Transfer Pricing Documentation requirement has changed, following the implementation of Country-by-Country (CBC) Reporting in Indonesia which makes reporting Transfer Pricing Documentation become three parts, after the issuance of the Regulation of the Minister of Finance, PMK 213 / PMK.03 / 2016.
Also read : Country-by-Country Reporting dan Transfer Pricing Documentation di 2016 (Bahasa Indonesia)
CBC Reporting application of the rules is based on Action 13: OECD / G20 Base Erosion and Profit Shifting Transfer Pricing Documentation Project and Country-by-Country Reporting where Indonesia as part of the G20 has committed to implement the Action Plan.
History CBC and Transfer Pricing Documentation
CBC Reporting has been initiated due to the flaws in the Transfer Pricing Documentation which is limited because it only covers one country and does not cover other countries so that, for example, the tax authority in country A could not know how much income is reported by multinational company X in Tax Haven compared with earnings reported in the country A.
Read: Transfer Pricing Documentation, Rencana CBC Reporting in Indonesia
Read: Final Report BEPS and Change Transfer Pricing Regulations in Indonesia
CBC Reporting has been initiated due to the flaws in the Transfer Pricing Documentation which is limited because it only covers one country and does not cover other countries
Because of the issues, CBC Reporting that was originally campaigned by the NGO with the assumption that consolidated reports can easily become a reference for CBC Reporting. This idea has eventually been accepted and ultimately adopted by the OECD.
Because of the issues, CBC Reporting that was originally campaigned by the NGO with the assumption that consolidated reports can easily become a reference for CBC Reporting
Application of Transfer Pricing Documentation in Indonesia
Regulation for Transfer Pricing Documentation is actually a part of the obligation of bookkeeping taxpayer as described in Article 10 (2) of Government Regulation No. 74 of 2011 on the Implementation of Rights and Fulfillment of Obligations Taxation while CBC Reporting and Transfer Pricing Documentation are conditions that must be carried out by the taxpayer as part of the obligation of bookkeeping. Accordingly, taxpayers who performs related party transactions are required to prepare a Transfer Pricing Documentation.
CBC Reporting in PMK 213 / PMK.03 / 2016
Based on the PMK 213, there are three types of documentation for transfer pricing documentation, namely:
- Master File,
- Local File and
- CbCR (report per country).
Master File is a document that contains information about the Group of business that is, at least, consists of the structure and outline of ownership and the jurisdictions of each member of the business group, business activities conducted, the intangible asset owned, financial activities, and the consolidated financial statements of entities’ parent and taxation information of related party transaction.
Local File is a document that contains information about the taxpayer such as the identity and business activities conducted, information about related party transcation and independent transactions, the application of arm’s length principle, financial information, as well as the event or events nonfinancial that influence the formation of price or income level.
For CbC Reporting, the information is about the allocation of income, taxes paid and business activities per jurisdictions for the member of the Business Group.
The requirement for Transfer Pricing Documentation is divided into two parts, namely the (i) the requirement for CBC Reporting and (ii) the requirement for only the Master File and Local File as follows
1. Master File and Local File
- Taxpayers are obliged to keep the Master File and Local File if the related party transactions in the current year and the a gross turnover is more than 50 billion IDR in the previous tax year, or
- Taxpayer’s related party transaction for tangible goods is more than 20 billion IDR
- The taxpayer’s related party transaction for services, interest, and intangible goods is worth more than 5 billion IDR in the previous tax year, and
- Taxpayers who conduct related party transactions with affiliates located in countries with lower tax rates than the corporate tax rate Indonesia, based on Article 17 of Income Tax Law.
2. Taxpayer with the Obligations for CbCR
To determine whether the taxpayer is obliged to provide CbCR,, there are two mechanisms.
- The first one is the primary filling mechanism where the parent entity of the business group in Indonesia has consolidated gross income in the tax year amounted to more than 11 trillion IDR and has affiliated transaction. The taxpayer is obliged to perform CbCR and also provides Master File and Local File.
- Second, secondary filling mechanism where taxpayers Indonesia who are members of the Group Enterprises whose parent is outside Indonesia with the provision that the country of the parent entity does not oblige CbCR, has no exchange agreement CBC with Indonesia, and the country of the parent entity has exchange agreements CBC with Indonesia but the CBC can not be obtained, then it is mandatory for the Indonesia’s entity to perform CbCR.
The obligation for TP Documentation for the Master File and Local File is to be performed since the transaction is performed, whereas for CbCR is based on data and information available by the end of the tax year.
When the Transfer Pricing Documentation, including CBC Reporting, should be available?
Based on the PMK 213, it is stipulated that :
- Master Files and Local File must be provided no later than four months after the end of the tax year,
- CbCR must be provided no later than 12 months after the end of the tax year.
Taxpayers are required to attach a statement regarding the current availability of the document and signed by the party providing the document. Master Files and Local File is reported in conjunction with the Annual CIT Return in the tax year concerned as an attachment or annex to the corporate income tax return. While CbCR reported as attachments of CIT Returns for the next tax year.
Penalty if there is no Transfer Pricing Documentation, for instance :
- If the provisions of the Master File and Local File and CBC Report are not met then CIT Return is considered incomplete and subject to a fine of 1 million IDR and the CIT return is considered not submitted.
- If the taxpayer subsequently is reprimanded, the tax audit could be performed with the potential for the issuance of underpayment penalty by 50%.
- If the Transfer Pricing Documentation is submitted but after the deadline, it is not considered as a Transfer Pricing Documentation and there could be the issuance of tax underpayment assessment letter with the penalty of interest rate of 2% per month.
- If the Transfer Pricing Documentation is not submitted, the taxpayer is considered not meeting the obligations to make and keep the Transfer Pricing Documentation with potential consequences for the issuance of underpayment penalty by 50%.
If the provisions of the Master File and Local File and CBC Report are not met then CIT Return is considered incomplete and subject to a fine of 1 million IDR and the CIT return is considered not submitted
Issues for Transfer Pricing Documentation
Other than the things aforementioned, there are some issues such as the application of Transfer Pricing Documentation for domestic transactions and the use of CBC Reporting for transfer pricing risk assessment for the Directorate General of Taxes (DGT).
Since the corporate income tax rates in Indonesia can be 0% until over 25% depending on the taxpayer hence the information provided through CBC Reporting or even Master File can be used as risk assessment for the DGT even though it may not be used as a basis for correction but there could be further inquiries from the tax office. It should also be noted that the application of transfer pricing rules also apply to the Value Added Tax in the related party transactions and in some cases lead to the application of 10% VAT rate instead of 0% VAT rate.
Author: Andreas Adoe and Nurindra Rusmana