What do Transfer Pricing Documentation Regulations govern?
In Indonesia the obligation of taxpayers which enter into transactions with related parties to provide transfer pricing documentation for tax purpose can be traced through the following regulations:
- Article 28 Paragraph (1) of the General Provisions and Tax Procedures Law (the Law Number 6 of 1983 concerning the General Provisions and Tax Procedures as lastly amended by the Law Number 16 of 2009) stipulates that : “Individual taxpayer conducting business activities or independent personal services and corporate taxpayer in Indonesia shall maintain bookkeeping.
- Article 10 of the Government Regulation Number 74 concerning the performance of right and fulfillment of tax obligations procedures stipulates that :
Paragraph (1) :
Books, records, and documents, that serve as the basis for bookkeeping or recording, and other documents including the result of data processing from electronic or online application, must be retained for 10 years in Indonesia, at the place of business activities or residence for individual taxpayers, or at the place of domicile for corporate taxpayers.
Paragraph (2) :
Where taxpayer conducts a transaction or transactions with its related parties, the obligation to maintain other documents as defined in paragraph (1) include documents and/or additional information to support that transactions conducted by taxpayer with its related parties satisfy the arm’s length principles,
For the purpose of paragraph (2), the type of documents and/or additional information and processing procedures shall be governed by Minister of Finance Regulations.
- The Director General of Taxes Regulation Number PER-32/PJ/2011 concerning the amendment of the Director General of Taxes Regulation Number PER-43/PJ/2010 concerning the application of the arm’s length principles in transactions conducted by taxpayers with the related parties stipulates that :
(1) Article 3 Paragraph (2)
The arm’s length principles are performed through the following stages :
- Conducting the comparability analysis and selecting the comparables;
- Determining the most appropriate transfer pricing method;
- Applying the arm’s length principles, based on the result of comparability analysis and the most appropriate transfer pricing method, into the transactions conducted by taxpayers with the related parties;
- Documenting each stage in determining the arm’s length price or profit according the prevailing tax regulations.
(2) Article 4 Paragraph (2) (guidance to perform comparability analysis), Article 11 Paragraph (14) (selection of the most appropriate transfer pricing methods) require taxpayers to document steps, studies, and result of studies in conducting the comparability analysis and the selection of transfer pricing methods.
(3) Article 18
Paragraph (1) :
Taxpayers shall perform and maintain books, records, and documents, that serve as the basis of bookkeeping or recording, and other documents as defined in Article 28 of the General Provisions and Tax Procedures Law.
Paragraph (2) :
The definition of documents for the purpose of paragraph (1) includes documents that serve as the basis application of the arm’s length principles in the transactions between taxpayers and related parties.
Chapter V of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (July 2010) provides guidance to assist taxpayers in identifying documentation that would be the most helpful in showing that their controlled transactions satisfy the arm’s length principles. According to the guidance :
- each taxpayer should endeavour to determine transfer pricing for tax purpose in accordance with the arm’s length principle, based upon information reasonably available at the time of determination. Thus, a taxpayer ordinarily should give consideration to whether its transfer pricing is appropriate for tax purpose before the pricing is established;
- the taxpayer’s process of considering whether transfer pricing is appropriate for tax purposes should be determined in accordance with the same prudent business management principles that would govern the process of evaluating a business decision of a similar level of complexity and importance;
- the taxpayer should not be expected to have prepared or obtained documents beyond the minimum needed to make a reasonable assessment of whether it has complied with the arm’s length principle;
- in considering whether documentation is adequate, a tax administration should have regard to the extent to which that information reasonably could have been available to the taxpayer at the time transfer pricing was established;
- tax administrations further should not require taxpayers to produce documents that are not in the actual possession or control of the taxpayer or otherwise reasonably available, e.g. information that cannot be legally obtained, or that is not actually available to the taxpayer because it is confidential to the taxpayer’s competitor or because it is unpublished and cannot be obtained by normal enquiry or market data;
- the taxpayer must take into consideration that adequate record-keeping practices and the voluntary production of documents can improve the persuasiveness of its approach to transfer pricing. This will be true whether the case is relatively straightforward or complex, but the greater the complexity and unusualness of the case, the more significance will attach to documentation.