Transfer pricing
Transfer pricing regulations apply to transactions between companies that have a special relationship, such as subsidiaries, branches, or affiliated entities, both domestically and across borders.
Indonesia's Income Tax Law (Law No. 36/2008) empowers the tax authorities to recalculate taxable income when such related-party transactions do not reflect the arm’s length principle. The underlying assumption is that affiliated parties may set prices to shift profits to lower-tax jurisdictions, thereby eroding Indonesia’s tax base.
To enhance transparency and reduce tax disputes, Indonesia has adopted documentation and disclosure requirements that follow OECD TP Guidelines, most recently detailed under PMK-172/2023.
The arm’s length principle
The arm’s length principle is accepted in Indonesia as the standard guide to transfer pricing. Under this principle, profits are taxed on where the profits are generated and where the real economic activities have occurred.
What are the required documents?
Effective for fiscal years starting 2024 onwards, PMK-172/PMK.03/2023 requires taxpayers engaged in related-party transactions to prepare comprehensive documentation, including:
- Price-setting documentation (Dokumen Penetapan Harga Transfer):
- Must be prepared at the beginning of the fiscal year (ex-ante).
- Shows how transfer prices are determined using comparable data and functional analysis.
- Demonstrates that transactions were structured at arm’s length before they occur.
- Required to be retained and submitted upon request during an audit.
- Local file & master file:
- Prepared contemporaneously and submitted when requested.
- Includes in-depth functional, industry, and financial analysis of the Indonesian entity and its group.
- Thresholds apply (e.g., gross turnover > IDR 50 billion or specific thresholds for intangible or loan transactions).
- Country-by-Country Reporting (CbCR):
Required for Indonesian entities that are part of multinational groups with consolidated revenue ≥ IDR 11 trillion (approx. EUR 750 million), or where the parent entity is located in a jurisdiction without CbCR exchange arrangements.
Transfer pricing methods
There are five transfer pricing methods for tangible or intangible transactions in Indonesia. These are:
- The comparable uncontrolled price (CUP) method;
- The cost-plus method;
- The resale price method;
- The profit split method; and
- The transactional net margin method (TNMM).
The CUP method is the most favored method used by Indonesia’s Directorate General of Taxes (DGT), such as for royalty and interest payments. If the CUP method is not applicable, then the Indonesian tax authorities will apply the TNMM method.
Mutual Agreement Procedure (MAP)
In addition to APA, Indonesia has implemented the Mutual Agreement Procedure (MAP) mechanism, regulated under MoF-49/2019, allowing taxpayers to resolve cross-border tax disputes that arise from double taxation or inconsistent transfer pricing adjustments.
- MAP is typically used when a foreign tax authority and the Indonesian DGT impose conflicting tax treatments on the same income.
- It can be applied concurrently with objection or appeal, but must be submitted within 3 years from when the taxpayer first receives the notice of assessment.
- Indonesia’s MAP system has grown more responsive in recent years and is aligned with international standards under the OECD's Action 14 (dispute resolution)
Advance pricing agreement
Regulated under PMK-22/PMK.03/2020, an APA is a bilateral or unilateral agreement between the taxpayer and one or more tax authorities, setting transfer pricing methods and parameters for certain controlled transactions over a fixed period (usually 3–5 years).
- APAs aim to reduce audit risk, enhance predictability, and ensure transactions remain compliant with the arm’s length principle.
- Taxpayers must submit an APA request before the start of the covered fiscal year, including full TP documentation and economic analysis.
- The Indonesian DGT encourages APA applications, especially for complex or high-value cross-border transactions.
APA application withdrawal and renewal
Taxpayers can withdraw from an APA application before the APA negotiation has been completed. A taxpayer, however, can submit an APA renewal application to the DGT within 12 months and up to six months before the last fiscal year.
