The development of the transfer pricing regulation has been one of the DGT’s focus lately. As we already noticed that in the end of 2016, Indonesia has enacted the MoF 213/2016 which basically adopts BEPS Action Plan 13 concerning “Transfer Pricing Documentation & Country-by-Country Reporting”. Additionally, the DGT also announced publicly the latest regulation on transfer pricing namely PER 29/2017 on 16 January 2018, regarding the procedures of the preparation of the CbCR was announced publicly by the DGT. How do the aforementioned regulations radically affect your TPDoc preparation?
Local File : Ex-Ante and Segregation
As stated in Article 3 of MoF-213, the TPDoc especially for Master File (MF) and Local File (LF) should be prepared with Ex-Ante approach which means that the preparation for the document should be based upon information reasonably available at the time of transaction, which allow the Taxpayers to give consideration to whether its transfer pricing policy is established and should confirm the arm’s length nature of its financial results at the time of filing its tax return. While such approach is required in the preparation of MF and LF, the preparation of Country-by-Country Report (CbCR) is based on Ex-Post approach, which means that CbCR document should be specially prepared based on the data and information available until the end of tax year. The application of Ex-Ante and Ex-Post approaches will affect the search of comparables used for transactions conducted in 2016.
While the application of Ex-Post approach is based on the actual outcomes observed in the arm’s-length outcome-testing which could be obtained by the Taxpayer through their Financial Data e.g. Audited Financial Report, the application of Ex-Ante approach is based on market expectations which are taken into account in the arm’s-length price setting through Taxpayer’s pricing policy and/ or Taxpayer’s budget for specific tax year.
With Ex-Ante approach, the use of comparables for finding the arm’s length range are based on the data and information available on commercial database (e.g. Oriana, Orbis, and Osiris) accounted for years before controlled transactions are conducted. For example, in the preparation of TPDoc FY 2016, the data and information which should be used are the ones accounted for the years up to 2014 as normally for the FY 2015 and 2016, the information is not available at the time the transactions occurred. This also applies to the other commercial database used (e.g. RoyaltyStat, LoanConnector, and KT Mine).
The Ex-Ante approach implicitly recommends the application of the arms-length analysis on each of the pricing policy of the transaction. It means that transfer pricing analysis should follow how the pricing policy of the controlled transactions pricing policy is set. Generally, an independent company would establish the pricing policy of each of the transactions separately from other depending on facts and circumstances which makes the test of transfer pricing for each transaction should be done separately from one to another. Needless to say, Ex-Ante approach more represents that the segregation as the most suitable/ recommended approach based on MoF-213, which also in line with OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations Paragraph 3.9.
Another salient point for Local File document preparation, MoF-213 has a special requirement especially for the ones which include the transactions of Commodities to conduct Comparable Uncontrolled Price (CUP) testing method, either Internal CUP or External CUP, so that makes the Aggregation Method is probably not the most suitable method to be applied on such transaction based on MoF-213.
Master File : Scope of Documentation
Specifically for Master File document preparation, OECD BEPS Action Plan 13 recommends that the Master File should provide the overview of the blueprint of the group pricing policy. The definition of the group itself is a collection of enterprise related through ownership or control which required to prepare the consolidated financial statement.
Meanwhile, the definition of the group according to MoF-213 is that a collection of related parties conducting business activities. Additionally, further explanation of the related party would be found from the Article 18 par. 3 of Indonesia’s Income Tax Law. Therefore, the scope of Master File according to MoF-213 would be broader than OECD recommendation as the definition of the group itself is based on the controlled parties instead of the consolidated financial report requirement.
Furthermore, even though it is not explicitly required by the MoF-213, DGT also demands taxpayer to disclose the pricing policy for tangibles transaction in addition to intangible, and financial transactions. Under the BEPS Action Plan 13, there is no such requirement.
If you consider that your current TPDoc has not met the MoF-213 requirements, please consult with your tax consultant or do not hesitate to contact us.