As a consequence of the consolidation of Regulation MOF-172/2023, Indonesia has reinforced its approach toward more technical and effective Transfer Pricing control. The Directorate General of Taxes (DGT) has moved beyond the purely declarative stage and adopted a more systematic and results-based approach, particularly starting in fiscal year 2025.
The tax administration focuses on Transfer Pricing policies and documentation, as well as the consistency of transactions with the Arm’s Length Principle, including previous economic analysis to support the prices agreed upon among related parties.
Entities Required to Prepare Documentation
In Indonesia, companies must prepare Transfer Pricing documentation when engaging in related-party transactions, whether domestic or foreign. This obligation is not solely based on cross-border transactions but also the materiality of the transactions and the income generated by the local entity.
In particular, the tax authorities require documentation if the company meets conditions such as:
- Significant annual gross income of at least 50 billion Indonesian rupiahs (US$3 million)
- Certain monetary thresholds in transactions of goods or services with related parties (20 billion Indonesian rupiah or US$1.2 billion for goods and 5 billion Indonesian rupiah or US$307,000 for services)
- Conducting transactions with lower tax jurisdictions than Indonesia;
- Or belonging to a multinational group subject to country-by-country reporting obligations (multinational group with total sales exceeding IDR 11 trillion or USD 675 million).
The burden of proof lies with the company, which must demonstrate that the commercial conditions agreed with its related parties comply with market standards.
Scope and Content of Documentation
Indonesia adopts the tripartite documentation approach promoted by the OECD, consisting of:
- Local File: It focuses on the specific analysis of the Indonesian entity. It includes a detailed description of its functions, assets, and risks (FAR analysis), as well as related-party transactions, methods used, selection and justification of comparables, and results obtained. It is the most critical document in an audit, as it supports the margins applied in the audited operations.
- Master File: This document provides a comprehensive overview of a multinational group. It contains information on the legal and operational structure, global economic activities, key intellectual property, intangibles, group financing, and an overview of the group’s Transfer Pricing policies. It intends to provide context and enable local authorities to understand the global strategy and profit distribution.
- Country-by-Country Report (CbCR): It requires the parent entity or a designated entity to file a financial breakdown by tax jurisdiction. This report provides details on revenue, profits, employees, assets, and activities of each entity in the multinational group to identify risks of tax base erosion and profit shifting.
Each document must be prepared when filing the annual income tax return, which is available upon request by the authority within a maximum period of 30 calendar days.
Price-Setting Report
One of the most significant innovations of MOF-172/2023 is the requirement to prepare a Price-Setting Report before or when entering into a related-party transaction, rather than as part of a retroactive defense.
This report intends to demonstrate that the price agreed for the transaction complies with the Arm’s Length Principle from its inception. It should include:
- A functional analysis of the parties involved.
- The economic and strategic justification for the transaction.
- The selection of the most appropriate valuation method.
- Details on the comparables selected.
- An assessment of expected gains.
Particularly for intra-group services, loans, assignment of intangibles, or restructuring, the absence of this report should be a high-risk indicator and may debunk the rest of the documentation. According to tax experts in Indonesia (Roedl & Partner, Deloitte Indonesia), failure to prepare or late filing of the Price-Setting Report entitles the DGT to make presumptive adjustments.
Risks and Non-compliance Penalties
In the current environment, failure to comply with formal or substantive Transfer Pricing requirements is no longer treated as a minor administrative offense. The General Tax Directorate can reject improperly available documentation with material deficiencies or a lack of economic support. This situation may lead to unilateral adjustments, in which the authority independently determines the profit margins it considers appropriate.
When adjustments increase unreported taxable income, the difference may be a deemed distribution of dividends, subject to a 20% withholding tax, unless a reduced rate applies under a double taxation agreement.
In this context, incomplete, late, or poorly structured reporting can result in a significantly higher tax burden, as well as the loss of the right to deduct certain expenses.
Accepted Appraisal Methods
MOF-172/2023 establishes a methodological hierarchy that favors the implementation of traditional methods whenever possible. The Comparable Uncontrolled Price (CUP) tends to have priority, followed by other methods such as:
- Resale Price Method (RPM),
- Cost Plus Method (CPM),
- Transactional Net Margin Method (TNMM),
- Profit Split Method (PSM).
When several methods equally apply, the CUP is the most recommended. The tax authority may contest the chosen method if it assumes that the latter does not accurately reflect the actual circumstances of the transaction.
Dispute Resolution and Alternative Mechanisms
Indonesia has several means to resolve disputes arising from Transfer Pricing adjustments, each with different conditions and consequence:
- Voluntary reconciliation consists of accepting the adjustments proposed by the DGT without formally objecting. Instead, the company can get lower penalties and avoid extended lawsuits. Conversely, this option entails forfeiting the right to appeal, so it should be thoroughly assessed in terms of its financial implications and the technical strength of the tax position.
- Mutual Agreement Procedure (MAP): Available when the adjustment results in potential double taxation worldwide. It enables the tax authorities of two countries to work jointly to avoid double taxation. Conversely, the procedure can take more than 30 months and does not always guarantee favorable results if the parties fail to reach a consensus.
- Advance Pricing Agreements (APA): They allow companies to agree with the DGT on the Transfer Pricing methodology applicable to future transactions for a specified period. Although it offers tax certainty, the process requires thorough preparation, detailed economic analysis, and technical validation, taking between two and three years from application to formal approval.
Final Considerations
The Indonesian Transfer Pricing landscape has evolved significantly, requiring multinational companies to adopt proactive strategies instead of defensive or reactive approaches. By 2025, monitoring will be more thorough, the use of comparables and methods will be subject to continuous validation, and advanced reports such as the Price-Setting Report will no longer be optional but critical.
An effective strategy requires integrated tax planning, ongoing regulatory updates, and documentation based on real economic traceability. Transfer Pricing risk management is no longer just a technical requirement, but the key to tax sustainability in the Indonesian market.
Source: Asean Briefing