If your Indonesian entity buys from, sells to, borrows from, or pays fees to its parent or affiliates abroad, those transactions fall under Indonesia's transfer pricing rules. These rules require you to price those transactions as you would with an independent party.
The Directorate General of Taxes (DGT) checks this on audit. If it finds that a price favoured the foreign affiliate, it adds the difference to your taxable income and taxes it. It then treats the same amount as a dividend and applies withholding tax, with interest on both.
Below, we cover the essentials of transfer pricing in Indonesia, from related-party rules to documentation and audit risk.
Who Counts as a Related Party in Indonesia
Transfer pricing rules apply to transactions between parties with a special relationship (hubungan istimewa). Under Article 18 of the Income Tax Law, as applied by PMK 172/2023, a special relationship exists in three situations:
- Ownership. One party holds 25% or more of the other, directly or indirectly, or a common parent holds 25% or more of both.
- Control. One party controls the other through management or technology, whether or not there is a 25% shareholding. Shared executives, dependence on the other party's technology or licences, and control over commercial contracts all qualify.
- Family. The owners or decision-makers are related by blood or marriage within one degree.
When Transfer Pricing Documentation Is Mandatory
Every taxpayer with related-party transactions must disclose them in the special attachments (Lampiran 3A and 3B) to the annual corporate income tax return, Form 1771, regardless of size. That disclosure is what the DGT reads first.
Formal transfer pricing documentation, meaning a Master File and a Local File, becomes mandatory when any one of the following applied in the previous tax year:
- Gross revenue above IDR 50 billion (about USD 3.2 million)
- Related-party transactions in tangible goods above IDR 20 billion
- Related-party transactions in services, interest, royalties or other intangibles, or any other category above IDR 5 billion each
- Any related-party transaction with a party in a jurisdiction whose corporate income tax rate is lower than Indonesia's 22%
Note that the last trigger has no minimum amount. If your PT PMA pays even a small management fee to an affiliate in Singapore or Hong Kong, where corporate tax rates are below 22%, you must prepare full documentation regardless of your revenue.
Deadlines
| Requirement | Deadline |
|---|---|
| Master File and Local File prepared and available | Within four months after the end of the tax year |
| Summary of documentation attached to Form 1771 | With the annual CIT return (also due four months after year-end) |
| Full documentation submitted to the DGT | Within 30 days of a written request, during an audit or compliance monitoring |
| Country-by-Country Report | Within 12 months after the end of the tax year |
The four-month deadline is the same as the CIT return deadline, which for a December year-end is 30 April. The Local File therefore has to be complete before the return is filed, not after. And because the thresholds are measured on the previous year's figures, you know by January whether the current year's documentation is mandatory.
Also, documentation must be prepared in Bahasa Indonesia. Only a company that has Ministry of Finance approval to keep its books in English may prepare it in English, but must provide an Indonesian translation when the DGT asks for the documents.
Country-by-Country Reporting
A Country-by-Country Report (CbCR) is required where the group's ultimate parent is Indonesian and consolidated gross revenue is IDR 11 trillion or more (roughly EUR 750 million). An Indonesian subsidiary of a foreign group files a CbCR locally only if the parent's jurisdiction does not require one or does not exchange it automatically with Indonesia. Groups within scope also file an annual CbCR notification with the CIT return.
Companies Below the Thresholds
Falling below the thresholds removes the obligation to prepare a Master File and Local File. However, it does not remove the arm's length principle.
PMK 172/2023 applies it to every related-party transaction regardless of size, and the DGT can test pricing in a general audit. Therefore, your PT PMA should still keep intercompany agreements, invoices, and a short note explaining how each price was set.
Master File, Local File, and CbCR: What Each Document Contains
Indonesia follows the three-tier structure of BEPS Action 13:
- Master File (Dokumen Induk): an overview of the global group, covering organizational structure, business lines, supply chain, intangibles, intra-group financing, and consolidated financial position.
- Local File (Dokumen Lokal): the Indonesian entity's own analysis, covering its functions, assets, and risks, each related-party transaction and the contracts behind it, the method selected, the benchmarking study, and the resulting arm's length range.
- Country-by-Country Report (Laporan per Negara): revenue, profit before tax, tax paid and accrued, capital, retained earnings, employees, and tangible assets for every jurisdiction in which the group operates.
The Local File is the document the DGT tests your pricing against. It needs to show that:
- Prices were set on information available at the time of the transaction
- Any service fees or royalties passed the benefit test
- The margins earned fall within a range of independent comparables
The next section explains how the DGT assesses each of these.
How the Arm's Length Principle Applies in Indonesia
To assess whether your transactions are at arm's length, the DGT works through four steps set out in PMK 172/2023: when the price was set, whether the charge is justified at all, what the Indonesian entity actually does, and how its results compare with independent companies.
Your documentation needs to address each one, because a gap in any step weakens the whole position on audit.
1. Set Prices Using Data Available at the Time
PMK 172/2023 requires you to set intercompany prices using the information available when the transaction takes place. This is known as the ex-ante approach. You document the analysis at the time of pricing, not at year-end.
The DGT does not accept year-end adjustments that move a margin into range after the fact. If your group uses year-end true-ups, the mechanism has to be written into the intercompany agreement and explained in the documentation before the year starts.
2. Pass the Benefit Test for Services and Royalties
For management fees, technical service fees, and royalties, the DGT first asks whether the charge should exist at all. Only then does it look at the price. You must be able to show that:
- The service was actually provided, with evidence such as timesheets, deliverables, or correspondence
- The Indonesian entity received a commercial or economic benefit from it
- An independent business would have paid for the service in the same circumstances
- The service did not duplicate work the Indonesian entity already does, and was not a shareholder or stewardship activity that benefits the parent rather than the subsidiary
Royalties carry three further requirements. You must show that the licensor legally owns the intangible, that the Indonesian entity uses it, and that it has value.
If a charge fails any of these tests, the DGT disallows it in full. It does not go on to consider whether the amount was reasonable.
3. Analyse Functions, Assets, and Risks
The functional analysis, often called FAR, sets out what the Indonesian entity does, what assets it owns, and what risks it carries. The DGT uses it to decide what level of profit the entity should earn.
The logic is simple. A back-office unit that performs routine work on the parent's instructions, owns no intangibles, and takes no market risk should earn a modest, stable margin. An entity that develops products, manages its own customers, and carries inventory or credit risk should keep a larger share of the profit.
The DGT compares the functional analysis with what the entity actually does. The most common finding in audits is an entity described as low-risk in its documentation while performing entrepreneurial functions in practice.
4. Select a Method and Establish the Arm's Length Range
PMK 172/2023 recognises five transfer pricing methods and allows others where they give a more reliable result. There is no fixed hierarchy. You select the method that fits the transaction best.
| Method | Typically used for | Example |
|---|---|---|
| Comparable Uncontrolled Price (CUP) | Commodities, standardised goods, loans, licences with market comparables | Selling a commodity to an affiliate at the same price quoted to independent buyers |
| Resale Price Method | Distributors that resell without adding significant value | Importing finished goods from the parent and reselling at an independent distributor's gross margin |
| Cost Plus Method | Contract manufacturers and routine service providers | Charging the parent for customer support at cost plus an arm's length markup |
| Transactional Net Margin Method (TNMM) | Services or distribution where no direct price comparable exists | Comparing an Indonesian software unit's operating margin with independent local peers |
| Profit Split Method | Integrated operations with shared intangibles or joint risk | Splitting profit from jointly developed software according to each party's contribution |
Once you have chosen a method, you apply it against a set of independent comparables drawn from commercial databases. PMK 172/2023 requires you to use comparables from Indonesia where they exist, and to widen the search to the region only if local data is insufficient.
Where several comparables are used, the interquartile range of their results becomes the arm's length range. A price or margin inside that range is defensible. One outside it is adjusted to the median.
What Happens If the DGT Disagrees
If an audit finds that a transaction was not at arm's length, the DGT makes two adjustments.
The first is the primary adjustment. The DGT recalculates the transaction at the arm's length price and adds the difference to the Indonesian entity's taxable income. Corporate income tax is charged on that amount at 22%.
The second is the secondary adjustment. Under PMK 172/2023, the same difference is treated as a dividend paid to the related party. Withholding tax applies to that deemed dividend: Article 26 at 20% for a foreign related party, or at the treaty rate where a tax treaty applies, and Article 23 at 15% for a domestic related party.
Interest is added to both amounts. It runs monthly from the original due date, at the benchmark rate plus a statutory uplift, for up to 24 months.
Example: Cost of a Disallowed Management Fee
An Indonesian software subsidiary pays IDR 3 billion a year in management fees to its Singapore parent. On audit, the DGT finds no evidence that the services were provided and disallows the full amount.
| Assessment | Calculation | Tax |
|---|---|---|
| Primary adjustment | IDR 3 billion added to taxable income at 22% CIT | IDR 660 million |
| Secondary adjustment | IDR 3 billion deemed dividend at the 10% treaty rate | IDR 300 million |
| Total before interest | - | IDR 960 million |
Without a treaty, the withholding rate would be 20%. The secondary adjustment would then be IDR 600 million, and the total IDR 1.26 billion before interest.
Avoiding the Secondary Adjustment
The secondary adjustment can be set aside. Under Article 37(4) of PMK 172/2023, it does not apply if, before the assessment is issued, you accept the primary adjustment and/or the related party returns cash equal to the difference to the Indonesian entity.
For a marginal case, this is usually the cheaper route. Accepting the correction costs the additional corporate tax and interest. Contesting it and losing costs the same plus the withholding tax.
Underpriced Sales to Affiliates
The example above concerns an overstated expense. The DGT also adjusts sales to affiliates that were priced too low. In that case, it revalues the sale at the arm's length price and charges corporate income tax on the additional revenue. For domestic sales, the VAT output on the e-Faktur must also be corrected, and interest is charged on the VAT shortfall.
Transactions the DGT Looks at First
The DGT focuses its audits on arrangements that can move profit out of Indonesia. The most common targets are:
- Service subsidiaries that bill the parent on a cost-plus basis, where the DGT checks both the markup and the cost base
- Contract manufacturers and limited-risk distributors earning thin margins on transactions with affiliates
- Management fees, technical service fees, royalties, and intercompany loans, all of which must pass the benefit test
- Any transaction with an affiliate in a lower-tax jurisdiction or one enjoying a tax holiday
Since January 2025, the DGT's CoreTax system has brought corporate income tax returns, e-Faktur VAT invoices, and e-Bupot withholding slips onto one platform.
As a result, the DGT can now match an intercompany expense on Form 1771 against the withholding that should have been applied to it, and see related-party flows across filings without opening an audit.
While CoreTax does not assess transfer pricing on its own, it makes an inconsistency easier to find and a request for your Local File more likely.
Avoiding Double Taxation: MAP and APA
A primary adjustment in Indonesia leaves the same income taxed twice unless the other country reduces its assessment to match. PMK 172/2023 provides two routes.
1. Mutual Agreement Procedure
Under the Mutual Agreement Procedure (MAP) in Indonesia's tax treaties, the DGT, as competent authority, negotiates with its counterpart in the related party's country to agree a corresponding adjustment. If the two authorities agree, the foreign affiliate's taxable income is reduced by the amount the DGT added in Indonesia. MAP is available after an adjustment and takes time; it is the remedy, not the prevention.
2. Advance Pricing Agreement
An Advance Pricing Agreement (APA) fixes the transfer pricing method and the arm's length range for specified transactions in advance. Indonesia offers unilateral APAs with the DGT alone and bilateral APAs that also bind the treaty partner. An APA can cover up to five tax years, and PMK 172/2023 allows rollback to earlier years that are still open and unaudited, so those years are settled on the agreed terms rather than left exposed.
For a group with material, recurring intercompany flows into Indonesia, a bilateral APA is the only mechanism that removes audit risk on both sides.
Working with Emerhub on Your Indonesian Transfer Pricing
Emerhub's tax team in Jakarta helps foreign-owned companies meet their transfer pricing obligations in Indonesia.
We assess whether your intercompany transactions cross the PMK 172/2023 thresholds, prepare the Master File and Local File, and support you through a DGT audit if one follows.
If you have related-party transactions in Indonesia and want to know where you stand, fill out the form below to speak with our tax experts.
Frequently asked questions
Does transfer pricing compliance apply to newly incorporated or small PT PMAs in Indonesia?
The obligation to prepare a Master File and Local File depends on the thresholds, but the arm's length principle applies to every related-party transaction regardless of size. A small PT PMA must still disclose related-party transactions in its CIT return, price them at arm's length, and keep records that show how the prices were set.
What language must Indonesian Transfer Pricing Documentation (TPD) be written in?
Under PMK 172/2023, you must prepare Master Files and Local Files in Bahasa Indonesia. If your company maintains its master documentation in English, you must obtain formal approval from the Ministry of Finance. You must also present an official Bahasa Indonesia translation within 30 days of a DGT audit request.
What are the consequences of missing the strict 30-day DGT submission deadline?
When the DGT requests your Master or Local File during an audit, you have a non-extendible 30 calendar days to submit it. Failing to deliver the complete documentation allows the DGT to disregard your transfer pricing study entirely. Examiners will assess your intercompany prices ex officio using their own benchmark data, issuing tax deficiency assessments with administrative interest penalties.
How does PMK 172/2023 treat intra-group management fees and IP royalties?
PMK 172 enforces a strict 4-point preliminary benefit test for intra-group services and IP royalties. Before evaluating the transaction price, you must provide proof that your affiliate physically rendered the service and that it provided direct economic value. You must also prove that the service did not duplicate internal functions and was not a shareholder/stewardship activity. Unproven service fees are disallowed in full as tax deductions.
What is a secondary adjustment, and how does it trigger additional withholding taxes?
When the DGT increases taxable income through a transfer pricing adjustment, it treats the difference as a dividend paid to the related party and applies withholding tax: Article 26 at 20% or the treaty rate for a foreign party, Article 23 at 15% for a domestic one. The secondary adjustment is set aside if you agree to the primary adjustment and/or the related party returns the cash difference before the assessment is issued.