The Indonesian transfer pricing guidelines (issued in September 2010) were amended in November 2011 to be more closely aligned with the 2010 OECD Guidelines. See TaxNewsFlash-Transfer Pricing: Indonesia - Revised transfer pricing guidelines include changes on most appropriate method, documentation for domestic transactions, and comparables
Then, later in 2011, a government regulation (GR 74/2011, 29 December 2011) covering a number of topics in relation to taxpayer rights and obligations revoked GR 80/2007 (i.e., the regulation which first included specific documentation requirements for related-party transactions).
What was the dilemma that taxpayers faced?
Since the issuance of the regulations concerning mutual agreement procedures (MAP) on 3 November 2010 (PER 48/2010), Indonesian taxpayers faced a dilemma concerning when adjustments made by the Indonesian Tax Office resulted in taxation that was not in accordance with an applicable income tax treaty / double tax agreement.
Under the terms of an applicable income tax treaty, taxpayers could have the option of requesting that the competent authorities of the respective jurisdictions resolve the matter (i.e., decide which jurisdiction would tax the “income”) through the MAP process. The income tax treaty also may have specifically stated that the MAP resolution could proceed independently of local dispute resolution options.
However PER 48/2010 stipulated that an MAP application was not to be accepted—or an ongoing MAP was to be cancelled—if the Indonesian taxpayer exercised the option to object to or appeal the issue under domestic provisions (i.e., under Indonesia’s general tax procedures law, Law 16/2009, Articles 25 and 27). This created what was viewed as an inequitable situation—one that was at odds with the spirit and legal position of income tax treaties—and resulted in difficult positions for both taxpayers and competent authorities alike.
Dilemma is addressed
It is now specifically stated in the December 2011 regulation (GR 74/2011) that a MAP may be applied concurrently with a taxpayer’s objection to or request for a reduction of an incorrect tax assessment when filed with the Indonesian Tax Office, or appealed to the Indonesian Tax Court.
If the MAP is concluded in manner such that an adjustment would need to be made to the tax authorities’ transfer pricing adjustment, GR 74/2011 refers to a provision in Article 16 of the general tax procedures law authorizing the Director General of Taxation to correct an assessment or objection decision. It is implied, though not specifically stated, that this approach will be taken if an objection is in “process” but not yet concluded.
However, when an appeal is in “process,” the regulation seems to imply that the appeal must be withdrawn (i.e., revoked) before any correction to the assessment or objection decision can be made.
Further, it is specifically stated that a MAP case will be terminated if an appeal decision is made prior to the mutual agreement being reached—signaling, perhaps, that Indonesian Tax Court decisions are perceived to have greater weight and authority than competent authority decisions.
The December 2011 regulation (GR 74/2011) covers a number of topics relevant in the transfer pricing context, including:
- The need to maintain documentation supporting the fact that the pricing of related-party transactions adheres to the arm’s length principle for 10 years (unchanged)
- Further clarifications on the application of advance pricing agreements (APAs) including that APAs are binding for the covered period; the Director General of Tax may not “correct” a matter covered by an APA; that documents submitted in an APA process must be returned if an agreement is not reached; and that documents submitted may not be used by the Director General of Tax as a basis for audit or investigation
The regulation states that additional guidance on these issues may be provided in the future.
KPMG observation
Tax professionals note that with the new regulation, the rapid development in the Indonesian transfer pricing arena continues with these positive changes. Prudent taxpayers would take note of these developments and consider all available options when faced with any adjustments. Also, it is noted that the clarifications regarding the use of documentation in APA applications may address some concerns that taxpayers have had in entering into such applications.
For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services in Indonesia:
Graham Garven
+62 (0)21 5799 5157