Major developments for taxpayers in Indonesia

Jan 30, 2017

A new Ministry of Finance (“MOF”) Regulation No. 213/PMK.03/2016 (“MoF-213”), which was issued and became effective on 30th December 2016, will have profound transfer pricing implications for taxpayers in Indonesia. The MoF-213 requires companies that meet certain criteria to maintain three tiers of transfer pricing documentation:

• Master file – providing a high level overview of the multinational’s global operations and value chain;

• Local file – providing detailed analysis of the local entity’s operations and transfer pricing practices; and

• Country-by-Country (“CbC”) report – providing a wide range of specific information regarding the value chain and operations of the multinational as a whole.

These requirements are broadly in line with the provisions of the final report on Base Erosion and Profit Shifting (“BEPS”) Action Plan 13 – Transfer pricing documentation, issued by the OECD on 5th October 2015, although with a number of exceptions. The issuance of MoF-213 on 30th December 2016 means that Indonesia is the first country in South-East Asia to implement the BEPS Action Plan 13.

The main implications of these new transfer pricing documentation requirements for taxpayers in Indonesia can be summarised as follows:

• Many more companies will need to prepare transfer pricing documentation with effect from fiscal year (“FY”) 2016;

• The transfer pricing documentation required for FY2016 onwards is much more extensive and onerous to prepare;

• The timing for preparation of this documentation is very demanding, much more so than was previously the case;

• The consequences of non-compliance, including not meeting the tight deadlines, are more severe than before; and

• The introduction of CbC reporting will provide the tax authorities with significant information regarding the operations and profitability of the multinational outside Indonesia, which is likely to lead to more transfer pricing audits, adjustments and disputes in the future.

 We will look at each of these in turn.

Many more companies will be caught by MoF-213

With effect from FY2016, any company will need to prepare transfer pricing documentation (Master and Local files) if it has related party transactions and:

• Gross turnover for the previous fiscal year (i.e. FY2015) in excess of IDR 50 billion (approx. US$3.75 million); or

• Related party transactions in the previous fiscal year in excess of:

  • IDR 20 billion (approx. US$1.5 million) for transactions involving tangible goods; or

  • IDR 5 billion (approx. US$375,000) for each service transaction, payment of interest, utilization of intangible goods or other related party transaction; or

• The related party on the other side of the transaction is located in a country or jurisdiction with a lower income tax rate than Indonesia’s rate (currently 25%).

Previously, transfer pricing documentation was required only where the taxpayer had an aggregate value of transactions with any one related party in excess of IDR 10 billion (approx. US$750,000). Under MoF-213, transfer pricing documentation is required:

• Where the company’s gross turnover exceeds IDR 50 billion in the previous fiscal year, irrespective of the amount of the related party transactions;

• Where the taxpayer enters into any type of and amount of related party transaction with a counter-party in a lower tax jurisdiction (such as Singapore and Hong Kong, for example), irrespective of the amount of the related party transaction and irrespective of the amount of turnover; and

• Where the taxpayer enters into any type of related party transaction, other than a tangible goods transaction, in excess of IDR 5 billion (much lower threshold than before).

Therefore, the requirements for transfer pricing documentation will be relevant for many more taxpayers in FY 2016 than before.

The documentation requirements are much more extensive

Taxpayers that are caught by the requirements of MoF-213 as outlined above will need to prepare two types of documentation with effect from FY2016:

Master file

The master file must include the following information about the multinational group (“MNE Group”) as a whole:

• Structure and ownership chart along with the state or jurisdiction of each member of the MNE Group;

• Business activities of each member of the MNE Group;

• Intangible assets owned by the MNE Group;

• Financial and financing activities taking place in the MNE Group; and

• Parent company’s consolidated financial statement and details of any Advance Pricing Agreement (“APA”) impacting on the related party transactions of the Indonesian taxpayer.

Therefore, the taxpayer will need to investigate whether a Master file has already been prepared, possibly by an overseas parent or intermediate parent entity, and whether this satisfies the specific requirements of the Indonesian tax authorities as specified in MoF-213, which are not completely in alignment with the standard requirements of a Master file per the OECD Action Plan 13 report (e.g. more details on group-wide management structure and development of intangibles are required than would be needed per OECD standard). If such a Master file does not already exist, urgent action will be required to prepare such a file for Indonesian requirements for FY 2016. It is often the case that some form of transfer pricing documentation will already have been prepared by the parent entity and so could be leveraged (if it can be obtained, of course), but such documentation will need to be updated and tailored to the Indonesian requirements.

It is also important to note that the documentation needs to be prepared using the Bahasa Indonesia language. If the taxpayer has been approved to perform bookkeeping using a foreign language or currency other than Indonesian Rupiah (i.e. normally US$), the transfer pricing documentation can be prepared in accordance with the foreign language permitted (i.e. normally English). However, a translation to the Indonesian language will still be required. This in itself will lead to an unwelcome additional compliance burden for many taxpayers.

 Local file

 The local file is to include the following information about the Indonesian taxpayer:

• Identity and description of business activities;

• Information on related party and independent transactions;

• Selection and application of the most appropriate transfer pricing method for each related party transaction in order to apply the arm’s length principle;

• Financial information and analysis; and

• Details of any non-financial events or facts which may affect the price setting or profit level.

If the taxpayer carries out more than one business activity, it will need to prepare segmented income statements and carry out transfer pricing analyses on each segment separately.

Although there was a need for local file transfer pricing documentation prior to MoF-213, it is important to note that the requirements of MoF-213 are now much more specific and comprehensive, which will require all taxpayers to revisit and update the structure and content of their existing transfer pricing reports to a substantial extent.

The deadlines for preparation of the transfer pricing documentation are very demanding

From an immediate and practical perspective, the most challenging aspect of the new rules will likely be the timing:

• The Master file and Local file must be prepared and “available” within four months of the end of the fiscal year – so for companies with a year-end of 31st December 2016, the transfer pricing reports will need to be prepared by 30 April 2017, even if an extension of time is obtained for the submission of the tax return for that year;

• The taxpayer is required to prepare a “Statement Letter”, to be signed by the preparer of the transfer pricing documentation, to declare when the transfer pricing reports were “available” and this is required to satisfy the above deadline if the reports are to be considered valid. The Statement Letter does not need to be submitted with the tax return, but should be attached to the Master file and Local file altogether for submission to the tax authorities on request; and

• The taxpayer is also required to submit an additional form along with the tax return – this form requires the taxpayer to confirm whether the Master file and Local file contains the required elements, and the date on which each of these reports were available, as declared on the Statement Letter. The form needs to be signed off by the taxpayer, in the same way as the tax return.

Therefore, while the taxpayer only has to submit the transfer pricing documentation to the tax authorities on request (deadlines are typically short), the above provisions do ensure that the transfer pricing documentation must be prepared within four months of the end of the fiscal year.

The CbC report is to be available no later than 12 months after the end of the tax year and submitted with the tax return of the following tax year. Since the MoF-213 became effective on 30 December 2016, it appears clear that the obligation to prepare the CbC report applies to the year ended 31st December 2016. Therefore, the CbC reporting obligations can be taken to apply for fiscal years commencing on or after 1 January 2016 – this makes Indonesia one of the few countries in the world that have introduced the CbC reporting obligations for the 2016 year.

The consequences of non-compliance are clear and severe

MoF-213 provides that if taxpayers do not prepare the transfer pricing documentation as required by MoF-213 or misses the deadline for preparation of such documentation, the consequences are that such documentation is deemed not to exist for the purposes of assessing the arm’s length nature of the company’s transfer pricing policies, and that there would be no protection from or reduction in penalties in the event of a transfer pricing adjustment.

Further, without the transfer pricing documentation as required by MoF-213, it would be impossible for the taxpayer to apply for any tax refund or file tax objection letters to claim back the tax benefits rightfully belong to the taxpayer, leading to an immediate loss of benefits.

It is also clear that non-compliance would leave the door wide open for the tax authorities to make their own transfer pricing analyses, as they deem appropriate.

The introduction of CbC reporting will lead to more transfer pricing disputes

A CbC report is required, together with the Master file and Local file, if the Indonesian taxpayer (i) is the parent company of a business group, (ii) prepares consolidated financial statements, and (iii) has consolidated gross turnover of at least IDR 11 trillion (approx. US$827 million) in the relevant tax year.

If the Indonesian taxpayer is a member of a business group with consolidated gross turnover of at least IDR 11 trillion (approx. US$827 million) in the relevant tax year and the parent company of that group is a non-resident taxpayer, the Indonesian taxpayer has the obligation to submit the CbC report if the country or jurisdiction where the parent company is domiciled:

• Has no obligation to provide the country-by-country report;

• Has no agreement with the Indonesian government in relation to the exchange of tax information; or

• Has an agreement with the Indonesian government in relation to the exchange of tax information, but the CbC report cannot be obtained by the Indonesian government from that country for some reason.

 Consistent with the OECD Action Plan 13 report, the CbC report should contain the following disclosures:

• List of members/entities in the group;

• Type of business activities;

• Country or jurisdiction;

• Gross income including independent and related party transactions (excluding payment considered as a dividend by the taxpayer’s jurisdiction);

• Net profit (loss) before tax;

• Income tax withheld/collected/paid;

• Total income tax payable reported in the financial statement;

• Capital;

• Accumulated retained earnings;

• Number of permanent employees; and

• Tangible assets other than cash and cash equivalents.

 This is to be done by way of completion of the following forms:

• Form CBC-1: Information on income allocation, taxes paid and business activities by country or jurisdiction;

• Form CBC-2: Information on the list of members of Business Group and main business activities by country or jurisdiction; and

• Form CBC-3: Additional information.

Although the information is to be stated in respect of each jurisdiction, which is the international norm, it is important to note that MoF-213 also requires the CbC Working Papers to be submitted as well, detailing all information regarding business activities as well as information on income allocation as outlined above, for all of the entities of the MNE Group in each jurisdiction. This is beyond the requirements of other countries and not in accordance with the OECD’s report on BEPS Action Plan 13.

The provision of this extensive information to the Indonesian tax authorities, either directly by the Indonesian taxpayer, or indirectly by the overseas parent entity (which would provide the CbC report to the overseas tax authority, which would then automatically exchange it with the Indonesian tax authority), will likely lead to more transfer pricing queries, challenges and disputes in the future in Indonesia.

What should taxpayers do?

The most urgent item on the to-do list for every Indonesian taxpayer must be to understand the impact and requirements of MoF-213 and formulate an action plan to comply. The consequences of non-compliance, including missing any of the stipulated deadlines, are far too serious to contemplate. In the longer-term, companies should ensure that their transfer pricing practices are in line with the arm’s length principle and can be supported as such if and when questioned by the Indonesian tax authorities.

How can we help?

Quantera Global can assist companies to:

• Understand the requirements of MoF-213 and advise on the types of transfer pricing documentation required;

• Prepare the necessary transfer pricing documentation, including Master file, Local file and CbC report (if required), in line with the requirements of MoF-213 within tight deadlines; and/or

• Carry out a prudential risk review of their existing business model, transfer pricing policies and documentation.

We can also prepare the required transfer pricing documentation for other countries in the Asia Pacific region, as we have our own offices and highly experienced transfer pricing specialists based across the region.

About Quantera Global

Quantera Global is one of the world’s leading independent transfer pricing advisory firms, providing specialist and integrated transfer pricing services to multinationals of all sizes across the globe. We provide specialist transfer pricing consulting services throughout the Asia Pacific region, as well as in Europe and the Americas.