The Concept of Transfer Pricing in Taxation
Transfer pricing refers to the determination of prices in transactions between entities that are part of an affiliated corporate group. In Indonesian tax regulations, this concept specifically governs how prices are set in transactions between entities with special relationships, as referred to in Article 1 point 9 of the Minister of Finance Regulation Number 172 of 2023 concerning the Application of the Arm’s Length Principle in Transactions Affected by Special Relationships (“PMK 172/23”).
If a transaction is conducted between entities that share a certain special relationship, it can be categorized as a transaction affected by affiliation. Once one of the transacting parties has a special relationship, then all affiliated transactions are deemed to be Transactions Affected by Special Relationships. However, the scope of Transactions Affected by Special Relationships is broad and may also include transactions with independent parties that are influenced by such relationships. In this case, taxpayers engaging in affiliated transactions are required to prepare and maintain a Transfer Pricing Documentation (TP Doc).
According to Chairil Anwar Pohan (2019), transfer pricing is defined as “the price charged for the transfer of goods/services or other intangible assets from one company to another.” Thus, transfer pricing can be understood as the tax treatment of transactions involving special relationships, whether visible or not.
Special Relationships
Certain conditions may classify a transaction as one Affected by Special Relationships under Article 18 paragraph (4) of Law Number 36 of 2008 (the Fourth Amendment to Law No. 7 of 1983 on Income Tax), as follows:
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At least 25% share ownership or capital participation exists between the companies conducting the transaction;
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There is control by one or more parties under the same management;
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A family relationship exists between the transacting parties, either by blood, marriage, in a direct or collateral line.
If a Transaction Affected by Special Relationships occurs, the Directorate General of Taxes (“DGT”) has the authority to make adjustments to determine Taxable Income based on the Arm’s Length Principle (ALP), with the aim of preventing tax avoidance practices by taxpayers.
The Arm’s Length Principle
In determining the taxable income of taxpayers from Transactions Affected by Special Relationships, Article 1 point 10 of PMK 172/23 provides:
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The determination of prices in Transactions Not Affected by Special Relationships (Arm’s Length Principle/ALP), hereinafter referred to as the Arm’s Length Principle, is the principle applied in sound business practices, carried out as if the transactions were independent.
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This principle is applied in transfer pricing to establish fair prices by comparing current conditions with pricing indicators in comparable independent transactions. The influence of special relationships is recognized as a factor, and comparable independent transactions may serve as benchmarks, as stipulated in Article 3 paragraph (2) of PMK 172/23. Furthermore, documentation related to Transactions Affected by Special Relationships is required to determine the proper amounts.
Transfer Pricing Documentation
Transfer Pricing Documentation (TP Doc) is a crucial tool to determine the appropriate amount payable by taxpayers for Transactions Affected by Special Relationships.
Taxpayers are required to prepare TP Docs if they meet any of the following criteria:
a) Engage in affiliated transactions with gross revenue exceeding a certain threshold;
b) Conduct transactions with affiliates located in jurisdictions with lower tax rates;
c) Are the parent entity of a multinational corporate group with consolidated gross revenue exceeding IDR 1,000,000,000,000 (one trillion rupiah).
Conclusion
Therefore, transfer pricing refers to pricing influenced by special relationships, whether through family ties, capital or share ownership, or the control exerted by one party in a transaction. The purpose of transfer pricing regulations is to prevent the erosion of the tax base payable by taxpayers.
Author :
- Nicko Surya Airlangga, S.H.
Editor :
- Muhammad Arief Ramadhan, S.H.