BDO Transfer Pricing Services

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BDO Indonesia

TRANSFER PRICING SERVICES

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What do you know about transfer pricing in Indonesia?

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REGULATORY REQUIREMENT

A special relationship can be triggered by: • Direct or indirect share

ownership of 25% or more • Common control (e.g.

management or technology)

• Bloodline or by marriage

SPECIAL RELATIONSHIP

• Embedded in Article 10 (1) of Income Tax Law and Article 2 (2) of VAT Law and Article 9 of tax treaty

• Pricing of transactions between parties with special relationship must be arm’s length

ARM’S LENGTH PRINCIPLE

• Article 18(3) of Income Tax Law gives DGT authority to re-determine the amount of income and/or expense or debt as equity using any of the five arm’s length methods (through an issuance of tax assessment)

CONSEQUENCE OF NON-ARM’S LENGTH

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THE WHAT, WHY AND HOW

WHAT

WHY

HOW

• The object of transfer pricing scrutiny is when pricing of transactions between related parties take place under different conditions than those taking place between third parties

• The possibility of tax evasion through profit shifting from a high-tax jurisdiction (e.g. Indonesia at 25%) to a low tax jurisdiction (e.g. Singapore at 17% or lower) for cross border related party transactions.

• The possibility of utilising different tax rate (e.g. final versus non final tax or when one of the parties has fiscal loss balance) for local related party transactions.

• Through sales or purchase of tangible products • Through transfer of intangibles (e.g. provision of services, technology, patent, etc) • Through provision of financial services transactions (e.g. loan, guarantee fee)

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INDONESIAN TRANSFER PRICING MILESTONE

2008 1 Jan 2008

(PP 80/2007)

2009 2 July 2009

(PER-39/PJ/2009)

2010 31 Mar 2010

(S-153/PJ.04/2010)

Oct 2010 6 Sep 2010 – (Reg 43/PJ/2010) 3 Nov 2010 – (Reg 48/PJ/2010) 31 Dec 2010 – (Reg 69/PJ/2010)

Nov 2011 11 Nov 2011

May 2013 30 May 2013

Oct 2013 24 October 2013

TP documentation

becomes mandatory

TP Disclosure form in CITR introduced

(effective FY 2009)

DGT issues internal TP

Guideline for auditors Reg-43

Reg-48 Reg-69

Key TP Regulations Reg-32 (Reg 32/PJ/2011)

Amendment of Reg-43

Reg-22 (Reg 22/PJ/2013)

TP Audit Guidelines Circular 50 (Circular No 50/PJ/2013)

Implementation of PER-22

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RECENT TRENDS

• In recent times, tax audit has become a challenging process for many taxpayers – especially those that have related party transactions.

• The risk of getting more scrutiny in the area of transfer pricing increases, especially when the audited taxpayer fits into one or more of the following conditions:

Significant volume of related party transactions in

proportion to sales or net operating

income.

Cross-border related party transactions.

Special related party transactions

such as provision of services, payment of royalties, and

payment of interest.

Financial performance that is

below industry standards.

Perpetual losses.

Significant interest expense, foreign exchange loss/

income and loss/income from asset

disposal.

Increased risk of scrutiny

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• For taxpayers who are expecting tax audit, they may want to consider assessing its position carefully and identify the potential areas that the Indonesian Tax Office (“ITO”) may challenge, then do an early preparation to effectively mitigate the risks of challenges that could lead to tax/transfer pricing disputes.

• The first step in managing your transfer pricing risk is to put in place contemporaneous transfer pricing documentation which is mandatory for the following related party transactions: • Those which are cross-border and with a

value of more than Indonesian Rupiah (“IDR”) 10 billion per annum (approximately USD 800,000) per counterparty, or

• Those within Indonesia where there is an opportunity to utilise “different” tax rates (e.g. transactions with a company that is

subject to final tax) and again with a value of more than IDR 10 billion per annum per counterparty

• For related party transactions categorised as “special transactions”, prepare the necessary supporting documents (what is commonly known as “Level 2 Documentation”) to satisfy the necessity/existence test and the economic benefits test which the ITO will apply during tax audit.

• For future transactions, prepare a planning study to ensure that implementing a pricing model that can be supported from an arm’s length principle perspective. For more certainty, a taxpayer can also opt to apply for Advance Pricing Agreement (“APA”).

MANAGING YOUR TRANSFER PRICING RISKS

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• Many taxpayers have formed a view that their transfer pricing compliance is only to prepare formal transfer pricing documentation (i.e. testing exercise). This is a common mistake that has often led to significant transfer pricing assessments.

• Many have disregarded the need to undertake a price-setting exercise (i.e. transfer pricing planning study) to ensure they will get an arm’s length return at year-end. Because of this, in many cases, taxpayers have returned year-end financial result that is either below industry standard or (in some cases) are in perpetual losses for many years. Consequently, these taxpayers are exposed to a high transfer pricing risk.

• Below is an illustration of the best practices to effectively manage your transfer pricing risks.

MANAGING YOUR TRANSFER PRICING RISKS (CONT’D)

Planning and price setting

Drafting and executing

intercompany agreement

Determining internal pricing

mechanism

Developing transfer pricing policy and

procedures manual

Documenting and compliance

Phase 1 Phase 2 Phase 3 Phase 4 Phase 5

Illustration 1 – Transfer pricing cycle

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HOW WE CAN HELP YOU?

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HOW WE CAN HELP YOU

YOUR NEEDS REQUIREMENTS REGULATORY BASIS OUR EXPERTISE YOUR BENEFIT

FIRST LAYER OF DEFENSE

Satisfying the Indonesian formality requirement

Contemporaneous transfer pricing documentation (“TPD”) that support CITR disclosures (Form 3A and 3A-1).

Director General of Taxes (“DGT”) Regulation No 32/PJ./2011 (“Reg-32”)

Assisting with the preparation of your formal transfer pricing documentation to reflect a current year’s financial and business performance.

• Enable identification of key soft areas (gap analysis).

•Develop action steps to put in place defense for these areas.

If your financial performance for a particular year is below the industry average or in a declining trend, you may want to consider undertaking Special Factor Analysis (“SFA”). The objective of this exercise is to prove that the poor/declining financial result does not necessarily mean it is a result of transfer pricing practices.

• Get a head start to collect supporting documents to support the analysis (and/or adjustments when appropriate).

•Take the opportunity to develop defense arguments.

•Take the necessary steps to put in place additional supporting documents as appropriate.

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HOW WE CAN HELP YOU (CONT’D)


SECOND LAYER OF DEFENSE

Preparation of supporting documents: [please note there are just some samples and therefore, is not an exhaustive list. A more comprehensive review may be required to identify your documentation needs]

Sale/purchase of product:

Commercial invoice, Import documents, purchase order, transfer pricing policy

• DGT Regulation No 22/PJ./2013 (“Reg-22”)

• DGT Circular Letter No 50/PJ./2013 (“Circular 50”)

Assisting with tax/TP diagnostic review

• Allow gap analysis to minimize potential risk of assessment due to non-reconciling items (e.g. between VAT and COGS).

Intra-group services and royalty payments:

• Compilation of supporting evidence (e.g. email correspondence, report, minutes of discussion, travel documents, CV of service providers, cost base calculation, etc.)

• Narration to evident the existence and economic benefits they have brought to the Company by linking the company’s supporting documents with the transfer pricing principles for intra-group services.

Assisting with Level 2 documentation review

• Increased possibility to secure deductibility of these expenses (in partial or full amount) – especially that these transactions are considered high risk transactions. You may want to consider preparing your Level 2 Documentation if you are expecting tax audit and the transaction value is above IDR 10 billion per annum.

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SECOND LAYER OF DEFENSE : (CONT’D)

Completion of various forms

In a tax audit event, taxpayers will be required to fill out ten different forms in only seven working days and conduct a presentation of its transfer pricing position before the tax audit team.

• Reg-22 Assisting with the completion of the forms.

• Head start on completion of these forms and preparation of defense arguments. This will also ensure that the Company’s responses on the questions are consistent with its FY2014 CITR disclosures and its transfer pricing documentation.

• Early preparation of what to present and determining the appropriate defense strategy.

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ASSISTANCE WITH TRANSFER PRICING DISPUTE RESOLUTION

Local avenue: Assistance with transfer pricing audit, filing tax objection and filing tax appeal to the tax court.

International avenue: Assistance with Mutual Agreement Procedure for transaction with a tax treaty country.

• To ensure requests from the ITO (or the Tax Court judges in case of tax appeal) are addressed in a timely manner.

• To ensure provision of data/information consists of those requested and not those that could potentially open an area for dispute.

• Art.18 of Income Tax Law • OECD Transfer Pricing Guidelines

• Reg-22 • DGT Circular No.50/PJ/2013

• Advising you on how to best present data/information to the ITO or tax court judges.

• Assisting you to put forward technical arguments that would strengthen your transfer pricing position.

• Guiding you in every step of the process and advising your rights as a taxpayer.

• Sharing with you our past experience and collaborating with you to develop an effective defense strategy.

• Reducing efforts in preparing documents/information that are not necessary for your defense.

•Having a more structured defense strategy and implementation.

•As transfer pricing audits (objection and appeal) tend to be fact-intensive, we will guide you to strike a balance between providing critical facts of your business/industry and ensuring discussions with the authorities are still conducted in consideration of the transfer pricing technical aspects.

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TRANSFER PRICING PLANNING

Legal certainty for future related party transactions through planning and/or APA

• Adherence to the arm’s length principle before and after transactions.

• Reduce unnecessary costs of transfer pricing disputes.

•Compliance to Base Erosion Profit Shifting initiatives of the OECD member countries.

• Art.18 of Income Tax Law • OECD Transfer Pricing Guidelines

• BEPS action plan • Reg-22 • PMK No 7/PMK.03/2015 regarding APA procedure

• Assisting with the pre-lodgment phase.

• Assisting with preparation of the planning document.

• Assisting with the preparation of the Advance Pricing Agreement Application.

• Assisting you in the discussions with the tax authorities.

• Reduce the risk of future transfer pricing disputes.

•Ensure obtaining an arm’s length outcome from transactions – which will help strengthen your position during tax audit.

Robust transfer pricing policy

• A policy that is consistent with the arm’s length principle yet able to accommodate your business needs.

• OECD Transfer Pricing Guidelines

• Assisting you in ensuring the policy is in line with the planning study.

• Advising you with the necessary Level 2 documents.

• Having a business process that is in compliance with the Indonesian arms length requirements.

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• We have a dedicated team of transfer pricing specialists who have vast knowledge in various industry segments, including: manufacturing and distribution of consumer products (fast moving consumer goods and consumer electronics), plantation (palm oil), energy (e.g. geothermal, oil and gas), utilities and mining (e.g. coal, copper, gold and nickel), hospitality, chemicals.

•A strong global network in 151 countries that operate through 1,328 offices across the globe. The BDO International network shares common culture & passion aligned around parallel themes of:

•Quality People. We focus on investing in & hiring the best & insist on strong personal relationships throughout firm & network; and

•Quality Service. We provide quality service based not only on technical expertise, but also on business acumen, commercial awareness & local knowledge.

•One clear defining aspect of the BDO network is its belief that working relationships between people are key factor. The network is known for its close involvement with clients, getting to know them & their business needs while always maintaining human perspective.

WHY US?

For more information please contact: PT BDO BISNIS SOLUSI INDONESIA

Michelle Mianova ([email protected])

BDO Indonesia Prudential Tower 16th-18th Floor Jl. Jenderal Sudirman, Kav. 79 Jakarta 12910, INDONESIA Tel : +62-21 5795 7300 Fax : +62-21 5795 7301 www.bdo.co.id

About BDO

BDO is the one of the largest global network of public accounting, tax and advisory firms which perform professional services. These firms have representation in 154 territories, with 64,300 people working out of over 1,400 offices worldwide.

BDO member firm in Indonesia dated back to 1992 when Drs Richard B Tanubrata was the Managing Partner of KAP Drs RB Tanubrata, a public accountant firm that was founded in 1979.

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BDO Transfer Pricing Services