New transfer pricing documentation requirements in Indonesia/Implementation of BEPS Action Plan 13

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1 January 2017 TaxAlert New transfer pricing documentation requirements in Indonesia/Implementation of BEPS Action Plan 13 General overview The Indonesian Ministry of Finance has issued Minister of Finance Regulation number 213/PMK.03/2016 (PMK-213) titled The type of additional documents and/or information mandatory to be kept by taxpayers who conduct transactions with related parties and its procedures. PMK-213 implements the guidance on transfer pricing documentation contained in Action Plan 13 of the Organization for Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project (Action Plan 13) in Indonesia. PMK-213, which has immediate effect from its stipulation date of 30 December 2016, has made significant changes to: Who needs to prepare transfer pricing documentation What comprises transfer pricing documentation When transfer pricing documentation needs to be prepared Taxpayers are recommended to consider immediate action steps to ensure compliance with PMK-213. Recommended immediate action steps for taxpayers to commence the preparation of their Master File and Local File for the 2016 fiscal year, given the tight deadlines for preparation and to consider the potential need to prepare a Country-by-Country Report (CbCR).

2 Transfer pricing documentation under PMK-213: a three tier structure Previously, taxpayers were only required to prepare transfer pricing documentation specific to their operations in Indonesia. This has changed with the issuance of PMK-213 with taxpayers now required to prepare transfer pricing documentation comprising a three tier structure. This three tier structure consists of a: Unlike other jurisdictions in implementing Action Plan 13, PMK-213 does not specify separate thresholds for the preparation of a Local File and a Master File. If the revenue or transaction thresholds are exceeded, then both a Local File and a Master File will need to be prepared by the taxpayer. There are a number of implications of the new thresholds for taxpayers including: Master File Local File Country-by-Country Report (CbCR) Each of these file/report is described in more details below. Thresholds for the preparation of transfer pricing documentation Master File and Local File Taxpayers that were not previously required to prepare transfer pricing documentation for historical years based on the old transactional thresholds will now also be required to prepare transfer pricing documentation as a result of the relatively lower thresholds The prior exemption for documenting domestic related party transactions has been removed in PMK-213. As such, taxpayers will now need to cover domestic transactions in their transfer pricing documentation Under PMK-213, Indonesian taxpayers are required to prepare a Master File and a Local file where the taxpayer: a) Conducts related party transactions (in the covered fiscal year) and has gross revenues in the prior fiscal year of more than IDR 50billion (approximately equivalent to US$3.7 million), or b) Conducted related party transactions in the prior fiscal year with a value of: More than IDR 20 billion (approximately equivalent to US$1.4 million) of tangible goods transactions, or Once a taxpayer has exceeded the thresholds, they will need to cover all of their related party transactions in their transfer pricing documentation. This is different from prior years where a taxpayer only needed to cover the specific related party transactions exceeding the prior transactional threshold in their transfer pricing documentation. Taxpayers should note that the transactional and revenue thresholds are based on the prior fiscal year s transactional and revenue information. This should make it easier to identify whether a taxpayer needs to prepare transfer pricing documentation for a given fiscal year in advance of the end of that fiscal year. More than IDR 5 billion (approximately equivalent to US$372,000) for each service, interest payment, utilization of intangible properties or other affiliated transactions, or c) Conducts transactions with related parties that are located in countries or jurisdictions with income tax rate lower than the Indonesian corporate income tax rate of 25%. 25% is the income tax rate specified in Article 17 of Income Tax Law No. 7 year 1983 as last amended by Law No. 36 of 2008.

3 PMK-213 has not repealed the prior transfer pricing documentation circular, Director General of Tax / Regulations / PER-32/PJ/2011 PER-32 (PER-32). As such, the transfer pricing documentation requirements under PER-32 may also need to be complied with at the same time as those contained in PMK-213. As an example, there may be certain related party transactions, particularly for tangible goods, that will fall below the thresholds in PMK-213 for the preparation of transfer pricing documentation, but are above the thresholds contained in PER-32 for the preparation of transfer pricing documentation. These transaction may need to continue to be covered under transfer pricing documentation prepared on a basis consistent with PER-32. Country-by-Country Report A CbCR is required to be prepared and filed in Indonesia by: a) An Indonesian taxpayer who is classified as Parent Entity of a Business Group who has consolidated gross revenues for that particular fiscal year of at least IDR 11 trillion (approximately US$818 million), or b) An Indonesian taxpayer whose Parent Entity is a foreign taxpayer and domiciled in the country/jurisdiction which: PMK-213 states that further regulations on CbCR are expected to be issued by the Directorate General of Taxation (DGT). The contents of Master File, Local File and CbCR Master File The Master File is focused on providing a broader overview of a Business Group s operations rather than being focused on the Indonesian taxpayer s operations (which is the role of the Local File). The contents of a Master File, as outlined in PMK-213, are largely consistent with those contained in Action Plan 13. Very broadly, the Master File is required to contain details of: a) Ownership structures and charts as well as the state or jurisdiction of each member b) Business activities performed c) Intangible assets owned d) Financial and financing activities e) Consolidated Financial Statements of the Parent Entity and taxation information regarding Related Party Transaction Does not require the Parent Entity to submit a CbCR Does not have exchange of information agreement for taxation purpose with Indonesian government Has an agreement with Indonesian government on exchange on information for taxation purpose however the CbCR information could not be obtained by the Indonesian government from that country/jurisdiction. There is a detailed list of specified items that are required to be contained in the Master File in an appendix to PMK-213. This list is detailed and includes, for example: A list of business group members as well as the operations of each business group member Description of the scheme/chart/diagram of the supply chain of the group s 5 largest products and/or services offered as well as other products and/or services of the business group with a revenue of 5% or more of the business group s total revenue Based on the definitions of Parent Entity and Business Group in PMK-213, taxpayer s should note that they may need to file a CbCR in Indonesia despite not being the ultimate parent entity of a multinational enterprise. Description of the business group s overall strategy for the development, ownership and exploitation of intangibles, including location of R&D facilities and R&D management

4 Local File The Local File is focused on providing information on the Indonesian taxpayer. The contents of a Local File, while relying on the guidance contained within Action Plan 13, are broader than the suggested contents of a Local File as outlined in Action Plan 13. Very broadly, the Local File is required to contain items including: a) Identification of the business activities performed b) information on Related Party Transactions and independent transactions conducted c) Application of the Arm s Length Principle d) Financial information e) Non-financial events/occurrences/facts influencing the formation of price or profit level. Similar to the Master File, there is a detailed list of specified items that are required to be contained in the Local File in an appendix to PMK-213. These include, for example: Explanation of the taxpayer s management structure, organizational structure, information of domestic or overseas parties that have a special relationship with the taxpayer and country or jurisdiction where these parties are located The operational aspects of the taxpayer s business activity Transactional scheme and its application Pricing policy applied in each of the past five years Country-by-Country Report The CbCR required to be filed by taxpayers in Indonesia is more detailed than that required to be prepared and filed under the guidance contained in Action Plan 13. PMK-213 introduces a third report, the CbCR working paper, that is required to be submitted as part of the CbCR, which over and above the two reports required to be prepared and issued under Action 13. Broadly, the CbCR requires the following information to be disclosed by the Parent Entities: a) Income allocation, taxes paid, and country by country or jurisdiction business activity from all the Business Group member both domestically and overseas that include the country s name or jurisdiction, gross revenue, profit (loss) before tax, income tax that has been selfdeducted/collected/paid, income tax payable, capital, retained earnings, permanent employee headcount, and tangible assets other than cash and cash equivalent b) List of Business Group member and country-bycountry or jurisdiction of main business activity. The CbCR working paper is significantly more detailed than the filing requirements contained in Action Plan 13 as it requires financial and taxation information to be provided for each individual party within the group. This information includes details of that party s gross revenues, tax paid, capital, retained earnings, etc. Language of transfer pricing documentation The Master File, Local File and CbCR must be prepared in Bahasa Indonesia. Timing for the preparation and submission of transfer pricing documentation Master File and Local File Under PMK-213, the Master File and Local File must be available no later than 4 months after the taxpayer s fiscal year end (see also comments below on penalties on non-compliance). The Master File and Local File must be submitted to the DGT based on the timeline stipulated in the taxation regulation. In this regard, there is no specific deadline for submission of the Master File and Local File mentioned in the PMK-213 and normal audit practice will apply. The submission of a Master File and Local File has to be accompanied with a statement letter specifying the time when the documents are available and needs to be signed by the party who provided the documents. Country-by Country Report The CbCR must be available no later than 12 months after fiscal year end. The CbCR must be filed together with the corporate income tax return (CITR) of the following fiscal year.

5 Attachments to tax return In addition to the special attachment forms 3A, 3A-1 and 3A-2 which taxpayers are currently required to submit with their CITR, based on PMK-213, taxpayers must also submit an additional summary (ikhtisar) form with their CITR. The ikhtisar form is similar to form 3A-1 with additional details on whether the Master File and Local File have been prepared and state the dates that they were prepared. Penalties for non-compliance If taxpayers have not prepared the Master File and Local File prior to the submission of their CITR, then their CITR may be considered as incomplete. Where a CITR is considered to be incomplete, there is the potential for penalties to be levied by the DGT on any unpaid tax of up to 200%, as well as further criminal sanctions. In our view it is not clear what the implication are of the master file and local file not being available within the specific four month period are, however there are clear implications for taxpayer whose master file and local file are not available before the CITR is filed. EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com/id. About EY s Transfer Pricing and Operating Model Effectiveness Services EY brings you a global perspective on transfer pricing and supply chains based on our longstanding experience of the subjects. We can help you configure your supply chain effectively and design and implement sustainable transfer pricing policies. EY s transfer pricing professionals can help you review, document, manage and defend your transfer pricing policies and processes aligning them with your business strategy. Our multi-skilled teams support you in implementing proactive, pragmatic and integrated strategies that address tax risks and help your business succeed Purwantono, Sungkoro & Surja Consult A member firm of Ernst & Young Global Limited All Rights Reserved. APAC No This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specificadvice. ey.com/id

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