Transfer Pricing in Indonesia for Foreign Businesses

Are you a foreign business operating in Indonesia? Do you have transactions between your Indonesian entity and related companies abroad? 

Understanding transfer pricing and the Arm’s Length Principle (ALP) is crucial for your tax obligations and compliance. 

This article will guide you through the essentials of transfer pricing and how the ALP applies to your business transactions in Indonesia. 

What is considered as Transfer Pricing in Indonesia? 

Transfer pricing are the prices you use in transactions between companies within your group, such as subsidiaries or branches. These transactions can include the transfer of goods, services, or intangible assets.

In Indonesia, transfer pricing rules ensure that you use market value prices for these transactions, just like independent parties would. This prevents your business from manipulating prices to shift profits to low-tax jurisdictions. 

Importance of Transfer Pricing in Indonesia

If you own businesses in different countries, including Indonesia, you must follow Indonesian tax laws for transactions between these entities. This helps you avoid double taxation and penalties. Proper transfer pricing ensures your Indonesian entity pays the correct tax without shifting profits unfairly. 

For example, if your Indonesian subsidiary sells goods to your parent company abroad, the price should be the same as if the goods were sold to an unrelated company. Transfer pricing prevents tax authorities from saying you manipulated prices to lower your tax bill. 

Transfer Pricing in Indonesia: Criteria for Related Parties

Transfer pricing rules in Indonesia apply to transactions between related parties. Related parties can be:

• Direct or Indirect Control: When your company controls another, like a parent company and its subsidiary. For example, if your parent company in Japan controls a subsidiary in Indonesia, transactions between these two entities fall under transfer pricing rules. 
• Common Control: When the same parent company controls multiple companies. For instance, if a parent company in the United States controls both a subsidiary in Indonesia and another in Malaysia, any transactions between the Indonesian and Malaysian subsidiaries are subject to transfer pricing regulations.
• Family Relations: When transactions occur between family members. For example, if a business owned by one family member in Indonesia sells goods to another family member’s business in Australia, these transactions must comply with transfer pricing regulations.

The Arm’s Length Principle (ALP) in Indonesia 

The Arm’s Length Principle (ALP) is the foundation of transfer pricing. You must use the ALP for all transactions between related parties.

Prices for goods, services, and financial transactions should match what unrelated parties would agree upon under similar conditions. It ensures fair taxation and prevents profit shifting to low-tax areas.

Transfer Pricing Methods in Indonesia

Indonesia recognizes five methods for determining arm’s length prices:

1. Comparable Uncontrolled Price (CUP) Method

The CUP method compares prices in controlled transactions to prices in similar uncontrolled transactions.

For example, your Indonesian subsidiary sells machinery to your parent company in Germany for $10,000. An unrelated company sells the same machinery for $11,000. The arm’s length price should be $11,000. 

2. Cost-Plus Method

The Cost-Plus method adds a standard markup to the cost of producing goods. 

For example, your Indonesian subsidiary makes electronic components and sells them to your parent company in Japan. It costs $500 to make them, and the usual markup is 20%. The transfer price would be $600 ($500 + 20% of $500).

3. Resale Price Method

The Resale Price method subtracts a standard gross margin from the resale price to find the transfer price. 

For example, your Indonesian subsidiary buys electronics from your parent company in the US and sells them to retailers for $1,500. If independent distributors usually earn a 30% margin, the transfer price would be $1,050 ($1,500 – 30% of $1,500).

4. Profit Split Method

The Profit Split method divides total profits from a joint venture based on each party’s contribution. 

For example, your Indonesian subsidiary and your parent company in Canada develop software together and make $2 million. If your subsidiary contributed 40%, it would get $800,000.

5. Transactional Net Margin Method (TNMM)

The TNMM compares net profit margins in controlled transactions to those in similar uncontrolled transactions. 

For example, your Indonesian subsidiary provides IT services to your parent company in France. Its net profit margin is 10%. Similar independent IT providers have a 15% margin, so your subsidiary should aim for a 15% margin.

Transactions Subject to the Arm’s Length Principle (ALP) 

The objective of the Arm’s Length Principle (ALP) is to ensure fair transaction pricing. Here are the key types of transactions that must follow ALP. 

Transactions with Foreign Affiliates: Any transactions between your Indonesian entity and related companies in other countries.

Transactions with Local Affiliates with Different Tax Rates: Transactions with related companies in Indonesia that have different tax rates, such as:

• Final and Non-Final Income Tax: Applies to sectors like construction or mining.
• Luxury Goods Sales Tax: Involves items subject to luxury goods tax.

Transactions with Oil and Gas Companies: Transactions with affiliated companies in the oil and gas industry. 

Transfer Pricing Documentation in Indonesia

Master File

The master file contains detailed information about your entire business group and must be prepared within four months after the end of the tax year. The master file should include: 

• Group Ownership Details: Who owns your group? For example, if your parent company is based in Japan, list that information.
• Intangible Assets: List patents, trademarks, and other intangible assets. For instance, if your group owns a trademark for a popular product, include that.
• Business Activities Overview: Summarize what your group does. For example, if your group operates in manufacturing and retail, mention these activities.
• Financial Operations: Detail financial transactions within your group. For instance, if your Indonesian subsidiary transfers funds to a branch in Malaysia, note that.
• Consolidated Financial Records: Include combined financial statements. For example, a consolidated balance sheet and income statement for the whole group.

Local File

The local file provides information relevant to your local transactions and must also be prepared within four months after the end of the tax year. The local file should include: 

• Business Identity and Activities: Describe the local entity and its activities. For example, if your Indonesian subsidiary manufactures electronics, mention that.
• Transaction Details: List transactions with related and unrelated parties. For example, sales to a related company in Singapore and purchases from a local supplier.
• Local Financial Details: Provide financial details specific to the local entity. For instance, the income statement of your Indonesian subsidiary.
• Application of ALP: Explain how the Arm’s Length Principle is applied to transactions. For example, if you use the Cost-Plus method to price products sold to a related party, describe that.
  

Country-by-Country Report (CbCR)

The CbCR gives a global overview of taxes, income, and business activities. You must submit it within 12 months of the fiscal year’s end. 

1. Tangible Assets: Report the value of tangible assets, excluding cash—for instance, the value of machinery and buildings in Indonesia.

2. Country Name: List each country where your group operates, such as Indonesia, Singapore, and Japan.

3. Profit or Loss Before Tax: Report financial results for each country. For instance, show the profit before tax in Indonesia.

4. Income Tax: Include taxes withheld or collected. For example, income tax is paid in Indonesia.

5. Registered Capital: State the amount of capital registered in each country—for instance, the capital invested in your Indonesian subsidiary.

6. Employees: Count the number of employees in each country, such as the number of staff working in your Indonesian office.

Get advice on tax and compliance matters in Indonesia

For further assistance, contact our experts at Emerhub.

We’re here to help you navigate the complexities of transfer pricing and ensure your business stays compliant with Indonesian tax laws.