Foreign-owned companies in Indonesia frequently transact with their parent companies, regional headquarters, and other group entities through service charges, purchases, loans, royalties, capital injections, and dividends.
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For an Indonesian PT PMA, “intercompany” describes the relationship between the parties rather than the accounting treatment. Each transaction must be recorded according to its economic nature under Indonesian Financial Accounting Standards (SAK), with resulting Indonesian tax obligations accounted for separately.
How Should a PT PMA Record Intercompany Transactions?
Related-party transactions can affect income, expenses, assets, liabilities, or equity depending on their purpose. Materially different transactions should therefore remain separately identifiable in the accounts rather than being combined in a general intercompany account.
Accounting for Common Intercompany Transactions in Indonesia
Management and Other Intercompany Service Fees
An Indonesian subsidiary may receive management, IT, finance, HR, marketing, technical, or other services from its parent or regional headquarters.
Once the service has been received and the company has an obligation to pay, the amount is generally recognized according to the nature of the expense, with a corresponding related-party payable. If services have been received by the reporting date but not yet invoiced, an accrual may be required.
The company should be able to support what service was provided and how its share of a regional or group charge was calculated.
The withholding-tax treatment depends partly on whether the service provider is in Indonesia or overseas. Payments for qualifying management, technical, consulting, and other specified services to a domestic taxpayer are generally subject to PPh 23 withholding at 2% of the gross amount.
Where the service provider is a foreign company, the payment may instead fall under PPh 26, which applies to specified Indonesian-source income paid to non-residents. The domestic rate is generally 20% of the gross amount, although an applicable tax treaty may provide a lower rate where its requirements are satisfied.
The use in Indonesia of taxable services supplied from outside Indonesia can also create an Indonesian VAT obligation, accounted for separately from the underlying service expense.
Intercompany Purchases and Sales
Products acquired from a related company for resale may be recorded as inventory and subsequently cost of sales, while machinery may be recognized as a fixed asset and depreciated. Sales to another group company can result in revenue and a related-party receivable.
The pricing of related-party transactions must also comply with Indonesia’s arm’s-length requirements. A subsequent transfer-pricing adjustment may therefore affect amounts originally recorded in the accounts.
Intercompany Loans and Interest
Funding received from a parent or another group company as a loan is recorded as a liability rather than income. Repayment of principal reduces that liability, while interest is accounted for separately and may need to be accrued before payment.
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Interest paid to a domestic taxpayer that falls within the scope of PPh 23 is generally subject to withholding at 15% of the gross amount. Interest paid to a foreign related party generally falls under PPh 26 at 20%, subject to a lower applicable treaty rate.
Royalties and Other Intragroup Charges
Payments for trademarks, intellectual property, software rights, or similar arrangements should be recorded according to the rights or services received. Amounts relating to a period that has already elapsed may need to be accrued even if invoicing or payment occurs later.
Royalties paid to an Indonesian taxpayer are generally subject to PPh 23 at 15% of the gross amount. Royalties paid to a foreign taxpayer generally fall under PPh 26 at 20%, subject to an applicable tax treaty.
Capital Contributions and Dividends
Capital contributed by a foreign shareholder is recorded within equity rather than as revenue, while a shareholder loan creates a liability.
A declared dividend is a distribution to shareholders rather than an operating expense. The accounting entries should reflect the shareholder resolutions and other corporate records supporting the distribution.
How Are Foreign-Currency Intercompany Transactions Treated?
Under PSAK 221, a foreign-currency transaction is initially recorded in the company’s functional currency using the applicable exchange rate at the transaction date.
Outstanding monetary items, including intercompany receivables, payables, and loans, are subsequently remeasured at the reporting date. Changes in exchange rates can therefore generate foreign-exchange gains or losses before settlement.
For a PT PMA with a large foreign-currency shareholder loan or substantial balances with overseas group companies, these movements can materially affect reported results.
Managing Intercompany Balances and Year-End Reporting
Intercompany balances should be reconciled with the corresponding group companies as part of the closing process. Differences can arise from invoices recorded in different periods, exchange rates, accruals, withholding taxes, credit notes, or payments in transit.
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At year-end, the review should cover related-party receivables and payables, loans, accrued interest, withholding-tax liabilities, and foreign-exchange adjustments. Long-outstanding differences should be investigated rather than carried forward without explanation.
Under PSAK 224 on Related Party Disclosures, companies may also need to disclose related-party relationships, transactions, outstanding balances, and commitments in their financial statements.
How Does an Intercompany Service Charge Flow Through the Accounts?
Consider an Indonesian PT PMA receiving a regional management service from its Singapore parent, invoiced in Singapore dollars.
The transaction can create a management expense, related-party payable, PPh 26 withholding obligation, Indonesian VAT obligation, and, while the SGD payable remains outstanding, a foreign-exchange gain or loss.
Manage Intercompany Accounting with MAP Resources Indonesia
MAP Resources Indonesia can assist foreign investors with intercompany bookkeeping and reconciliations, month-end and year-end closing, financial reporting, and related Indonesian tax compliance. Contact us at info@mapresourcesindonesia.com.
