FAQ About The Advance Pricing Agreement

The Advance Pricing Agreement (APA) is one of the solutions that taxpayers (WP) can use to mitigate tax risks arising from transfer pricing determinations.

Here are some frequently asked questions regarding the implementation of APA in Indonesia, which we have compiled.

Read: Indonesia Frees the Cost of International Tax Dispute Negotiation

BRIEF OVERVIEW 

What is an Advance Pricing Agreement (APA)? 

An Advance Pricing Agreement (APA) is a written agreement between the Directorate General of Taxes (DJP) and a Taxpayer or the tax authority of another country to agree on the criteria and/or determine the arm’s length price or profit in advance for related party transactions 

What are the benefits of APA? 

• Tax treatment certainty for related party transactions 
• Mitigating the risk of transfer pricing disputes 
• Lower compliance costs for filing APA, with no charges, saving time and expenses as taxpayers avoid prolonged tax disputes 

What are the types of Advance Pricing Agreement? 

APA can be divided into three types: unilateral, bilateral, and multilateral. 

1. DJP and Taxpayer (unilateral), or 
2. DJP and 1 tax authority of the partner country or partner jurisdiction in a P3B involving TP (bilateral) 
3. DJP and more than 1 tax authority of the partner country or partner jurisdiction in a P3B involving Taxpayer (multilateral) 

SCOPE of APA 

Who can apply for APA? 

Domestic Taxpayers, based on: 

a. Domestic taxpayer's initiative (unilateral or bilateral) 

b. Written notification from the DGT regarding a Bilateral APA application submitted by a Foreign Taxpayer to the Competent Authority of the tax treaty partner country. 

What is submitted in an APA? 

All or some related party transactions 

Read more: Advance Pricing Agreement, Banyak Manfaat Minim Peminat

What are the contents of an APA agreement? 

APA takes the form of an agreement that includes: 

• Criteria in Transfer Pricing, which covers: 
  • Identities of the involved Related Parties 
  • Covered related parties transactions  
  • Transfer pricing method  
  • The application of the agreed transfer pricing method 
  • Critical Assumptions 
• Advance Transfer Price for the APA period and roll back application in case the taxpayer requests a roll-back 

How long is the period of APA? 

• The APA period is the fiscal year covered in the APA as requested by the taxpayer. It can last for a maximum of 5 fiscal years after the APA application is submitted 
• Roll-back (with certain conditions) can also be performed if requested by the taxpayer 

What are the conditions for the roll-back? 

• The facts and conditions of the related party transactions do not materially differ from the facts and conditions outlined in the APA 
• The statute of limitations has not passed. 
• The Corporate Income Tax Assessment Letter (SKP PPh Badan) for the subject year has not been issued 
• The taxpayer is not under investigation or facing criminal charges related to taxation 

Read more: Through PP 55/2022, Advance Pricing Agreements Can Be Made Multilaterally

APA APPLICATION 

What are the requirements for Domestic Taxpayers when applying for an APA? 

• Taxpayer has filed Corporate Income Tax (CIT) Return for the last 3 years prior to the APA application 
• Taxpayer has fulfilled implementation of Transfer Pricing (TP) Documentation for the last 3 years 
• The taxpayer is not under investigation or facing criminal charges related to taxation 
• Related party transactions are reported in the last 3 years, the CIT Return 
• The proposed transfer pricing based on Arm’s Length Principle (ALP) and does not make the taxpayer’s operating profit lower than that declared in the Annual CIT Return of the last 3 years 

How to apply APA? 

• Submitted in Indonesian Language on the APA application form. 
• Signed by the authorized representative whose name is specified in the articles of association 
• Filed within the period of 12 to 6 months before the start of the APA period 
• Attachment: 
  • A statement expressing willingness to complete all required documents in the APA process. 
  • A statement expressing willingness to comply with the APA agreement.  

The APA application is then examined to determine its completeness and compliance with the requirements for taxpayers eligible to apply for APA. 

Following the submission of the APA application, the DGT will issue a formal written notice determining the feasibility of proceeding with the application. This notification is dispatched to both the taxpayer and the Competent Authority of the partner country or jurisdiction (in the case of Bilateral or Multilateral APA) within one month of receiving the APA application 

What should the taxpayer (WP) do after the APA application is accepted? 

• Submit the required documents of APA application directly through the Directorate of International Tax (hardcopy and/or softcopy). 
• Within a maximum of 2 months from the date of notification that the APA application can be followed up. 

What are the required documents for the APA application? 

• Audited financial reports for the last 3 years. 
• Transfer Pricing Documentation for the last 3 years. 
• Documentation providing a detailed explanation of the application of ALP each proposed related party transaction covered in the APA application, in the Indonesian language. 

If the required documents are not submitted within the specified timeframe, a written notice of the termination of the APA process will be issued. The APA application process will be discontinued, and the taxpayer may reapply for APA as long as they meet the requirements. 

SETTLEMENT OF APA APPLICATION. 

What will the DGT do when the APA application is complete? 

DGT will conduct Material Examination by applying the ALP, involving discussions with the taxpayer, on-site reviews of the taxpayer's business activities and/or related parties, requesting additional data from the taxpayer or related parties, Exchange of Information (EoI), etc. 

Can the data and documents obtained by the DGT during material examination be used as a basis for tax assessment, preliminary investigation (bukti permulaan), or criminal acts investigation related to taxation? 

No, the taxpayer's data and documents used during the material examination process cannot be used by the DGT as a basis for tax assessment, preliminary investigation (bukti permulaan), or criminal acts investigation related to taxation 

When and how long is the APA negotiation? 

a. Unilateral APA is commenced no later than 6 months after the Taxpayer submits the completed APA application and are concluded within a period of 12 months from the start of the APA negotiations. 

b. For Bilateral or Multilateral APAs, the process follows the provisions of the legislation governing Mutual Agreement Procedure (MAP), starting 24 months from the submission of the MAP request and can be extended once for a maximum of 24 months. 

How does the result of APA? 

The results of APA negotiations can lead to either an Agreement or Disagreement. DGT does not agree to the APA if: 

• Related party transactions are not based on economic motives/commercial reason 
• The economic substance of related party transactions differs from their formal structure. 
• Related party transactions are conducted to minimize tax burdens. 
• Information, evidence, or statements provided by the taxpayer are untrue or do not reflect the actual conditions. 
• Information, evidence, or statements requested by DGT are not obtained within 21 calendar days from the date of the written request. 
• The proposed Fiscal Year in the APA or roll-back period has been issued a CIT Assessment Letter (SKP PPh Badan) 

a. If the negotiation results in Disagreement: 

• Unilateral APA: The DGT will discontinue the APA process and issue a written notice to the taxpayer 
• Bilateral/Multilateral APA: Receipt of a written notice from the Competent Authority of the partner country or jurisdiction stating that the APA cannot be carried out. In this case, the taxpayer may initiate unilateral APA negotiations. 

b.  If the negotiation results in an Agreement: 

• Unilateral APA: The APA document serves as the basis for the DGT to issue a Decision Letter on the Enforcement of the APA, no later than 1 month after the APA Document is signed 
• Bilateral/Multilateral APA: The Mutual Agreement becomes the basis for the DGT to issue a decision letter implementing APA, no later than 1 month after receiving/delivering the written notification from/to the Competent Authority of the partner country or jurisdiction that the Mutual Agreement can be implemented 

APA IMPLEMENTATION 

How is the Implementation of APA carried out for Taxpayers and the DGT? 

For Taxpayers: 

• Taxpayers must implement the agreements outlined in the APA as specified in the Decision Letter implementing the APA 
• These agreements should be incorporated into the taxpayer's Transfer Pricing Policy, and their implementation must be documented in the Transfer Pricing Documentation for the APA period 

In the case of a roll-back where the CIT Return has been submitted, no tax assessment has been conducted, and there is a deficiency in the tax payment based on the APA agreement, the taxpayer must rectify it in line with the APA agreement no later than 1 (one) month after the issuance of the decision letter 

For the DGT 

• If the Decision Letter is issued during the tax assessment of the APA period/roll-back, the DJP issues the Corporate Income Tax Assessment Letter (SKP PPh Badan) considering the agreement in the APA 
• If the SKP has already been issued for the APA period/roll-back, the DJP makes corrections to the SKP administratively, under the tax law, taking into account the agreement in the APA 
• The APA agreement does not prevent the DGT from conducting a tax assessment, preliminary investigation (bukti permulaan), or investigation of criminal acts related to taxation 
• The DGT will not make transfer pricing adjustments as long as the taxpayer implements the agreement within the APA 

In cases where administrative sanctions arise as a result of amending the Annual CIT Return, issuance of the Corporate Income Tax Assessment Letter (SKP), or correction of the SKP, the DGT may reduce or waive administrative sanctions based on the taxpayer's request under the provisions of the The General Tax Provisions and Procedures Law (Ketentuan Umum Perpajakan/KUP) 

 APA EVALUATION 

DJP conducts an evaluation of the APA agreement in the following aspects: 

• Evaluation of compliance with the implementation of the APA 
• Evaluation of the conformity of the criteria in Transfer Pricing within the agreement in the APA 

Based on the evaluation results, the DGT has the right to: 

• Judicial Review the APA as long as there are material changes in the facts and conditions of the related party transactions covered in the APA with critical assumptions agreed upon in the APA 
• APA Cancellation before the APA period ends. 

APA Judicial Review

What circumstances does the Judicial Review can be carried out? 

The Judicial Review APA can be carried out based on: 

• Evaluation results of the APA agreement 
• Requests for the judicial review of the APA submitted by the taxpayer 

Involving material changes in the facts and conditions covered within the APA, along with critical assumptions agreed upon 

APA CANCELLATION 

What makes DGT may cancel the APA agreement? 

Based on the evaluation results, the DGT identifies that: 

• The taxpayer provided information and/or evidence or statements that are untrue or inconsistent with the actual conditions. 
• The taxpayer did not provide information and/or evidence or statements that: 
  • Were known or should have been known by the taxpayer, and 
  • Could affect the outcome of the APA agreement 

DGT will send a written notice to the taxpayer to provide clarification regarding discrepancies in the information and/or evidence or statements submitted during the APA process. The taxpayer is required to submit a written response within a period of 21 days.