With the consolidation of Regulation MOF-172/2023, Indonesia has reinforced its approach towards more technical and effective transfer pricing control. The Directorate General of Taxes (DGT) has moved away from a purely declarative stage and adopted a more systematic and results-oriented approach, especially as of the 2025 fiscal year.
The tax administration focuses not only on the existence of transfer pricing policies and documentation, but also on whether these reflect transactions consistent with the arm’s length principle and include ex-ante economic analysis to support the prices agreed between related parties.
Entities required to prepare documentation
In Indonesia, companies must prepare transfer pricing documentation when they have transactions with related parties, whether domestic or foreign. This obligation is not subject solely to the cross-border nature of the transactions, but also to 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:
- Having significant annual gross income of at least 50 trillion Indonesian rupiah (US$3 million)
- Reaching certain monetary thresholds in goods or services transactions with related parties (20 trillion Indonesian rupiah or US$1.2 billion for goods and 5 trillion Indonesian rupiah or US$307,000 for services);
- Conducting transactions with jurisdictions that have a lower tax level than Indonesia;
- Or, be part of a multinational group subject to country-by-country reporting obligations (multinational group with total sales exceeding 11 trillion Indonesian rupiah or US$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: This file contains the specific analysis of the Indonesian entity. It includes a detailed description of its functions, assets, and risks (FAR analysis), as well as transactions with related parties, methods used, selection and justification of comparables, and results obtained. This is the most critical document in an audit, as it supports the margins applied in the audited transactions.
- Master File: this document provides a comprehensive overview of the multinational group. It contains information on the legal and operational structure, global economic activities, key intellectual property and intangibles, group financing, and an overview of the group’s transfer pricing policies. Its purpose is to provide context and enable local authorities to understand the global strategy and distribution of profits.
- Country-by-Country Report (CbCR): requires the parent entity or a designated entity to submit a financial breakdown by tax jurisdiction. This report includes information on the income, profits, employees, assets, and activities of each entity of the multinational group. It is a tool for detecting risks of tax base erosion and profit shifting.
Each document must be prepared at the time of filing the annual income tax return and made 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 for a Price-Setting Report, which must be prepared before or at the time of the transaction between related parties, not subsequently as part of a retroactive defense.
This report seeks to demonstrate that the price agreed for the transaction complies with the arm’s length principle from its inception. It must include:
- The 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;
Particularly in intra-group services, loans, transfers of intangibles, or restructurings, the lack of this report is considered a high-risk signal and may invalidate the rest of the documentation. According to tax experts in Indonesia (Roedl & Partner, Deloitte Indonesia), failure to prepare or timely submit the Price-Setting Report entitles the DGT to make presumptive adjustments.
Risks and penalties for non-compliance
In the current environment, failure to comply with formal or substantive transfer pricing requirements is no longer treated as a minor administrative offense. The Directorate General of Taxes is empowered to reject documentation that is not available in a timely manner, is materially deficient, or lacks economic support. This situation may lead to unilateral adjustments, in which the authority independently determines the profit margins it considers appropriate.
When adjustments result in increases in unreported taxable income, the difference may be treated as 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 documentation can result in a significantly higher tax burden, as well as the loss of the right to deduct certain expenses.
Accepted valuation methods
MOF-172/2023 establishes a methodological hierarchy that favors the use of traditional methods whenever possible. Priority is given to the Comparable Uncontrolled Price (CUP) method, 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 are equally applicable, it is recommended to choose the one that is closest to the CUP. The tax authority may challenge the choice of method if it considers that it does not reflect the actual circumstances of the transaction.
Dispute resolution and alternative mechanisms
Indonesia has several avenues for resolving disputes arising from transfer pricing adjustments, each with different conditions and consequences:
- Voluntary reconciliation: consists of accepting the adjustments proposed by the DGT without filing formal objections. In return, the company can benefit from reductions in penalties and avoid lengthy litigation. However, this option involves an express waiver of the right to appeal and should therefore be carefully evaluated based on the financial impact and technical soundness of the tax position.
- Mutual Agreement Procedure (MAP): available when the adjustment gives rise to potential international double taxation. It allows the tax authorities of two countries to work together to avoid double taxation. However, 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): These 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. In addition, it can take between two and three years from application to formal approval.
Final considerations
The Indonesian transfer pricing landscape has reached a level of regulatory and enforcement maturity that requires multinational companies to abandon defensive or reactive approaches. By 2025, supervision will be more thorough, the use of comparables and methods will be subject to constant validation, and ex-ante 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 built on real economic traceability. Transfer pricing risk management is no longer just a technical requirement, but a key component of tax sustainability in the Indonesian market.
Source: Asean Briefing