Amid the global trend of strengthening tax base protection and combatting profit shifting, Indonesia has significantly upgraded its transfer pricing regulatory framework, through Minister of Finance Regulation (PMK) No. 172 of 2023. This not only replaces previous rules but also marks a fundamental shift from formal compliance to substantive review, posing unprecedented challenges to the tax governance capabilities of multinational enterprises.
Framework restructured
Indonesia’s transfer pricing regime is based on article 18 of the Income Tax Law and responds to the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Action Plan. The introduction of PMK No. 172/2023 systematically consolidates fragmented rules, establishing a comprehensive regulatory ecosystem on the arm’s length principle (ALP). The main highlights are:
(1) The scope of special relationships is expanded to include implicit control, such as third-party influence over pricing or counterparty selection. Even if there is no direct equity relationship between the parties, transactions are deemed related if a third party can substantially influence pricing, or choice of counterparty. The regulation also introduces a new category of “other financial transactions”, covering complex arrangements such as cash pooling and derivatives.
Rao Guodong
Senior Partner
Tiantai Law Firm
Tel: +86 139 1724 0759
E-mail:
raoguodong@tiantailaw.com
(2) The regulation unifies supervision of cross-border and domestic transactions. Regardless of whether a transaction is cross-border, as long as it involves a special relationship it must comply with the ALP. The regulation also strengthens the corresponding adjustment mechanism for domestic transactions to avoid double taxation.
(3) For the first time, the ALP application process is standardised into six steps: (a) identifying controlled transactions and relationships, with a focus on revealing implicit control; (b) analysing the industry environment relevant to the transaction, including market structure and competition; (c) examining the functions, assets and risks (FAR) and business strategies of both parties; (d) conducting a comparability analysis, prioritising internal comparable data and using external data only when internal data is insufficient; (e) selecting the method, with preference given to the comparable uncontrolled price (CUP) method and ratio-based comparable transaction methods, such as specific interest or fee rates; and (f) conducting a pricing assessment, using either a single point or range to justify reasonableness, and allowing use of the median as an adjustment basis when necessary.
(4) A preliminary review mechanism is introduced. For high-risk transactions such as those involving intangibles or restructurings, taxpayers must demonstrate the economic rationale, actual performance and benefit relationships of the transaction, strictly controlling the abuse of “nominal transactions”.
Documentation compliance
PMK No. 172/2023 elevates the master file, local file, and country by country report from mere archival tools to key evidence for determining tax authority compliance.
Timeliness and authenticity are both emphasised. Documentation must be completed by the tax filing deadline and based on available information at the time of transaction; post-audit amendments are restricted. Similarly, the local file requires detailed disclosure of all related-party transactions (amounts, counterparties, products and unit prices), enhancing the transparency of industry analysis, FAR analysis and the logic of comparability adjustments.
A strict presumption of “non-submission equals violation” is introduced. Failure to provide documentation promptly during tax audit is presumed a violation of the ALP, with significant potential adjustments to taxable income. A simplified mechanism is available, but only for companies with local transaction values of IDR20 billion (USD1.2 million) or less – not in high-risk industries such as mining or finance – and does not exempt them from substantive review.
Expense review
Due to their abstract nature and evidentiary challenges, service transactions have long been a focus of audits. The tax authority now applies a four-dimensional review framework:
(1) Service authenticity. Companies are required to provide evidence of the service process, such as contracts, detailed service records, emails and travel documentation – not just summary presentations or invoices, lacking execution traces.
(2) Benefit test. Enterprises must demonstrate specific benefits to the Indonesian entity from the service (such as cost reduction or efficiency gains), but explaining the actual value is often a struggle.
(3) Avoidance of duplication. The tax authority compares the functional configuration of the local entity to determine whether related services are redundant, while the local team is often already equipped with the same capabilities.
(4) Reasonableness of consideration. Enterprises are required to provide comparable data or cost-plus justifications. However, pricing models are frequently ambiguous, and the lack of third-party support reports remains a common shortcoming.
Practical difficulties
Despite the advanced legislative design of PMK No. 172/2023, there are still multiple challenges to effective implementation.
(1) Data scarcity constrains comparability analysis. Indonesia lacks a local comparable database, and companies relying on international databases such as Orbis are often questioned by the tax authority regarding representativeness, resulting in a “law without effective application” dilemma.
(2) Ambiguity in the boundaries of discretion. The tax authority has the power to directly reassess taxable income, but the “reasonable boundaries” of ALP compliance lack clear standards, making adjustment outcomes difficult to predict.
(3) Advance pricing agreements and mutual agreement procedures have not formed a closed loop, and cross-jurisdictional review standards are inconsistent.
Compliance strategies
To adapt to the new regulations, companies must shift from passive record-keeping to proactive explanation, and manage the entire chain of service transactions.
At the contract stage, avoid vague language and clearly define service content, delivery standards and quantifiable outcomes.
During execution, establish a complete evidence chain, from task assignment to acceptance of deliverables such as meeting minutes and system logs, to facilitate verification.
At the pricing stage, when using the cost-plus method, disclose the base and mark-up logic, supplemented with independent adviser reports when necessary.
Adopt a dual-track approach to comparability analysis. Prioritise mining local Indonesian data and, if unavailable, clearly explain the limitations, providing alternative solutions. For high-risk transactions such as restructurings or licensing, prepare transaction simulation reports and internal decision records in advance.
Establish a dynamic compliance mechanism, conducting annual assessments of business changes such as functional migration or profit model adjustments, and updating analysis logic in a timely manner.
Finally, set up cross-departmental compliance teams covering tax, finance, legal and operations to ensure consistency between documentation and business substance.
Rao Guodong is a senior partner at Tiantai Law Firm. He can be contacted by phone at +86 139 1724 0759 and by mail at raoguodong@tiantailaw.com