New Tax Audit Guideline On The Related Party Transactions

New Tax Audit Guideline On The Related Party Transactions

August 1, 2019

Effective 1 July 2013, Indonesia issues a new tax audit guideline, PER-22/PJ/2013 (PER-22), towards taxpayers which have transactions with related parties. This regulation superseded the former regulation KEP-01//PJ.07/1993.

PER-22 provides directions to the tax officers on how to carry out an audit of related party transactions, commonly called a transfer pricing audit. In principle, this audit examines the arm’s length principles on transactions with affiliated parties, including but not limited to sale, purchase and/or transfer of tangible assets, intra-group services, transfer and/or use of intangible assets, interest payments and sale and/or purchase of shares. The significance of PER-22 for taxpayers is to better assist them in preparing for tax audits in Indonesia. Tax audits will be more likely to be conducted in Indonesia as Directorate General of Taxation (DGT) has increased its tax collection target through audit or examination in 2013 by 40% or approximately USD1.8 billion.

Some key issues that are relevant to the taxpayers are as follows:

  1. More detailed information is required in a form template to be provided during a transfer pricing audit. Such forms are as follows:

No.FormRequired Information
1Transactions with related partiesSimilar to appendix 1771-3A CITR.
2Segment informationFinancial information by segments.
3Supply chain management analysisIdentification of companies within the tax payer’s group that perform a determined function in the overall value chain of the group and the net operating income of those companies.
4Functions, assets and risks analysisA detailed checklist of functions, assets, and risks.
5Business characteristicsStatement of business characteristics, similar to the business sector the taxpayer is in, based on functions, assets, and risks.
6Comparability analysisDetails on the comparability of the selected comparable companies.

  1. Supply chain analysis is now required as described in 1). A taxpayer is required to provide information on the value chain relevant to the tax payer’s business and its group as a whole, including the foreign entities. Additionally, it is also required to provide information on net operating income for each entity involved in the value chain.
  2. The use of multiple year data to avoid distortion.
  3. Methods used in transfer pricing audit are Comparable Uncontrolled Price (CUP), Resale Price, Cost Plus, Transactional Net Margin, and Profit Split. The Profit Split method is being discussed in more detail in the guidance. Therefore, given more vivid guidance in applying this method, it is likely that the government tax auditors will apply this method during the tax audits.
  4. Continuously focus on segment data.

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