Transfer Pricing Issue in Today’s Indonesia Tax World
Transfer pricing is not something new in taxation. This term has been used for quite some time, even not long after the first Income Tax Law applied in 1984. Even so, transfer pricing nowadays become the latest and the most important taxation issue both for the taxpayers and the tax authority. Why and how should this issue be handled?
Charles T. Hongren defines a transfer price as ‘the price one subunit (department or division) charges for product or service supplied to another subunit of the same organization’. While Gunadi (former Director of Tax Assessment) defines transfer pricing as an improper business practice, in terms of pricing or fee determination related to transfer of goods, service, or technology between affiliated companies and systematic price manipulation in order to reduce artificial profit, to create the condition as if a company is in loss position, or to avoid tax or customs in a country.
Recently on September 6th, 2010 through the Regulation of Director General of Taxes No. PER-43/ PJ /2010 (“PER-43”), the Director General of Taxes affirms that transfer pricing is a price determination in transaction between parties under special relation (affiliated transaction). From the definition above, it is clear that in general, transfer pricing is a common thing in business world. But, as what stated by Gunadi, transfer pricing could have a negative connotation,which is transfer of Taxable Income from a company owned by a multinational company to the countries with low tax rates to reduce the tax charges to the group’s business.
Because of this negative connotation, as mentioned before in the April 2010 MUC Tax Minimagz edition, the tax authority tends to give more attention to the transactions of multinational companies. The purpose is to assure that multinational companies are not using transfer pricing in affiliated transaction as a way of tax avoidance. the transfer pricing provisions at the end will decide which country having the right to tax the profit generated by the company running its business in more than one countries.
A. For the tax authority
The first reason the Directorate General of Taxes (DGT) pays more attention to the transfer pricing issue is regarding the information from OECD (Organization for Economic Cooperation and Development).
According to OECD, approximately 60% of commercial and financial transactions between countries (cross border transaction) are transactions between companies in one multinational company group. Based on this reason, DGT concludes that total value of affiliated transactions in Indonesia is also in the same significant percentage. According to the DGT calculation, the potential State loss due to transfer pricing practices is estimated around IDR 1.300 trillion, related to payments of interest, royalty, also intragroup services.
B. For the Taxpayer
In the previous years, the transfer pricing issue has long become one of the most crucial tax issues in the perspective of the taxpayers. Starting from 2009, the transfer pricing issue has become more important for the taxpayers since in that year those having affiliated transactions are obliged to provide a more detailed statement of affiliated transactions, as seen in Form 3 A1-A2/Form 3 B1-B2 in Annual Corporate Income Tax Return of 2009. Thus, it will simplify the DGT in detecting unfair transfer pricing transaction in the assessment later on.