Transfer Pricing Investigation Notes | Indonesian Tax Guide 2025 (46)
Indonesia
Transfer pricing investigation
2025-03-19 09:11:44
Page view：312
This issue's introduction
Special Tax Adjustment Policy
Transfer pricing investigation
Stage 1: Preparation for transfer pricing investigation
The preparation phase should be mainly carried out according to the laws and regulations of the investigation agency, and the tax audit officials should focus on collecting information on the production and operation status of the enterprise. The enterprise should provide the tax bureau with information on related-party transactions in the first phase of the investigation.
Phase 2: Field research
When determining the characteristics of related transactions, transfer pricing investigators should pay special attention to the differences in functional risks and economic environment between related transactions and non-related transactions, as well as other factors affecting operating profits, including: execution of functions, risk-taking and use of assets, industry and market conditions, business scale, economic cycle and product life cycle, allocation of costs, expenses, income and assets among transactions, accounting treatment and management efficiency, etc.
(1) Identification of the taxpayer’s business
The following financial ratios can be used as a basis for comparison:
① Total profit to sales ratio (gross profit margin);
② Total profit to cost of goods sold ratio (cost profit margin);
③ Sales profit margin;
④ Return on assets (ROA);
⑤ Return on capital employed (ROCE);
⑥ Berry ratio;
⑦ Debt-to-asset ratio;
⑧ Development expenses to sales ratio;
⑨ Marketing expenses to sales ratio.
In addition, a functional analysis is required to determine the risks borne by the taxpayer and related parties and the profits that match the risks.
(2) Selecting a transfer pricing method
The transfer pricing method is based on the validity and reliability of comparable data.
Comparability factors are determined based on the following:
① Characteristics of goods and services;
② Analysis of functions, assets and risks (FAR);
③ Contract terms;
④ Economic environment;
⑤ Business strategy.
In the absence of reliable internal comparable data, external data can be used, such as domestic and foreign public data, commercial databases, London Metal Exchange and other databases.
In addition, it is necessary to collect additional data to evaluate the intangible assets in the taxpayer's business and the taxpayer's contribution to the development of the intangible assets.
In determining the most reasonable transfer pricing method, the following factors must be considered:
① Advantages and disadvantages of each method;
② Applicability of the transfer pricing method (based on functional analysis);
③ Availability of reliable information for the application of the selected method or other methods;
④ Comparability of related-party transactions and independent transactions, including the reliability of adjustments made to eliminate differences.
The selection of the test party must be based on the data, information and facts collected during the functional analysis and transfer pricing investigation.
In general, the tested party should not have complex functions and have fewer or no intangible assets of significant value. Based on the functional analysis based on reliable data and evidence obtained from the transfer pricing investigation, the transfer pricing investigator can select two test parties in the related-party transaction, namely the taxpayer (the investigated party) and its counterparty.
(3) The application of the arm's length principle should be carried out in the following stages:
① Conduct a comparability analysis. If the differences between the transactions do not have a substantial impact on the price or profit, or the substantial impact can be eliminated through reliable and accurate adjustments, the transaction can be considered comparable. Therefore, a comparison should be made between related-party transactions and independent transactions;
② Use the following means to improve comparability: criteria for selecting comparable data, using data from multiple years to eliminate substantial differences in economic or market conditions, and adjusting factors that have a substantial impact on transaction comparability:
③ If the related-party transactions are closely related or ongoing, an aggregated method can be used;
④ Determine the profit or price of the independent transaction. Once reliable comparable data are determined, the selected method can be used to compare prices and profits.
In addition, the regulations also stipulate the application of the arm's length principle in the following aspects:
① Intra-group services
The transfer pricing methods that can be used are the comparable uncontrolled price method (CUP), the cost plus method and the transactional net profit method. Transfer pricing investigators should confirm that the services actually occurred and the taxpayer has received the corresponding economic benefits. At the same time, the service remuneration should be calculated according to the arm's length principle.
②Intangible assets
The process of transfer pricing investigation for intangible assets includes the following steps:
A. Through functional analysis, identify intangible assets that contribute to the success of the product in the market:
B. Price the intangible assets and determine whether the parties have contributed to the value of the intangible assets;
C. Through analysis, determine whether the intangible assets are transferred:
D. Determine the independent transaction price of the transferred intangible assets
③The methods that can be used to price intangible assets are:
A. Comparable uncontrolled price method;
B. Resale price method;
C. Cost plus method;
D. Profit split method;
E. Transactional net profit method;
F. Other methods: income method, cost method and market method.
For intra-group loans, only the comparable uncontrolled price method can be used; if the group is a financial institution, the transactional net profit method can be used.
Transfer pricing investigators should:
A. Analyze the demand for loans;
B. Ensure that loans have been provided:
C. Test the rationality of the debt-to-asset ratio;
D. Test the fairness of loan interest rates and other related costs of loans within the group.
The next issue will continue...