Indonesian transfer pricing laws align with the Guidelines set by the Organization for Economic Co-operation and Development (OECD). They are incorporated within Income Tax Law (ITL) Number 36/ 2008.
Arm’s Length Principle
According to the provisions of the ITL, a transaction will be considered to have been conducted based on the arm’s length principle, if the respective income, expenses, or debts were determined as had been done under normal business conditions. The Director General of Taxes in Indonesia has the authority to adjust the income, deductions, and debt of taxpayers who have a special relationship with other parties. These adjustments must be made using fair market values.
Related Party Definition
In Indonesia, related parties are considered:
- A taxpayer reports ownership of 25% or more of another company.
- Also, some groups of companies are controlled by the same person or are controlled by the same group.
- In families that are very close, for instance between parents and their children, or between brothers and sisters.
These issues play into how transactions between the parties are reported for tax.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price are:
- Comparable Uncontrolled Price Method (CUP)
- Resale Price Method (RSM)
- Cost Plus Method (CPM)
- Transactional Net Margin Method (TNMM)
- Profit Split Method (PSM)
In Indonesia, the selection of the transfer pricing method is based on the most appropriate principle. Factors to determine the appropriateness include the nature of the transaction, the business involved, how strong and reliable the method is, and how similar the compared transactions are. Although there’s no strict order of methods, if two methods are equally reliable, the traditional methods are preferred (CUP, RSM, and CPM); among those, the CUP method is the first choice. Indonesia also allows other methods, like asset and business valuation, when needed.
Comparability Analysis
To determine an arm’s length price in Indonesia, tax authorities look at key factors like the terms of the agreement, what each party does and risks, the nature of the goods or services, the economic conditions, and business strategies. A comparability analysis is done by first understanding the relationship and transaction, finding similar independent transactions, picking which party’s price will be tested, spotting any differences, making adjustments to account for those differences, and finally selecting the best comparable transaction.
In Indonesia, if there are multiple comparable transactions with the same level of reliability, those from the same country as the tested party are preferred. However, in practice, comparable from the same region are also commonly used. The country does not use secret comparables.
Documentation Requirements
Documentation requirements for transfer prices in Indonesia are based on the three-layer method of the OECD. That means multinationals have to report the following to the French tax authorities:
- Master file;
- Local file; and
- Country-by-Country (CbC) report.
In Indonesia, companies must prepare a master file and a local file in line with the OECD’s Base Erosion and Profit Shifting (BEPS) to prevent tax avoidance through transfer pricing. These documents are required if a company’s annual revenue exceeds 50 billion rupiah, or if related-party transactions exceed certain thresholds, 20 billion rupiah for tangible goods or 5 billion rupiah for services, intangible assets, or interest. They are also required if any transaction involves a related party in a low-tax country. The master file provides an overview of the group’s global operations, structure, and finances, while the local file focuses on the Indonesian entity’s related-party transactions and its application of the arm’s length principle. These files must be ready within four months after the end of the fiscal year.
Country-by-Country Reporting
In addition, also a Country-by-Country (CbC) report is to be presented if the Indonesian taxpayer is the parent in a group that has a consolidated annual turnover of at least 11 trillion rupiah. We report that the CbC is to be put forward within 12 months of the fiscal year’s end and that it includes details on income, taxes paid, employees, capital, and business activities by country. Also, all transfer pricing documentation is to be kept for 10 years and is to be put forward within one month if requested during a tax audit or review.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
In Indonesia, taxpayers have the option of using Advance Pricing Agreements (APAs), which in turn may help them to avoid or resolve transfer pricing issues. Both unilateral and bilateral APAs are allowed for a term of up to 5 years, which may also be renewed. Rollback is also a possibility should certain conditions be met, which include consistent facts and no ongoing tax investigation. Also, taxpayers may put forth objections or appeals if they disagree with a tax assessment. These may also be presented at the same time as an APA or a Mutual Agreement Procedure (MAP) to settle disputes that are either domestic or international.
Mutual Agreement Program (MAP)
In Indonesia, the Mutual Agreement Procedure (MAP) allows taxpayers to resolve treaty-related disputes such as transfer pricing adjustments or double taxation directly with the Directorate General of Taxes (DGT). To file a MAP request, an Indonesian resident submits their application (or objection/appeal in parallel) to the Director of International Taxation; treaty partners’ authorities may also file on behalf of a taxpayer. MAP covers all issues under Indonesia’s tax treaties, including anti‑abuse provisions, and allows rollbacks where treaty terms and domestic statutes permit.
Approach to Transfer Pricing Audits
Indonesian tax authorities are increasingly focusing on transfer pricing compliance, leading to a more challenging audit environment for multinational corporations.
Penalties
In Indonesia, if a company fails to submit or is late in submitting the Country-by-Country Report (CbCR), the annual tax return is treated as incomplete, and a fine of IDR 1,000,000 applies. If the issue continues after a warning, the tax authority may audit the company and, if a correction is made, apply a 50% penalty on the underpaid tax.
Taxation at a Glance
Both corporate and personal income taxes are levied at the national level, with no additional state or local taxes on income. Corporate income is taxed at a fixed rate, while personal income is taxed at progressively higher rates.
The currency of Indonesia is the Indonesian Rupiah (IDR). The official name of the Indonesia tax authority is the Directorate General of Taxes.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 22% |
VAT | 12% |
Withholding tax on dividends to non-residents | 20% |
Withholding tax on interest to non-residents | 20% |
Withholding tax on royalties to non-residents | 20% |
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