Response to Transfer Pricing Issue
Due to the importance of transfer pricing issue and its effect to the State’s tax revenue, it is not surprising that DGT has taken a series of responses to the transfer pricing by:
- Forming a special unit of transfer pricing since 2007;
- Reorganizing the human resource and information technology;
- Providing approximately 2.000 tax investigators with adequate knowledge of transfer pricing.
DGT also provides the taxpayers with the socialization program to increase the compliance of taxpayers in conducting affiliated transactions, so that:
- transfer pricing conducted by the taxpayers is in accordance with arm’s length principle;
- transfer pricing methodology used by the taxpayers is in accordance with the existing regulation and the common business practice that is not affected by special relation;
- the taxpayers and the affiliated companies pay the tax based on its functional proportion in transaction; and
- the taxpayers should prepare sufficient documentation to prove that the transactions are in line with the arm’s length principle (preparing TP Documentation).
In addition, as seen in Article 18 paragraph (3) of Income Tax Law (Law No. 7 Year 1983 as lastly amended with Law
No. 36 Year 2008), the Government now has stipulated the transfer pricing method in detail in the Law. Previously, it was only explained in DGT’s circulars.
The methods has been discussed in MUC Tax Minimags April 2010 edition as well (such as, comparable uncontrolled price method, resale price method, and cost-plus method).
Other provisions concerning transfer pricing are Article 18 paragraph (3) and (4) of Income Tax Law, Article 2 paragraph (1) and (2) of Value Added Tax Law, Article 28 paragraph (1) of Law of General Tax Provisions and Procedure, Article 9 paragraph (1) of Tax Treaty of UN convention model, Decree of Directorate General of Tax Number KEP-02/PJ.7/1993, Circular of Director General of Tax Number SE-04/PJ./2010, Regulation of Director General of Tax Number PER-43/ PJ.2010, OECD Guideline, APA (Advanced Pricing Agreement); and MAP (Mutual Agreement Procedure).
On the other side, the taxpayers should be carefully prepared in dealing with transfer pricing cases, by, among others:
- Understanding a series of regulations related to transfer pricing;
- Conducting tax review for the transfer pricing policy carried out up until now;
- Conducting tax planning for potential transfer pricing transactions in the future; and
- Preparing transfer pricing documentation comprehensively to justify the application of the arm’s length principles,