An Expert's View about Taxes and Accounting in Indonesia

Posted on: 12 Jul 2010

Following the issuance of the Directorate General of Taxation (DGT) Nos. PER-39/PJ/2009 of 2nd July 2009, transfer pricing has become a hot topic and drawn the attention of business community in Indonesia.

This DGT regulation requires companies engaged in related party (controlled) transactions to maintain Transfer Pricing (TP) documentation starting fiscal year 2009; including the requirement to submit the three new related party transaction forms together with the corporate income tax return starting the fiscal year 2009, as follow:

  • Form 3A: List and details of the related parties and the transactions involvedli>
  • Form 3A-1: Questionnaire in yes/no form regarding the documentation prepared and held in relation to the arm’s length principle.
  • Form 3A-2: List and details transactions with the companies in the tax haven countries


Generally, companies are related if they are have same shareholders; they are in holding and subsidiary relationship or they are related in terms of control and management.


The special relationship above results in inappropriateness prices, fees or other benefits that were realized in a business transaction. Universally a transaction between the taxpayer who has a special relationship is known as transfer pricing. This can result in the transfer of income or tax base and / or expenses from one taxpayer to another taxpayer, which can be engineered to reduce the overall amount of tax payable of the taxpayers which having a special relationship.


In the international arena, transfer pricing focuses on cross-border transactions between related parties, for example, companies within a multinational group.  The transfer price adopted by a multinational group can have direct impact on the proportional profit it derives in each country where it has an operation.  If a non-arm’s length price is paid for the transfer of goods or services between the members of a multinational group, the distribution of profits in each country where it has an operation will be distorted. This distortion will produce an impact on the tax revenue in the relevant tax jurisdictions in which the group operates.


In Indonesia, TP documentation has long been regulated in Indonesia in Income Tax Law No. 36/2008 Article 18 (the forth amendment of Income Tax Law No.7/1983). However, it has had not been applied due to the absence of implementation regulations and some technical issues that had not been resolved for both tax administrators and taxpayers.


The purpose of TP documentation is to document and justify arm’s length pricing of related party transactions. Under the provision of the DGT, the taxpayers has been asked to disclose any of their domestic and international related party transactions in specific forms that are submitted along with the annual corporate income tax returns (CITRs). Some of the information to be reported include related party(ies) involved in the transactions, types of transactions, the values of the transactions and the pricing method used to determine the arm’s length price, as well as the reason of companies in using a particular pricing method.


Like most countries in the world, Indonesia has adopted the principles of the OECD Transfer Pricing Guidelines in evaluating whether transfer prices of related parties comply with the arm’s length principle. In determining transfer prices, the basic principle is to make reference to the commercial conditions or financial relations of transactions between independent enterprises.


The Indonesia Tax Authority (ITO) is requesting that the related parties adopt arm’s length price in accordance with article 18 paragraph 3 of the Income Tax Law Nos. 36/2008 and the related party transactions are well documented as stipulated in the Government Regulation (PP) Nos. 80/2007. However, the process of determining the arm’s length price of related party transactions is rather complex and it involves identification and analysis of economic factors affecting the transactions and transfer prices. The data and analysis gathered then should be compared with those of non-related party transactions (uncontrolled transactions).


The most difficult part is to find the pricing of comparable uncontrolled transactions.  In Indonesia, there is very limited access to local industry database that provides information about the pricing adopted in the uncontrolled transactions. Such industry information, if available, would be very expensive to access and create additional financial burden to taxpayers.


Until today, ITO has not issued any implementation regulation and clear guidelines on how TP documentation should be prepared by the taxpayers. ITO has only issued tax regulation SE 96/PJ/2009 concerning transfer pricing providing guidelines for benchmarking ratios for certain industries. The ratios published in October 2009 will be used by the Account Representative (AR) to target taxpayers with transfer pricing records and to conduct queries and audits. The guidelines only provides benchmarking ratio for certain industries. Taxpayers with performance below the benchmarking ratio will receive enquiries from the ITO.


Even though specific documentary requirements are yet to be issued, it is clear that TP documentation should now be on a priority list of corporate taxpayers in Indonesia. The Indonesian Government has recently put their attention to related party transactions in particular cross- border transactions. The ITO has assigned more staff to examine and inspect transfer prices related party transactions in Indonesia.


In reviewing a taxpayer’s transfer pricing, the Tax Authorities would examine documents such as company’s organizational structure and statute of incorporation as well as audit reports of the parties involved submitted and look into any irregularities in each transaction made with related parties.


The fast development of tax practices and regulations will continue pressuring companies to adapt to the new requirements.



Written by Rita Kurnia Dewi - Head of Tax Compliance & Consulting, Mazars

As an expert in the Indonesia taxation with more than 10 years experience, Mrs. Dewi was involved in developing the tax department of Mazars Indonesia providing her technical expertise to local and overseas clients across different sectors.

For further information, the author of the article can be contacted at:

Posted: 12 July 2010

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