The government has updated provisions related to transfer pricing. The latest regulation on these provisions is regulated in Minister of Finance Regulation Number 172 of 2023 concerning the Application of Arm’s Length Principle in Transactions Affected by Special Relationships (PMK 172/2023).

The provisions regulated in PMK 172/2023 come into effect on December 29 2023. For this reason, it is important for taxpayers to immediately understand these provisions, especially for those carrying out special relationship transactions. This is because the obligation to organize, store and submit transfer pricing documents for the 2024 tax year and beyond is carried out based on PMK 172/2023.

The enactment of PMK 172/2023 revokes several basic rules related to transfer pricing and codifies them into one rule, namely PMK 172/2023. This is done to provide justice, legal certainty and ease the implementation of tax provisions relating to special relationship transactions which are considered not to be accommodated in the previous provisions. Apart from that, the codification aims to ensure that the transfer pricing landscape in Indonesia is in line with international best practice.

There are several rules that have been revoked and do not apply, namely:

1. Regulation of the Minister of Finance Number 213/PMK.03/2016 concerning Types of Documents and/or Additional Information that Must be Kept by Taxpayers Carrying Out Transactions with Parties Who Have Special Relationships and Procedures for Managing Them (PMK 213/2016);
2. Minister of Finance Regulation Number 49/PMK.03/2019 concerning Procedures for Implementing Mutual Agreement Procedures (PMK 49/2019); And
3. Minister of Finance Regulation Number 22/PMK.03/2020 concerning Procedures for Forming and Implementing a Transfer Pricing Agreement (PMK 22/2020).

New Arrangements in PMK 172/2023

In general, there are 7 (seven) new regulatory points relating to transfer pricing regulated in PMK 172/2023, namely:

1. Arm's Length Principle (PKKU);
2. Corresponding adjustments for domestic transfer pricing;
3. Secondary correction (Secondary adjustment);
4. Value Added Tax (VAT);
5. Transfer Pricing Documentation;
6. Mutual Agreement Procedure (Multilateral Agreement Procedure or MAP); And
7. Transfer Price Agreement (Advance Pricing Agreement or APA).

(1) PKKU and Expansion of the Special Relationship Concept in PMK 172/2023

By definition, the Arm’s Length Principle that is Not Influenced by Special Relationships, also known as PKKU, is a principle that applies in sound business practices carried out as independent transactions. This definition is the same as the definition of PKKU as regulated in PMK 22/2022, but slightly different from the definition of PKKU as regulated in PMK 213/2016.

Previously in Article 1 PMK 213/2016, the Arm’s Length Principle was defined as a principle which regulates that the conditions in transactions carried out between parties who have a special relationship is same or comparable to the conditions in transactions carried out between parties who do not have a special relationship. The price or profit used as a comparison, the price or profit in transactions carried out between parties who have a special relationship in question must be the same as or within the price range or profit range in transactions carried out between parties who do not have a special relationship which is used as a comparison.

The definition of PKKU in PMK 213/2016 is limited to the scope of special relationship transactions, namely affiliated transactions due to ownership, power and family relationships. Meanwhile, PMK 172/2023 expands the clause by adding rules regarding transactions affected by special relationships.

Transactions that are influenced by special relationships are simply explained as transactions with attachment and dependence. These transactions are basically carried out between independent parties, but the counterparties and transaction prices have been regulated so that in the end the transactions are not independent.

Furthermore, based on PMK 172/2023, there is no difference in the application of PKKU for transfer pricing carried out between domestic taxpayers (domestic transfer pricing) and for transfer pricing carried out between domestic taxpayers and other foreign tax subjects (cross border transfer pricing ). In this case, PMK 172/2023 completes the provisions regarding corresponding adjustments for domestic transfer pricing.

(2) Corresponding Adjustments in Domestic Transfer Pricing

Corresponding adjustment is a transfer pricing adjustment to calculate the Taxpayer's taxable income as a follow-up to the counterparty transaction transfer pricing adjustment determined or corrected by the tax authority. For your information, this kind of adjustment was previously regulated in Article 21 PER-43/PJ/2010. This provision stipulates that the Directorate General of Taxes (DGT) has the authority to make adjustments (correlative adjustments) to the calculation of a Taxpayer's taxable income as a follow-up to adjustments made by the DGT or another country's tax authority on the calculation of income and deductions by the Taxpayer's counterparty (primary adjustment). In simple terms, corresponding adjustments arise due to tax audits on transaction counterparties, both domestic and cross border.

In making corresponding adjustments for domestic transfer pricing, PMK 172/2023 regulates that the Tax Assessment Letter (SKP) must be approved and no legal action must be submitted. In addition, the corresponding adjustment must be initiated by the counterparty of the taxpayer.

Corresponding adjustment carried out through a mechanism by correcting the Annual Tax Return (if it has not been audited), issuing SKP (if an audit is being carried out and the Taxpayer discloses untruths), or correcting the SKP ex officio (if an SKP has been issued and no legal action has been filed). In the event that a primary adjustment is made to a foreign tax subject counterparty, the Taxpayer's corresponding adjustment is carried out through a mutual agreement procedure (MAP).

(3) Secondary Adjustments and Transactions Treated as Dividends

Apart from clarifying the provisions for corresponding adjustments, PMK 172/2023 also clarifies the provisions for secondary adjustments. Secondary adjustments arise in the event that there is a SKP or correction to the Tax Return (SPT) due to the re-determination of the transfer price (primary adjustment) by the DGT in the case of:

1. Taxpayers do not apply PKKU;
2. Taxpayers apply PKKU but do not comply with the provisions;
3. Taxpayers cannot prove compliance with the preliminary stages; or
4. The transfer price determined by the Taxpayer does not meet the PKKU.

The secondary adjustment provisions in PMK 172/2023 are consistent with Government Regulation Number 55 of 2023 (PP 55/2023), namely that the difference between the fair value that meets PKKU and the actual transaction value is considered as an indirect profit distribution, so it is treated as a dividend and will be subject to income tax in accordance with the provisions of Article 23 or Article 26 of the Income Tax Law. This is in accordance with the provisions of Article 24 of the Minister of Finance Regulation Number 18/PMK.03/2021 that dividends are only exempt from Income Tax objects as long as they are distributed at the general meeting of shareholders (GMS) or interim dividends.

However, in accordance with the provisions of Article 37 paragraph (4) PMK 172/2023, currently there is a mechanism that taxpayers can eliminate secondary adjustments. Secondary adjustment does not apply in two conditions, namely:

1. There is an addition and/or return of cash or cash equivalents in the amount of the difference as intended (occurring before the SKP was issued during the audit process); and/or
2. Taxpayers agree to the transfer price determined by the DGT.

The end of the two conditions above is the return of cash. In the event that the Taxpayer only agrees to the transfer price determined by the DGT, the Taxpayer must correct his bookkeeping first. If the secondary adjustment has been lost or is no longer valid, the provisions for the primary adjustment remain.

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