The Minister of Finance (“MoF”) has issued a new regulation No. 172 of 2023 (“PMK-172”) concerning   the implementation of the arm’s length principle in related-party transactions. This regulation revokes several MoF regulations, i.e. MoF Regulation No. 213/PMK.03/2016 (“PMK-213”), MoF Regulation No. 49/PMK.03/2019 (“PMK-49”), and MoF Regulation No. 22/PMK.03/2020 (“PMK 22”), yet combines the TP principles stipulated therein altogether to provide legal certainty on Transfer Pricing (“TP”) regulations.

Although most TP principles remain the same as in the previous MoF regulations, PMK-172 emphasizes and clarifies several principles / treatments, such as the following:

1. Introduces the term “independent transactions influenced by related parties” which need to comply with TP rules;
2. Related-party transactions (“RPT”) can also be described as transactions involving attachment and dependency. Such attachment and dependency are deemed to occur if one or more parties control each other, or if one or more parties are not independent;
3. Control is deemed to exist including if there are parties that are commercially or financially known or declare themselves to be in the same business group or if a party declares that it has a special relationship with another party;
4. If the Directorate General of Taxes (“DGT”) imposes a TP adjustment on transactions conducted between parties located in Indonesia during a tax audit, which leads to a double taxation, the counterparty involved in the RPT has the option to implement a corresponding adjustment, provided that the adjusted taxpayer agrees to such adjustment and refrains from pursuing any legal action;
5. Secondary adjustments and constructive dividends will apply the Tax Treaty rate, if relevant. The auditor will eliminate the secondary adjustment if funds are returned by the counterparty to the Taxpayer (auditee) and/or if the Taxpayer agrees to the primary TP adjustment;
6. As a TP adjustment is also applicable to the selling prices when calculating the VAT payable at the seller’s side, the input VAT credit at the buyer’s side can still be recognized according to the facts of the VAT Invoice; and
7. Introduces new requirements for intercompany loan transactions whereby such transactions shall meet certain criteria stipulated within Article 13(4).

PMK-172 also explains further the administrative guideline for the above, including for Mutual Agreement Procedure (“MAP”) and Advance Pricing Agreement (“APA”) procedures.

This regulation became effective on 29 December 2023. However, it comes into effect for the ongoing MAP / APA processes for which the decision letter has not been issued. The compliance obligation of TP documentation for FY 2024 onwards shall also be conducted based on PMK-172.