Transfer Pricing Risks in Indonesia: Key Challenges, Regulations, and Mitigation Strategies

Indonesia's transfer pricing enforcement environment has entered a decisively new phase.  Multinationals that have not yet refreshed their documentation, implemented mandatory pre-transaction analyses, or stress-tested their intercompany pricing against current DGT standards face material exposure. This article sets out what every CFO, tax director, and regional finance lead needs to understand before the DGT comes knocking.

Contributing Advisor

Duha Ziaun

Senior Associate, Corporate Accounting Services

Which transfer pricing transactions carry the highest risk of dispute?

For commodity transactions, particularly in palm oil, nickel, coal, and petroleum, the DGT applies the CUP method using published price quotations as its benchmark, often without requesting taxpayer comparables. Multinationals with commodity supply chains must ensure their pricing documentation is contemporaneous, benchmarked against publicly available quotation data, and consistent with the ex-ante analysis requirements.

How rigorously does the DGT examine management fees and intragroup service charges?

Management fees and intragroup service charges face a mandatory two-stage preliminary test under PMK-172/2023 before any deduction is permitted:

• Existence test: Evidence that the service was actually rendered (service agreements, delivery records, beneficiary documentation)
• Benefit test: Demonstration of direct economic benefit to the Indonesian recipient, distinct from general shareholder oversight, group coordination, or stewardship activities

Failure at either stage results in full disallowance. The DGT specifically excludes from deductibility any charges that constitute shareholder activities, strategic oversight, group compliance, governance costs, even where a mark-up has been applied. Management fee disputes represent the highest-frequency category of TP litigation in Indonesia's Tax Court.

What makes intragroup loans and guarantees one of the most audited TP areas in Indonesia?

Intercompany financing arrangements attract scrutiny on two axes. First, the DGT evaluates arm's length interest rates by reference to borrower creditworthiness, currency, tenor, security, and prevailing market rates, frequently substituting Bloomberg or Reuters benchmarks for taxpayer analysis. Second, under Article 49 of the Income Tax Law, interest deductions are subject to the DGT's debt-to-equity ratio controls. Cross-border loans directed to or from low-tax jurisdictions are classified as potential base erosion mechanisms and are systematically prioritised in audit selection.

Why do royalties and IP licensing arrangements routinely end up in transfer pricing disputes?

The taxpayer must demonstrate that the IP exists, that the Indonesian entity genuinely benefits from its use, and that the royalty rate reflects arm's length terms. The DGT retains, and regularly exercises the power to disallow royalty deductions in their entirety where this standard is not met. Post-PMK-172/2023, all IP licensing arrangements require a pre-transaction analysis covering economic rationale, a comparability assessment, and pricing justification, making retrospective royalty arrangements indefensible.

Is your business already on the DGT's audit shortlist?

Can consistent losses in your Indonesian entity signal a transfer pricing problem to the authorities?

Persistent losses in a manufacturing or distribution entity are among the most reliable audit triggers in the DGT's risk profiling system. The DGT's operating presumption is that a genuine independent operator would not absorb losses over multiple consecutive years — and therefore that above-market intercompany charges are the probable cause. Multinationals with loss-making Indonesian subsidiaries must maintain contemporaneous functional analysis demonstrating that losses are commercially justifiable and not a product of intercompany pricing distortion.

Does dealing with low-tax jurisdictions automatically increase your audit exposure?

Transactions with entities in jurisdictions levying CIT at rates lower than Indonesia's 22 percent rate trigger mandatory TP documentation requirements irrespective of transaction volume, and receive elevated risk scores within the DGT's audit profiling system. Under PMK-112/2025, non-resident counterparties in treaty jurisdictions must now satisfy the Principal Purpose Test (PPT), demonstrating genuine economic substance and that the arrangement's primary purpose was not to obtain treaty benefits. Entities transacting with Singapore, Hong Kong, or Labuan-based affiliates should verify counterparty eligibility before applying reduced withholding rates.

How does IP migration, even when commercially justified, attract enforcement action?

Transfers of IP, functions, risks, or assets out of Indonesia are explicitly classified as controlled transactions requiring ex-ante analysis under PMK-172/2023. For hard-to-value intangibles, the DGT is entitled to substitute its own valuation methodology when it concludes that the asset has been transferred below arm's length value. Even technically compliant IP migrations face challenge where the DGT determines that the commercial rationale or post-restructuring remuneration is insufficiently documented.

Which business restructurings does the DGT challenge most aggressively?

Restructurings that result in a diminution of the Indonesian entity's functional profile attract the most aggressive DGT response — conversions from full-risk manufacturer to contract manufacturer, from full distributor to limited-risk distributor, or centralisation of key supply-chain functions offshore. Each such conversion compresses the Indonesian entity's profitability; the DGT requires detailed documentation that post-restructuring remuneration reflects the revised risk and asset profile, and may impose exit charges on functions and risks transferred out of Indonesia.

Does your industry face sector-specific transfer pricing risks in Indonesia?

Sector-specific TP exposure is particularly pronounced in:

• Extractive industries (oil and gas, mining): Commodity pricing, production-sharing contracts, and cost recovery arrangements
• Pharmaceutical and consumer goods: Brand royalties, supply-chain structuring, and marketing intangibles
• Financial services: Intragroup funding, treasury operations, guarantee fees, and thin capitalisation
• Technology and digital: IP transfers, digital service fees, and revenue attribution in multi-sided platform models

What documentation does Indonesian law require?

What are the three-tiered TP documentation obligations under Indonesian tax law?

All documentation must be prepared in Bahasa Indonesia. The Local File must incorporate the expanded content requirements introduced by PMK-172/2023 for fiscal year 2024 onwards.

Does your business meet the thresholds requiring a Master File, Local File, or CbCR?

Master and Local File obligations apply to any taxpayer meeting at least one of the following conditions:

• Gross annual revenue exceeding IDR 50 billion (~USD 3 million)
• Related-party goods transactions exceeding IDR 20 billion (~USD 1.2 million)
• Related-party services, interest, or intangible transactions exceeding IDR 5 billion (~USD 307,000)
• Any transactions with entities in jurisdictions with a lower CIT rate than Indonesia (22%)

CbCR obligations apply to ultimate parent entities with consolidated group revenue exceeding IDR 11 trillion (~USD 675 million), with potential extension to non-parent entities where the parent's jurisdiction lacks a qualifying exchange-of-information agreement with Indonesia.

What penalties and tax adjustments can result from inadequate or late TP documentation?

Non-compliance with Indonesia's TP documentation framework triggers a cascading sequence of financial consequences:

• Primary adjustment — DGT recharacterises intercompany pricing, increasing taxable income or disallowing deductions
• Secondary adjustment — Adjusted amounts are treated as constructive dividends subject to 20 percent withholding tax (or applicable treaty rate)
• VAT adjustment — PMK-172/2023 extends adjustment consequences to VAT on transaction values
• Administrative penalties — Sanctions under the General Tax Provisions Law (UU KUP) for late or absent documentation
• Interest surcharge — Underpaid tax from TP adjustments attracts interest calculated from the original due date

Without cash or equivalent remedy within the prescribed timeframe, all five consequences may apply simultaneously.

How does incomplete documentation shift the balance of power toward the DGT in a dispute?

Where documentation is absent, incomplete, or fails to reflect contemporaneous data, the DGT is explicitly entitled to conduct unilateral adjustments based on its own assessment of arm's length pricing. In Tax Court proceedings, the absence of adequate documentation consistently undermines taxpayer positions — the courts have repeatedly upheld DGT adjustments where taxpayers could not produce documentary evidence of economic substance, service benefit, or arm's length determination. Incomplete documentation does not merely create a compliance risk; it fundamentally compromises the taxpayer's ability to defend any transaction before the court.

When does managing transfer pricing risk in Indonesia require specialist support?

The convergence of mandatory ex-ante analysis, Coretax digital filing, evolving DGT audit methodologies, and the risk of simultaneous primary, secondary, and VAT adjustments means that Indonesia's post-PMK-172/2023 TP regime has moved decisively beyond the capacity of most in-house tax functions to manage alone. The stakes, cascading penalties, deemed dividend withholding, double-taxation exposure, and the structural disadvantage of inadequate documentation in Tax Court, require the depth of specialist advisory support.

Dezan Shira & Associates provides end-to-end transfer pricing advisory, documentation preparation, benchmarking, and dispute resolution services for multinationals operating across Indonesia and the broader ASEAN region. Our Indonesia-based tax specialists bring direct DGT audit experience, sector-specific benchmarking expertise, and a track record of producing documentation that withstands regulatory scrutiny.

Whether your business is building a TP policy from the ground up, responding to a DGT audit, or seeking prospective certainty through an APA, our team is positioned to protect your position — before the DGT comes knocking.