Indonesia continues to consolidate its position as one of the strictest jurisdictions in Southeast Asia in terms of transfer pricing. The Directorate General of Taxes (DGT) has strengthened the documentation, disclosure, and traceability requirements applicable to transactions between related parties, in line with the guidelines of the OECD and G20 BEPS Plan.
The country has implemented a robust compliance regime that requires a set of standardized reports—Local Report, Master Report, and Country-by-Country Report—along with active tax risk management by multinational companies. This article examines the documentation structure, the areas of risk identified by the tax authority, and the main mitigation strategies applicable in the Indonesian context.
Transfer Pricing Documentation Regime
Indonesia has adopted a tiered documentation system that seeks to ensure transparency and consistency among entities within a multinational group. This regime includes three main types of reports:
- Master Report: This document contains global information on the multinational group, including a description of its organizational structure, value chain, transfer pricing policies, and profit allocation. The Master Report is mandatory for taxpayers who exceed certain income thresholds defined by the Directorate General of Taxes (DGT) and must be available at the time of filing the annual return.
- Local Report: This report includes specific information on transactions carried out by the local entity. It contains a detailed functional analysis (functions, assets, and risks assumed), a description of controlled transactions, the selection of the transfer pricing method applied, the identification and justification of comparables used, as well as related contracts and financial results. The Local Report is required for companies that maintain transactions with related parties and exceed the income or transaction criteria established by the regulations.
- Country-by-Country Report: This report provides aggregated information by country on the revenues, profits, taxes paid, and main economic activities of each entity in the multinational group. It is intended for groups with global consolidated revenues above the threshold established by BEPS regulations (approximately IDR 11 trillion) and may be submitted by the parent entity or the designated subsidiary.
Each type of document must be prepared in Bahasa Indonesia, and both the Master Report and Local Report must be prepared within four months of the end of the fiscal year. The tax authority may require their submission during audits, and failure to provide this documentation constitutes an offense subject to administrative penalties and tax adjustments.
Thresholds and Application Criteria
The regime establishes specific thresholds that determine the obligation to prepare transfer pricing documentation:
- Annual gross income exceeding IDR 50 billion.
- Transactions with related parties exceeding IDR 20 billion for tangible goods or IDR 5 billion for services, royalties, or financing.
- Transactions with related parties located in low- or no-tax jurisdictions.
Companies that do not exceed these thresholds are exempt, unless they engage in activities classified as high risk or belong to strategic sectors, in which case the DGT may require additional documentation.
Identification of Critical Risk Areas
According to the DGT’s observations, the main areas of tax exposure in transfer pricing in Indonesia include:
- Intragroup services: The authority requires evidence of actual provision, economic benefit to the recipient entity, and reasonableness of the markup.
- Financing between related parties: Evaluation of the debt-to-equity ratio, solvency analysis, and justification of interest rates in accordance with market conditions.
- Royalties and intellectual property rights: The authority examines the DEMPE (Development, Enhancement, Maintenance, Protection, and Exploitation) functions to determine the entity that actually creates value.
- Commodity transactions: Detailed review of the CUP (Comparable Uncontrolled Price) method and adjustments applied for differences in quality or contractual conditions.
- Business restructurings: Economic substance and commercial justification are required, especially when they involve transfers of functions or intangibles.
These areas are often subject to intensive audits, so documentation must be aligned with economic reality and support the consistency of the prices applied.
Auditing and Penalties
Failure to comply with documentation obligations may result in:
- Loss of the right to defense during audits if documentation is not submitted within the established deadline.
- Transfer pricing adjustments determined by tax estimation.
- Administrative fines in the event of non-compliance with proper documentation exposes taxpayers to progressive administrative penalties.
- Inclusion of the taxpayer in risk lists or intensive monitoring by the DGT.
Therefore, keeping documentation up to date and accessible is an essential measure of internal control and prevention of tax contingencies.
Compliance and Risk Mitigation Strategies
Effective transfer pricing management in Indonesia must be based on a comprehensive strategy that combines sound internal policies with continuous monitoring. Best practices include:
- Develop documented and consistent pricing policies, supported by detailed functional analysis.
- Update comparability studies annually, reflecting changes in functions, risks, or market conditions.
- Align accounting, tax, and financial reports to avoid inconsistencies between returns and documentation.
- Formalize Advance Pricing Agreements (APAs), bilateral or unilateral, when justified by the complexity of the transactions.
- Train the accounting, financial, and legal departments internally in the document management required by the DGT.
- Implement technological controls that allow for the centralization of information, recording of evidence, and facilitation of internal audits.
These measures not only reduce tax exposure but also strengthen the organization’s transparency and tax governance.
Conclusion
The Indonesian approach to transfer pricing combines advanced technical regulation with a high level of documentation requirements. The country’s tax policy seeks to ensure that profits generated within its territory reflect the real economic substance of the operations, avoiding tax base erosion practices.
In this context, compliance is not limited to the formal submission of reports, but involves comprehensive information management, consistency between documents, and verifiable operational evidence.
Transparency and traceability have become the cornerstones of tax compliance in Indonesia, consolidating an environment where prevention, rather than correction, is the key to a sustainable tax strategy.
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Source: Asean Breafing