Transfer pricing disputes in Indonesia usually arise when the Directorate General of Taxes (DGT) challenges a related-party transaction during a tax audit. Foreign-owned companies can challenge the resulting adjustment through Indonesia’s objection and Tax Court procedures.
What Triggers a Transfer Pricing Dispute in Indonesia?
DGT can examine whether a related-party transaction follows Indonesia’s arm’s length principle, which broadly requires related companies to price transactions as independent companies would.
A dispute can arise when DGT disagrees with how a related-party transaction was priced or with the companies or transactions used for comparison. DGT may also check whether the transfer pricing analysis matches what the companies actually do, the assets they use, and the risks they take.
Facing an intercompany transaction dispute? Contact MAP Resources Indonesia at info@mapresourcesindonesia.com
Payments for management services, technical services, royalties, and other intercompany charges can receive additional scrutiny. A contract and invoice may not be enough if the company cannot show what services were provided, why the Indonesian company needed them, and how the charge was calculated.
Related-party financing can also create disputes over interest rates, loan terms, why the financing was needed, and whether the arrangement complies with Indonesian tax rules.
Can a Company Challenge a Transfer Pricing Adjustment Through an Objection?
If DGT concludes during a tax audit that a related-party transaction does not follow the arm’s length principle, it can adjust the company’s taxable income and issue a tax assessment.
A taxpayer that disagrees with the assessment can generally file an objection with DGT within three months from the date the assessment is sent, subject to the applicable procedural requirements.
The objection should state the amount of tax the company considers correct and explain why it disagrees with DGT’s adjustment. Before filing the objection, the company must generally pay at least the amount of tax it agreed to during the final audit discussion that remains payable.
DGT generally has 12 months from receiving a complete objection to issue its decision. If DGT does not issue a decision within this period, the objection is deemed granted.
If the objection is rejected or only partly accepted and the company does not appeal, a 30% administrative penalty can apply to the relevant unpaid amount.
When Can a Transfer Pricing Dispute Go to the Tax Court?
If DGT rejects or only partly accepts the objection, the taxpayer can appeal the decision to Indonesia’s Tax Court.
An appeal generally must be filed within three months from receiving the objection decision and should clearly explain why the taxpayer disagrees with it.
Preparing an objection or Tax Court case? Contact MAP Resources Indonesia at info@mapresourcesindonesia.com
The Tax Court can review the company’s transfer pricing analysis, financial information, contracts, benchmarking, and other evidence relating to the adjustment.
If the appeal is rejected or only partly accepted, a 60% administrative penalty can apply to the amount determined by the Tax Court, after taking into account tax paid before the objection.
How Can MAP Resolve Cross-Border Double Taxation?
An Indonesian objection or Tax Court appeal deals with the Indonesian tax assessment. It cannot require another country’s tax authority to change its tax treatment.
If an Indonesian transfer pricing adjustment causes the same income to be taxed in Indonesia and another country, a Mutual Agreement Procedure (MAP) may provide another way to resolve the problem under the relevant tax treaty.
Under MAP, the tax authorities of Indonesia and the treaty partner discuss the case and try to resolve tax that should not arise under the treaty.
The deadline for requesting MAP depends on the relevant tax treaty and Indonesian procedural rules. Companies should check the applicable deadline when the transfer pricing adjustment is identified.
MAP can generally run alongside an Indonesian objection or appeal when the same disputed issue is covered by both procedures.
Can an APA Prevent the Same Transfer Pricing Dispute From Returning?
An Advance Pricing Agreement (APA) allows a taxpayer and the relevant tax authority to agree in advance on how certain related-party transactions will be priced.
An APA can be useful when the same pricing issue repeatedly arises in tax audits, as it can establish the transfer pricing approach for transactions during the period covered by the agreement. Depending on the circumstances, an APA can involve DGT alone or DGT and the tax authority of another country.
An APA does not replace the objection or appeal process for every existing dispute. Whether it is suitable depends on the transaction and the applicable APA rules.
What Evidence Matters in a Transfer Pricing Dispute?
Transfer pricing documentation is important, but having the documents does not by itself prove that the company’s pricing is correct.
Where required, the company’s master file and local file should match its financial statements, agreements, invoices, and what happened in the actual transaction.
For intercompany services, useful evidence can include contracts, invoices, correspondence, reports, deliverables, calculations showing how costs were allocated, and records showing what the Indonesian company received for the payment.
MAP Resources Indonesia can review the evidence supporting a disputed related-party transaction. Contact info@mapresourcesindonesia.com
For financing, the company may need to support the amount borrowed, interest rate, loan terms, use of the funds, and business reason for the arrangement.
Benchmarking should also reflect the actual transaction. A company or transaction used for comparison may provide weak support if the businesses operate differently, take different risks, use different assets, or operate under significantly different market conditions.
Manage Transfer Pricing Disputes With MAP Resources Indonesia
MAP Resources Indonesia assists foreign-owned companies with transfer pricing reviews, tax audit support, objections, dispute preparation, MAP, and APA matters. Contact us at info@mapresourcesindonesia.com.
