Road to More Advanced Transfer Pricing (TP) Practices:

Three-tiered approach to transfer pricing documentation

Following the finalization of the OECD/G-20 BEPS Report Action 13 in October 2015, the Indonesian Ministry of Finance has finally issued a new regulation No. 213/PMK.03/2016 (“PMK-213”) on 30 December 2016, which requires taxpayers with certain conditions to prepare a three-tiered approach to transfer pricing documentation. The new regulation is effective from 30 December 2016 onwards.  On this basis, although it is not stated clearly in the regulation, it could be interpreted that the requirements stated within PMK-213 are also applicable for fiscal year 2016, and this would affect taxpayers immediately.

Three-tiered approach to transfer pricing documentation

The three-tiered approach to transfer pricing documentation consists of three types of documents that need to be prepared by taxpayers.  These documents consist of:

a. Master File:
A document presenting information on the overall group entities, including but not limited to information on the group structure, functional profiles of the group entities, and contractual obligations of the group entities;

b. Local File:
A document presenting information on the local Taxpayers and detail information on their related-party transaction(s); and

c. Country-by-Country Report.
A report stating information on the financial and tax information of the group entities residing in the respective country / jurisdiction.

Who should prepare the three-tiered transfer pricing documentation?

The master file and the local file should be prepared by taxpayers who fulfil one or more of the criteria stated below:

1. Taxpayers who earned a gross revenue of more than IDR 50,000,000,000 in the previous fiscal year;
2. Taxpayers who conduct related party transaction(s), in the form of tangible goods transaction(s), of more than IDR 20,000,000,000 in the previous fiscal year;
3. Taxpayers who conduct related party transaction(s), in the form of intangible goods transaction(s), of more than IDR 5,000,000,000 in the previous fiscal year; or
4. Taxpayers who conduct transaction(s) with related party(ies) located in a jurisdiction with a lower Income Tax Rate than Indonesia.

A taxpayer that is a subsidiary of an overseas entity should also prepare a country-by-country report if the country / jurisdiction where the ultimate parent resides:

1. Does not require the filing of country-by-country report;
2. Does not have an agreement with Indonesia in relation to the exchange of tax information; or
3. The Directorate General of Tax (DGT) is unable to obtain the country-by-country report from such country / jurisdiction despite the fact that the country / jurisdiction has an exchange of tax information agreement with Indonesia.

A Taxpayer that resides in Indonesia and acts as the ultimate parent of its subsidiaries should prepare all the three tiers of the transfer pricing documentation (i.e., master file, local file and country-by-country report) if the taxpayer earns a consolidated gross revenue of more than IDR 11,000,000,000,000.

When to prepare the transfer pricing documentation

Contemporaneous master file and local file should be prepared.  This means that the master file and local file should be prepared based on the data and information available when the affiliated transaction(s) occur.  The completed documentation should be readily available at the latest 4 months after the end of the fiscal year.  Quick action is required to anticipate this requirement.

As for the country-by-country report, it should be prepared based on the data and information available at the end of the fiscal year.  The country-by-country report should be readily available at the latest 12 months after the end of the fiscal year.

Is the three-tiered approach documentation required to be submitted along with the annual CITR?

Master file and local file

The regulation does not mandate taxpayers to submit the master file and local file along with the annual CITR.  However, the regulation clearly states that taxpayers should submit a prescribed form which declares that the said documents are readily available during the submission of the CITR.

Country-by-country report

The regulation requires taxpayers to submit the country-by-country report as an appendix of the CITR in the following fiscal year.  For example, the country-by-country report for FY 2017 should be submitted in the FY 2018 CITR.

Repercussions of not preparing/ not submitting transfer pricing documentation in a contemporaneous and timely manner

The regulation specifies that the DGT has the authority to deem a taxpayer’s related party transaction(s) to be not in accordance with the arm’s length principle if the taxpayer fails to prepare / the transfer pricing documentation in a contemporaneous manner.

Furthermore, the documentation should be provided to the tax office upon request within the timeline as specified under the prevailing tax regulations.  When the taxpayer fails to submit the documents on time or the taxpayer cannot provide the documents as requested, the tax office shall deem that the taxpayer does not properly maintain the transfer pricing documentation.

Language

The three-tiered approach documentation should be presented in the Indonesian language, except for taxpayers that obtains an approval for English bookkeeping where they can prepare the documentation using English language along with the Indonesian translation.

Action points

We believe that this requirement is important for the taxpayers and the relevant Group companies to fulfil immediately. We suggest that you consider this thoroughly and take immediate action to undertake a comprehensive analysis on you and your Group overall transfer pricing structures.  For this purpose, you may contact us or our professionals to discuss further, as we would be happy to assist you in this process.