Why Should Transfer Pricing Documentation be Prepared?
To answer why taxpayer must prepare transfer pricing documentation refers to the regulations governing that requirement, benefit and loss created by transfer pricing documentation.
- Certainly the first benefit of preparing transfer pricing documentation that is immediate and clear is to comply with transfer pricing regulations. Although the requirement to submit transfer pricing documentation is not at the stage of filling income tax return, however, taxpayer must prepare and make transfer pricing documentation that should be contemporaneous. Contemporaneous means prepared on or before the related party transactions are executed.
- The transfer pricing documentation demonstrate that taxpayer has satisfied the transfer pricing regulations and the arm’s length principles in good faith and transparent.
- With the compliance to transfer pricing documentation requirement, taxpayer will create a better relationship and communication with tax authorities.
- With the transfer pricing documentation, taxpayer can avoid penalty for non-compliance. Although Indonesia is not applying penalty regime yet, in some jurisdictions there are penalty charges for non-compliance to transfer pricing documentation regulation.
- With contemporaneous documentation, taxpayer will establish early risk detection on whether the related party transactions will expose taxpayer with risk of transfer pricing adjustment made by tax authorities.
- Transfer pricing documentation can be considered by management as evaluation tools to assess the effects of the company’s pricing policy in the related party transactions to business as well as taxation concern.
- Transfer pricing documentation is a tool for tax authorities to assess the transfer pricing risk adjustment. Taxpayers which do not make transfer pricing documentation available to tax authority will be classified as high-risk of non-compliance, although the related party transactions conducted by these taxpayers are already priced at arm’s length.
- To provide evidence in the transfer pricing scrutiny and in event of disputes such as objection and appeal.
- Non-compliance to transfer pricing documentation requirement will make taxpayers to be classified as high-risk by tax authorities. Further scrutiny will be imposed for non-compliance and this will incur high administrative burden and costs for taxpayers.
- Taxpayer will be imposed penalty charges for non-compliance to transfer pricing documentation requirement.
- Tax authorities will determine the arm’s length pricing and adjustment for the related party transactions conducted by taxpayers in the absence of transfer pricing documentation. The lack of sufficient information provided by taxpayer in the absence of transfer pricing documentation will cause excessive adjustment by tax authorities which in many cases the underpayment adjustment will be paid fully by taxpayers to avoid penalty if loosing the case in objection and appeal.
- In the absence of appropriate transfer pricing documentation will cause unprepared defense of transfer pricing position in tax audit, objection, and appeal which in turn will cause lost to the case.