The Minister of Finance (MoF) issued a new regulation concerning the implementation of the Arm’s Length Principle in Affiliated Transactions on 29 December 2023 (PMK 172). PMK 172 revokes the previous regulations concerning (i) Transfer Pricing Documents, (ii) Mutual Agreement Procedures and (iii) Advance Pricing Agreement (Revoked Regulations) and unifies the regulations that were previously regulated under such regulations into one single regulation. The purpose of this unification is to provide fairness, legal certainty and easiness to the taxpayers. PMK 172 contains 11 sections that are further elaborated into 75 articles, i.e., (i) Section 1: Article 1 – Definition, (ii) Section 2: Article 2 – Related Parties, (iii) Section 3: Articles 3-15 – Implementation of Arm’s Length Principle, (iv) Section 4: Articles 16-35 – Transfer Pricing Documents, (v) Section 5: Articles 36-39 – Compliance Testing, (vi) Section 6: Article 40 – Linkage Adjustment, (vii) Section 7: Articles 41-54 – Mutual Agreement Procedures, (viii) Section 8: Articles 55-17 – Advance Pricing Agreement, (ix) Section 9: Article 72 – Delivery of Documents and Decrees, (x) Section 10: Article 73 – Transitional Provisions, (xi) Section 11: Articles 74-75 – Closing Provisions. This publication will focus more on some differences of PMK 172 compared to the Revoked Regulations.
Transactions Affected by Certain Related Relationships
PMK 172 regulates that the arm’s length principles implementation for transactions affected by certain related relationships must be preceded by an initial procedure. While the previous regulation only mentions six categories of transactions affected by certain related relationships, PMK 172 adds one more criterion, i.e., other financial transactions. There is no further explanation of what fits into other financial transactions. We believe this may give more flexibility to the directorate general of taxation when they carry out their supervisory duties.
Local Taxpayers is Declared as Permanent Establishment
If a local taxpayer who carries out related parties’ transactions also fulfills the requirements as a permanent establishment, such local taxpayer will also be declared as a permanent establishment. Such local taxpayers (permanent establishment) must submit the necessary data/information on the transactions carried out by foreign-affiliated parties concerning the activities of the permanent establishment. The information will be used to determine the transaction value of the permanent establishment. Failure to fulfill this requirement will result in the transaction value being determined by applying the arms’ length principle.
Removal of Administrative Sanctions (APA)
Article 66 paragraph (6) of PMK 172 removes the imposition of sanction for (i) amendment of the annual return for corporate income tax, (ii) issuance of notice of tax assessment, or (iii) amendment of the notice of tax assessment.
TP Docs
PMK 172 sets a maximum deadline for a taxpayer to submit TP Docs once requested by the Directorate General of Taxation (DGT). The taxpayer must submit the documents within one month as the delivery notice of such request. If the taxpayer cannot submit the documents within the given deadline, it will be subject to sanctions, among others (i) the documents would not be considered as TP Docs, (ii) issuance of an underpayment assessment letter with a monthly benchmark interest rate with an uplifting factor of 15%.
Corresponding Adjustment
PMK 172 adopts the concept of corresponding adjustment if there is (i) determination of transfer prices by the DGT through audit, or (ii) correction of transfer prices determination by the partnered tax avoidance’ authorities of foreign taxpayers. In these cases, the local taxpayer (Indonesian taxpayer) can request for corresponding adjustment. The adjustment would be carried out by (a) correction of the annual tax return, (b) issuance of a notice of tax assessment, and (c) correction of a notice of tax assessment. This can only be carried out if the local taxpayer (i) approves the determination of the transfer prices by the DGT and (ii) does not carry any appeal against the determination of the transfer prices by the DGT.
Commentary
In general, we view that the issuance of PMK 172 would create a significant impact on the transfer pricing regulations in Indonesia. The transfer pricing regulations, which were divided into several regulations, are now unified in one single regulation by the issuance of PMK 172. PMK 172 also addresses some issues that were not previously regulated, among others the corresponding adjustment. It also provides more guidance on the application of mutual agreement procedures and the advance pricing agreement in Indonesia. Hopefully, the issuance of this PMK 172 will clear out some issues which currently persist in Indonesia, especially during the dispute settlement mechanism.
The Minister of Finance (MoF) issued a new regulation concerning the implementation of the Arm’s Length Principle in Affiliated Transactions on 29 December 2023 (PMK 172). PMK 172 revokes the previous regulations concerning (i) Transfer Pricing Documents, (ii) Mutual Agreement Procedures and (iii) Advance Pricing Agreement (Revoked Regulations) and unifies the regulations that were previously regulated under such regulations into one single regulation. The purpose of this unification is to provide fairness, legal certainty and easiness to the taxpayers. PMK 172 contains 11 sections that are further elaborated into 75 articles, i.e., (i) Section 1: Article 1 – Definition, (ii) Section 2: Article 2 – Related Parties, (iii) Section 3: Articles 3-15 – Implementation of Arm’s Length Principle, (iv) Section 4: Articles 16-35 – Transfer Pricing Documents, (v) Section 5: Articles 36-39 – Compliance Testing, (vi) Section 6: Article 40 – Linkage Adjustment, (vii) Section 7: Articles 41-54 – Mutual Agreement Procedures, (viii) Section 8: Articles 55-17 – Advance Pricing Agreement, (ix) Section 9: Article 72 – Delivery of Documents and Decrees, (x) Section 10: Article 73 – Transitional Provisions, (xi) Section 11: Articles 74-75 – Closing Provisions. This publication will focus more on some differences of PMK 172 compared to the Revoked Regulations.
Transactions Affected by Certain Related Relationships
PMK 172 regulates that the arm’s length principles implementation for transactions affected by certain related relationships must be preceded by an initial procedure. While the previous regulation only mentions six categories of transactions affected by certain related relationships, PMK 172 adds one more criterion, i.e., other financial transactions. There is no further explanation of what fits into other financial transactions. We believe this may give more flexibility to the directorate general of taxation when they carry out their supervisory duties.
Local Taxpayers is Declared as Permanent Establishment
If a local taxpayer who carries out related parties’ transactions also fulfills the requirements as a permanent establishment, such local taxpayer will also be declared as a permanent establishment. Such local taxpayers (permanent establishment) must submit the necessary data/information on the transactions carried out by foreign-affiliated parties concerning the activities of the permanent establishment. The information will be used to determine the transaction value of the permanent establishment. Failure to fulfill this requirement will result in the transaction value being determined by applying the arms’ length principle.
Removal of Administrative Sanctions (APA)
Article 66 paragraph (6) of PMK 172 removes the imposition of sanction for (i) amendment of the annual return for corporate income tax, (ii) issuance of notice of tax assessment, or (iii) amendment of the notice of tax assessment.
TP Docs
PMK 172 sets a maximum deadline for a taxpayer to submit TP Docs once requested by the Directorate General of Taxation (DGT). The taxpayer must submit the documents within one month as the delivery notice of such request. If the taxpayer cannot submit the documents within the given deadline, it will be subject to sanctions, among others (i) the documents would not be considered as TP Docs, (ii) issuance of an underpayment assessment letter with a monthly benchmark interest rate with an uplifting factor of 15%.
Corresponding Adjustment
PMK 172 adopts the concept of corresponding adjustment if there is (i) determination of transfer prices by the DGT through audit, or (ii) correction of transfer prices determination by the partnered tax avoidance’ authorities of foreign taxpayers. In these cases, the local taxpayer (Indonesian taxpayer) can request for corresponding adjustment. The adjustment would be carried out by (a) correction of the annual tax return, (b) issuance of a notice of tax assessment, and (c) correction of a notice of tax assessment. This can only be carried out if the local taxpayer (i) approves the determination of the transfer prices by the DGT and (ii) does not carry any appeal against the determination of the transfer prices by the DGT.
Commentary
In general, we view that the issuance of PMK 172 would create a significant impact on the transfer pricing regulations in Indonesia. The transfer pricing regulations, which were divided into several regulations, are now unified in one single regulation by the issuance of PMK 172. PMK 172 also addresses some issues that were not previously regulated, among others the corresponding adjustment. It also provides more guidance on the application of mutual agreement procedures and the advance pricing agreement in Indonesia. Hopefully, the issuance of this PMK 172 will clear out some issues which currently persist in Indonesia, especially during the dispute settlement mechanism.
For Further Information, Please Contact:
MetaLAW, Legal Consultant, Jakarta, Indonesia
general@metalaw.id
