If an Indonesian company must prepare both a Master File and Local File, it cannot choose one instead of the other. For many Indonesian subsidiaries, the Local File requires more preparation work because it must support the company’s actual related-party transactions. The Master File may need to come first where that analysis depends on information held by the overseas parent or wider group.
Do You Need Both a Master File and Local File?
Indonesia requires taxpayers to prepare a Master File and Local File when certain transfer pricing documentation thresholds are met.
The requirement can apply where the taxpayer’s gross turnover in the previous fiscal year exceeds IDR 50 billion (USD 2.82 million), or where related-party transactions in the previous fiscal year exceed IDR 20 billion (USD 1.13 million) for goods or IDR 5 billion (USD 282,000) for each category covering services, interest payments, use of intellectual property and other intangible assets, or other related-party transactions.
The requirement can also apply where the taxpayer has a related party in a country or jurisdiction with an income tax rate lower than the rate applicable in Indonesia.
Unsure whether your company meets the documentation thresholds? Contact info@mapresourcesindonesia.com
Companies below these documentation thresholds must still follow Indonesia’s arm’s length principle, which requires related-party transactions to be priced on terms comparable to those between independent parties.
The Master File and Local File must be available no later than four months after the end of the fiscal year. A summary of the documentation is submitted with the annual corporate income tax return.
What Does the Master File Establish?
The Master File covers the multinational group rather than focusing only on the Indonesian entity.
It includes the group’s organizational structure, business activities, intellectual property and other intangible assets, financing arrangements, financial position, and transfer pricing policies.
Much of this information may need to come from the overseas parent company or regional headquarters.
Why Does the Local File Require More Indonesia-Specific Work?
The Local File focuses on the Indonesian taxpayer and its related-party transactions.
It includes information about the local business, related-party transactions, functions performed, assets used, risks assumed, financial information, the selected transfer pricing method, and evidence supporting the pricing of those transactions.
Depending on the transactions involved, the company may also need benchmarking against comparable independent transactions or companies.
A management fee charged by a foreign parent cannot be justified solely by the group’s general policy for management services. The Indonesian company also needs evidence of the service provided and the basis used to determine the charge.
The same issue can arise with royalties, intercompany financing, distribution arrangements, and other material related-party transactions.
Which File Should You Prioritize?
Where both documents are required, an Indonesian subsidiary will often need to devote more preparation work to the Local File. This does not make it legally more important than the Master File.
The Local File can require significant work where the Indonesian company has service fees, royalties, financing, purchases, sales, or other material transactions with affiliates.
A transfer pricing policy set by headquarters is not enough on its own to prove that the Indonesian company’s pricing meets the arm’s length principle.
When Should the Master File Come First?
The Master File may need to come first when the Local File depends on information held by the wider group.
This can arise where the Indonesian company uses group-owned intellectual property, receives centralized services, participates in group financing arrangements, or operates under a regional transfer pricing policy.
Need Indonesia-specific benchmarking for your Local File? Email info@mapresourcesindonesia.com
The Indonesian team may need information on which group companies perform key functions, own important assets, take on risks, provide financing, or control intellectual property before completing the Local File.
The Master File can also come first where a multinational group is preparing documentation across several jurisdictions and needs to establish its group-wide position before individual entities complete their Local Files.
Why Must the Master File and Local File Be Consistent?
Problems can arise if the Master File describes one group structure or transfer pricing arrangement while the Local File records something different in Indonesia.
For instance, the Master File may identify one entity as performing a key group function while the Indonesian Local File attributes that function to another entity. Financing terms, ownership of intellectual property, service arrangements, and the Indonesian company’s role should also match the actual transactions.
Already have group documentation? MAP can review it against your Indonesian Local File at info@mapresourcesindonesia.com
The documents do not need to contain identical information. The Master File provides the group-wide position, while the Local File provides the detail needed to support the Indonesian taxpayer’s transactions.
Should You Wait Until the Four-Month Deadline?
Written agreements, group transfer pricing policies, and transactions recorded in the Indonesian company’s accounts should be checked for inconsistencies before the documentation is finalized.
The Master File and Local File must also be prepared using the data and information available when the related-party transactions occur. Companies should not treat transfer pricing documentation simply as a year-end exercise using information assembled after the transactions have occurred.
Prepare Your Transfer Pricing Documentation With MAP Resources Indonesia
MAP Resources Indonesia assists foreign-owned companies with Master Files, Local Files, benchmarking, and reviews of related-party transactions in Indonesia. Contact us at info@mapresourcesindonesia.com.
