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New transfer pricing guidelines

Freddy KaryadiOene Marseille

The Indonesian Director General of Taxation recently issued regulation no. per-43/PJ/2010 dated September 6 2010 in order to clarify how to implement arm's length and ordinary business practice principles for related party transactions.

The related parties' transactions are classified as follows:

  • sale, transfer, purchase or acquisition of tangible goods or intangible goods;
  • rentals, royalties, or other benefits arising from the provision or utilisation of tangible asset and intangible asset;
  • delivery or utilisation of services;
  • cost allocation; and
  • delivery or acquisition of asset in the form of financial instruments and income or expenditure arising from the transfer or acquisition of asset in the form of financial instruments concerned.

In order to apply both practice principles when entering related parties' transactions, the following steps shall be undertaken:

  • to conduct comparability analysis and to determine the comparison object;
  • to determine the appropriate transfer pricing method;
  • to apply the arm's length principle – based on comparability analysis and appropriate transfer pricing method – to transactions conducted by the taxpayer with related parties; and
  • to document every step in the determination of the arm's length price of the arm's length profit in accordance with prevailing tax regulations.

With regard comparability analysis, related parties transactions are considered comparable to the transaction between independent parties, if there is no significant difference of conditions which can effect the price or profit of the comparable transactions; or there are different conditions, but they can be adjusted to eliminate the material or significant influence of such differences on the price or profit. Internal comparison data which has the same level of comparability with external comparison data shall be prioritised for doing the analysis.

Comparability factors are terms and conditions in the transaction which may influence the result, including: the characteristics of goods or services; function performed (including associated risk, assets used and organisational structure); agreement between the parties in the transaction; economic condition and business strategy.

The most appropriate transfer pricing methods are as Comparable Uncontrolled Price (CUP); Resale Price Method (RPM) or Cost Plus Method (CPM); Profit Split Method (PSM) or Transactional Net Margin Method (TNMM).

Arm's Length Price or Arm's Length Profit resulting from the above method could be a single price or a range.

The regulation also addresses special transactions, transfer pricing documentations and adjustment (correlative and primary) powers of the tax authority. A taxpayer may submit an application of Mutual Agreement Procedure (MAP) to the Director General of Tax in accordance with the tax treaty, to resolve tax disputes (including transfer pricing issues) involving the application of the provisions in the tax treaty in accordance with prevailing regulations.

Oene Marseille & Freddy Karyadi

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