Indonesia implements new transfer pricing documentation requirements in line with BEPS Action 13

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1 16 January 2017 Global Tax Alert News from Transfer Pricing Indonesia implements new transfer pricing documentation requirements in line with BEPS Action 13 EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary 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 13 of the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) project (Action 13). 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, including 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 (CbC) Report.

2 2 Global Tax Alert Transfer Pricing Detailed discussion 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 consisting of a: Master File Local File Each of these documents is described in more detail below. Thresholds for the preparation of transfer pricing documentation Master File and Local File Under PMK-213, Indonesian taxpayers are required to prepare a Master File and a Local file where the taxpayer meets any of the following criteria: a) Conducts related party transactions (in the covered fiscal year) and has gross revenues in the prior fiscal year of more than IDR50 billion (approximately US$3.7 million) b) Conducted related party transactions in the prior fiscal year with a value of: More than IDR20 billion (approximately US$1.4 million) of tangible goods transactions, or More than IDR5 billion (approximately US$372,000) for each service, interest payment, utilization of intangible properties or other affiliated transactions c) Conducts transactions with related parties that are located in countries or jurisdictions with income tax rates 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 Unlike other jurisdictions in implementing Action 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: 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. 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. 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 transactions may need to continue to be covered under transfer pricing documentation prepared on a basis consistent with PER-32. A is required to be prepared and filed in Indonesia by: a) An Indonesian taxpayer who is classified as the parent entity of a business group who has consolidated gross revenues for that particular fiscal year of at least IDR11 trillion (approximately US$818 million), or

3 Global Tax Alert Transfer Pricing 3 b) An Indonesian taxpayer whose parent entity is a foreign taxpayer and domiciled in a country/jurisdiction that: Does not require the parent entity to submit a CbC Report. Does not have an exchange of information agreement for taxation purposes with Indonesian Government. Has an agreement with Indonesian Government on the exchange of information for taxation purposes, however, the information could not be obtained by the Indonesian Government from that country/jurisdiction. Based on the definitions of parent entity and business group in PMK-213, taxpayers should note that they may need to file a in Indonesia despite not being the ultimate parent entity of a multinational enterprise. PMK-213 states that further regulations on ing are expected to be issued by the Directorate General of Taxation (DGT). Contents of the Master File, Local File and CbC Report 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 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 transactions 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 five largest products and/or services offered as well as other products and/or services of the business group with revenue of 5% or more of the business group s total revenue Description of the business group s overall strategy for the development, ownership and exploitation of intangibles, including location of research and development (R&D) facilities and R&D management 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 13, are broader than the suggested contents of a Local File as outlined in Action 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 The 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 13. PMK-213 introduces a third report, the working paper, that is required to be submitted as part of the, which is over and above the two reports required to be prepared and issued under Action 13.

4 4 Global Tax Alert Transfer Pricing Broadly, the 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 members both domestically and overseas that include the country s name or jurisdiction, gross revenue, profit (loss) before tax, income tax that has been self-deducted/ collected/paid, income tax payable, capital, retained earnings, permanent employee headcount, and tangible assets other than cash and cash equivalent b) List of the business Group members and country-bycountry or jurisdiction of main business activity. The working paper is significantly more detailed than the filing requirements contained in Action 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, and retained earnings, among others. 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 four months after the taxpayer s fiscal year end (see also comments below on penalties on noncompliance). 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. The 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. 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. It is not clear what the implications are of the Master File and Local File not being available within the specific four month period, however there are clear implications for taxpayers whose Master File and Local File are not available before the CITR is filed. For additional information with respect to this Alert, please contact the following: Purwantono, Sarwoko & Sandjaja Consult, Jakarta Peter Ng peter.ng@id.ey.com Jonathon McCarthy jonathon.mccarthy@id.ey.com Rachmanto Surahmat rachmanto.surahmat@id.ey.com

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