An Overview of Approaches in Preparing Transfer Pricing Documentation

Every multinational company or part of a business group that meets certain criteria is required to prepare Transfer Pricing Documentation (TP Doc) according to applicable regulations.

Therefore, it is important for taxpayers to understand the approaches used in preparing TP Docs. The approaches include Ex-Post, Ex-Ante, and Contemporaneous.

The approach selected by the taxpayer will impact the resulting Transfer Pricing Documentation (TP Doc). To help taxpayers distinguish between each approach, we outline them below.

1. Ex-Post Approach

The Ex-Post Approach, often referred to as the testing approach, is used to assess the arm's length nature of transfer prices based on actual results after the transaction has taken place.

According to the OECD Transfer Pricing Guidelines 2022, Paragraph 3.70, the Ex-Post approach is used not only to test the actual results of related party transactions but also to demonstrate that these transactions are consistent with the Arm's Length Principle (ALP). This approach is typically applied when preparing the tax report at the end of the year.

Example:

PT G conducts a test on several related party transactions using the TNMM method for the 2022 tax year.

PT G compares the actual operating margin for 2022 with that of comparable companies for the same tax year, i.e., 2022. In other words, the related party transaction occurs first, and then the taxpayer must assess whether the transaction is at arm's length or not.

2. Ex-Ante Approach

The Ex-Ante Approach is used to assess the arm's length principle of transfer prices before or at the time the transaction takes place, based on available information.

According to the OECD Transfer Pricing Guidelines 2022, Paragraph 3.69, the Ex-Ante approach is also referred to as the price-setting approach. This means that the taxpayer sets a fair price or profit before or at the time of the related party transaction. The data used includes not only data from previous years but also data between the prior years and the year in which the related party transaction occurred.

In Indonesia, the Ex-Ante approach was first adopted through Article 3, Paragraph (1) of Minister of Finance Regulation (PMK) Number 213/PMK.03/2016. This regulation states that transfer pricing documentation, consisting of the Local File and Master File, must be prepared based on data and information available at the time the affiliate transaction is conducted.

To this day, the Ex-Ante provision remains relevant, as the government has retained it in the latest transfer pricing regulation, PMK Number 172 of 2023.

Example:

At the beginning of the year, PT G tests its related party transactions for 2022 using the TNMM method. PT G searches for comparable companies at the start of 2022 and determines a reasonable operating profit range of 2%-5%. The financial statements of the comparable companies used are based on data available before the 2022 tax year.

This range is used as a reference by the taxpayer to set prices/profits for the related party transaction, ensuring that by the end of the 2022 tax year, PT G’s actual operating profit falls within that range.

In this case, PT G has applied the price-setting approach. PT G conducts testing at the beginning of the year and then executes the related party transactions throughout the year while ensuring the transaction remains within the reasonable range established at the start of the tax year

3. Contemporaneous Approach

The Contemporaneous Approach involves preparing Transfer Pricing Documentation (TP Doc) at the time the transaction occurs, using relevant data and analysis. This concept aligns closely with the Ex-Ante approach, as both the Local File and Master File must be prepared based on data and information available up to the end of the tax year.

This requirement is emphasized in the OECD Transfer Pricing Guidelines 2022, as well as in Minister of Finance Regulation (PMK) Number 213/2016 and PMK Number 172/2023. According to PMK Number 172/2023, the Local File and Master File must be completed no later than four months after the end of the tax period.

Additionally, the regulation requires taxpayers to document preliminary steps related to certain transactions before conducting an arm's length analysis of related party transactions. This additional documentation requirement will apply to the preparation of the Local File starting in 2024.

Example:

At the beginning of 2022, PT G conducts an arm's length analysis at the operating profit level and document the fairness of the analysis. During conducting related party transactions, PT G also documents the transaction based on the data and conditions available at the time the transaction occurs.

Furthermore, PT G ensures that the transfer pricing policies implemented are consistent with the arm's length principle established at the beginning of 2022.

Sumber:  

• Organization for Economic Co-operation and Development. (2022). Transfer pricing guidelines for multinational enterprises and tax administrations 2022. OECD Publishing. 
• Minister of Finance of the Republic of Indonesia. (2016). Minister of Finance Regulation Number 213/PMK.03/2016 on the Types of Additional Documents and/or Information Compulsarily Retained by Taxpayers Conducting Related Party Transactions and its Administration Procedures. Jakarta: Ministry of Finance of the Republic of Indonesia. 
• Minister of Finance of the Republic of Indonesia. (2023). Minister of Finance Regulation Number 172/PMK.03/2023 on the Application of the Arm's Length Principle in Transactions Affected by Special Relationships. Jakarta: Ministry of Finance of the Republic of Indonesia.