Worldwide transfer pricing reference guide 2014

Indonesia
Taxing authority and tax law
Taxing authority: Director General of Tax (DGT).
Tax law:
• Law Number 7 Year 1983 regarding Income Tax (amended by Law Number 36 Year 2008) (PPh Law)
• Law Number 6 Year 1983 regarding General Taxation Provisions and Procedures (amended by Law Number 16 Year 2009 (KUP Law)
• Law Number 8 Year 1983 regarding Value Added Tax of Goods and Services and Sales Tax on Luxury Goods (amended by Law Number
42 Year 2009) (PPN Law)
Relevant regulations and rulings
Indonesia’s primary transfer pricing provisions are contained in Article 18 of the PPh Law. Article 18 (3) authorizes the DGT to
re-determine the amount of taxable income and deductible expenditure for transactions between taxpayers, where a “special relation”
exists. Article 18(3) also allows a re-determination of debt as equity. The re-determination should be made in accordance with equity and
common practice of business with independent parties, i.e., in accordance with the arm’s length principle. A “special relation” is deemed
to exist where:
• A taxpayer has direct or indirect ownership of 25% or more in another taxpayer, or two or more other taxpayers
• A taxpayer controls another taxpayer, or two or more other taxpayers
• There is a family relation biologically or by marriage in the first degree
DGT Regulation PER–22/PJ/2013 (PER–22) also extends the ambit of Article 18 to domestic related party production sharing contracts,
contracts of work or cooperative agreements for oil and gas extraction, and mining. PER–22 states that Article 18 will apply where
transfer pricing between related parties is not specified in the production sharing contract, the contract of work or the cooperative
agreement.
The DGT issues regulations which provide guidance on the application of tax law, rather than being binding on taxpayers. Regulation
PER–43/PJ/2010 (PER–43) provides guidance on the application of the arm’s length principle. In 2001, this regulation was amended by
regulation PER 32/PJ/2011 (PER–32). Under these regulations, taxpayers should:
• Conduct a comparability analysis and determine comparable transactions
• Determine the appropriate transfer pricing method
• Apply the arm’s length principle based on the results of the comparability analysis and the most appropriate transfer pricing method
• Document the steps taken in determining the fair price or fair profit in accordance with the provisions of the prevailing tax regulations
PER–43, as amended by PER–32, can apply to domestic related party transactions as well as international related party transactions.
The regulations may be applied where there are transactions between a taxpayer and another domestic taxpayer or permanent
establishment, where the related parties are subject to different tax rates caused by items such as:
• The imposition of final and non-final income taxes within a specific sector
• The imposition of the sales of luxury goods tax
• Transactions conducted with taxpayers of oil and gas production sharing contractors
OECD guidelines treatment
Indonesia is not a member of the OECD, although it has been granted “enhanced participation” status. The DGT largely endorses the
principles of the OECD Guidelines in its regulations. However, it should be noted that the practical application of the arm’s length principle
by the DGT in an audit context regularly diverges from the principles endorsed by the OECD Guidelines.
Priorities/pricing methods
PER–32 states that the most appropriate transfer pricing method should be selected. The decision for the most appropriate method
should regard:
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