit the documentation within one month of receiving the request. This aims to improve efficiency in tax compliance monitoring.

2. Revised Threshold for Country-by-Country Reporting (CbCR)

PMK 172/2023 also modifies the threshold for Country-by-Country Reporting (CbCR). Unlike PMK 213/2016, where the threshold was based on the current tax year, the new regulation bases the threshold on the previous tax year’s revenue.

In other words, an Indonesian taxpayer that serves as the ultimate parent entity of a corporate group with consolidated gross revenue of at least IDR 11 trillion in the prior tax year must prepare and maintain a CbCR.

Conclusion

The updates in PMK 172/2023 demonstrate the government’s commitment to enhancing tax transparency and compliance. With a broader definition of special relationships, expanded transaction categories, and stricter TP Doc submission deadlines, businesses must stay informed and adapt to these changes.

For companies engaged in related-party transactions, understanding and complying with these new regulations is essential to avoid penalties and ensure optimal tax compliance. These measures not only strengthen Indonesia’s tax system but also promote fair competition in a transparent business environment.

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