In 2023, Indonesia introduced Regulation of Minister of Finance No. 172/2023 (PMK 172/2023) to modernize its Transfer Pricing framework and align with international standards and the recommendations of the OECD’s BEPS project. The amendment shifts from formal compliance to substantive review, creating major effects for multinational companies, tax authorities, auditors, and advisors.
Key Elements of PMK 172/2023
One of the core amendments is the broadening of the concept of special relationships. An entity can substantially influence pricing or counterparty selection in direct equity stake and implicit control cases despite not holding an equity stake. Furthermore, new categories of financial transactions are incorporated, including structures such as cash pooling and derivatives, which must now be supervised.
The regulation also standardizes the treatment of domestic and cross-border transactions. All related-party transactions must comply with the Arm’s Length Principle (ALP), regardless of where. This approach is reinforced by the introduction of corresponding adjustment mechanisms to avoid double taxation on local transactions.
It also establishes a six-step regulatory process for applying the ALP, which covers the identification of controlled transactions and special relationships, analysis of the industrial environment and market structure, examination of the functions, assets, and risks of each party (FAR analysis), comparability analysis-priorizing internal data-selection of the most appropriate method (such as the CUP mtethod for specific transactions), and finally evaluating the price using a single point or range, using the median value if necessary.
Another innovative aspect is the creation of a preliminary review mechanism for high-risk transactions, such as those involving intangibles or corporate restructuring. In these cases, the taxpayer must demonstrate the economic logic, actual execution, and existence of beneficial relationships to avoid considering such transactions as merely artificial.
Regarding documentation, the local file, master file, and country-by-country report became evidentiary support. They must be available when filing the tax return and reflect the information reported. Failure to provide these documents during an audit is assumed to be an ALP breach and may result in substantial adjustments to taxable income. Entities with local transaction amounts of less than 20 billion rupees (approximately $1.2 million) are limitedly exempt, as long as they do not belong to high-risk sectors such as mining or finance.
Finally, the regulation introduces a detailed review framework for intra-group services. This review assesses the authenticity of the service provided, the existence of a concrete benefit for the recipient entity, the absence of duplication with existing internal functions, and the reasonableness of the agreed consideration, which must be supported by market criteria, cost-plus structures, or external references where applicable.
Practical and Compliance Challenges
Despite a more robust framework, implementation remains challenging. One key issue is the lack of comparable local data, complicating the analysis of comparability. Tax authorities often question whether international databases, such as Orbis, are representative, which creates uncertainty and risks a shift toward formality without substance.
Added to this is the ambiguity in the margins of discretion. While the regulation establishes procedures and criteria, the limits for considering a transaction reasonable remain unclear, hindering the prediction of audit results. Additionally, gaps persist in advance pricing agreement (APA) processes and dispute resolution mechanisms, increasing the risk of conflicts and legal uncertainty for multinational companies.
Adaptation Strategies and Best Practices
To address these challenges, companies must strengthen their compliance mechanisms. It is essential to enhance the contractual content and documentation associated with each related-party transaction, clearly defining deliverables, performance metrics, and acceptance criteria from the negotiation stage. It is also essential to create a comprehensive chain of operational evidence that includes records of tasks, follow-ups, approvals, communications, and minutes to demonstrate the authenticity and real benefit of the operations.
Moreover, the pricing methodology must be explicitly supported, disclosing the cost base, margins applied, and any adjustments made, involving independent advisors when necessary. When performing the comparability analysis, it is recommended to prioritize internal data and, if external data is used, to transparently explain its limitations and the adjustments applied to ensure its reasonableness.
Monitoring must be constant. It is advisable to implement periodic internal reviews that assess changes in functions, assets, and risks, ensuring that Transfer Pricing policies remain appropriate. Finally, coordination among the tax, finance, legal, and operations departments ensures that the documentation accurately reflects the operational reality and consistency among the accounting records, contractual agreements, and actual practices.
Implications for Tax Authorities and Tax Policy
The new regulatory framework also has significant consequences for tax administration. PMK 172/2023 empowers tax authorities to make substantive adjustments to taxable income, which could increase tax collection but also possible disputes with multinational companies. Likewise, the relevance of APAs and those of mutual procedures for resolving disputes will increase, although there are still gaps to be resolved in their implementation to guarantee greater certainty.
On the other hand, the increased documentation and analysis requirements could pose a challenge for companies with low margins or numerous intra-group transactions; conversely, the regime provides for certain exemptions for smaller companies or those with limited local operations.
Conclusion
PMK 172/2023 represents a structural amendment to Indonesia’s Transfer Pricing regime, evolving from a focus on formal compliance to one based on substantive verification that underpins documentation for tax defense and requires complete consistency among pricing policies, actual operations, and available evidence.
From an international taxation perspective, this reform demonstrates how countries intensify their efforts against base erosion and artificial profit shifting, aligning themselves with international standards and the BEPS project. Companies operating in Indonesia will need to adapt their compliance structures to mitigate risks, strengthen their documentation, and ensure their operations are at the Arm’s Length Principle required by the regulations.
Transfer Pricing and International Taxation Advice
TPC Group operates in several countries in Latin America, the United States, and Spain, offering specialized advisory services in Transfer Pricing and international taxation. Our multidisciplinary team assists multinational groups in implementing OECD guidelines and global best practice tax policies. Contact us for a consultation tailored to the specific characteristics of your organization and country of operation.
Source: Law.Asia