Shall Arm's Length Test be Made on Every Affiliated Transaction?

On 11 November 2011, the DGT Regulation No. PER-32/PJ./2011 (“PER 32”) was issued  and it came up with  crucial changes particularly on the policies of the implementation of the Arm’s Length Principle (ALP) in affiliated transaction. Below is the significant issues related to the  policy changes which is important to note.

Scope of Affiliated Transactions Required for ALP Implementation

Referring to PER 32, the ALP is now only mandatory to apply in affiliated transactions between Resident Taxpayers or Permanent Establishments (PE) in Indonesia and the following entities:

 

 

1. Non Resident Taxpayers; or

2. Other Resident Taxpayers or other PE in Indonesia in order to utilize the tax rate differences, among others, due to:

a.       Final Income Tax Imposition;

b.      Non Final Income Tax Imposition on the certain business sectors;

c.       Imposition of the Sales Tax in Luxury Goods;

d.      Transaction with Oil and Gas Joint Operation Contract.

with value above IDR 10 Billion for every transaction within 1 (one) fiscal year.

As to compare, referring to the DGT Regulation No. PER-43/PJ./2010 (“PER 43”), any affiliated transactions with the value above IDR 10 billion is mandatory to apply the ALP.

Transfer pricing Methods

The same 5 (five) transfer pricing methods used in  PER 43 are also used in PER 32 as follows:

1. Comparable Uncontrolled Price (CUP);

2. Resale Price Method (RPM);

3. Cost Plus Method;

4. Profit Split Method (PSM); or

5. Transactional Net Margin Method (TNMM).

The difference will be the selection phase of the methods. Now, the transfer pricing methods are no longer selected in hierarchy, starting from the first to the last method. The further requirement to this new approach is that the taxpayers should not only provide the explanation and the rationale basis on the selected transfer pricing in their transfer pricing documentation. They are required to present the reasons for rejecting the other transfer pricing metehods. In other words, the Taxpayers are actually obliged to test all the five transfer pricing methods.