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

At its core, transfer pricing refers to the determination of prices for transactions between related parties within a multinational group, covering the sale of goods, provision of services, licensing of intangibles, and financing arrangements.

Contributing Advisor

Duha Ziaun

Senior Associate, Corporate Accounting Services

Indonesia stands out as one of the world’s most challenging jurisdictions for transfer pricing compliance. Its reputation as a high-risk environment arises from the tax authority’s assertive enforcement, an evolving regulatory framework, and increasingly sophisticated audit methodologies. The Directorate General of Taxes (DGT) has consistently taken a proactive stance in scrutinizing intercompany pricing—particularly transactions that appear to shift profits to lower-tax jurisdictions or that lack clear economic substance.

Understanding Transfer Pricing in Indonesia

The arm’s length principle (ALP) underpins TP rules, requiring related-party transactions to be priced as if between independent parties.

The OECD Transfer Pricing Guidelines (2022 edition) provide the global standard, recognizing five core TP methods:

• Comparable Uncontrolled Price (CUP)
• Resale Price Method (RPM)
• Cost Plus Method (CPM)
• Transactional Net Margin Method (TNMM)
• Profit Split Method (PSM)

These methods apply to a wide spectrum of transactions—from routine distribution to complex intellectual property licensing.

Indonesia's alignment and divergence from global practices

Indonesia has substantially adopted the OECD Transfer Pricing Guidelines, demonstrating commitment to international best practices while incorporating specific local requirements that reflect the country's unique economic and regulatory environment. The Indonesian framework generally aligns with OECD principles in its recognition of the five standard transfer pricing methods and its emphasis on the arm's length principle as the cornerstone of transfer pricing analysis.

However, notable divergences exist that create additional complexity for taxpayers. Indonesia's transfer pricing regulations exhibit certain hierarchical preferences in method selection that may differ from OECD guidance, particularly in commodity-based transactions where the CUP method receives preferential treatment. Additionally, Indonesia has implemented specific documentation requirements and compliance thresholds that exceed OECD minimums, reflecting the DGT's emphasis on comprehensive transfer pricing substantiation.

Indonesian regulatory framework

Indonesia’s TP regime culminated in the issuance of Minister of Finance Regulation No. 172/PMK.03/2023 (PMK-172), which consolidated prior regulations into a unified framework. This landmark regulation revoked:

• PMK-213/2016 on TP documentation,
• PMK-49/2019 on mutual agreement procedures (MAP), and
• PMK-22/2020 on advance pricing agreements (APA).

PMK-172 strengthened guidance on comparability analysis, secondary and corresponding adjustments, and introduced clearer procedures for APAs and MAPs, while maintaining consistency with OECD principles. Earlier guidance, such as PER-22/PJ/2013 continues to shape technical audit practices.

Directorate General of Taxes (DGT) enforcement approach

The DGT has adopted an aggressive and increasingly data-driven enforcement approach. Using compliance risk management systems and industry-specific profiling, the DGT identifies taxpayers for audit based on related-party transaction volumes, profitability, and dealings with low-tax jurisdictions.

Audit procedures often involve a dual framework:

• Ex-ante compliance, requiring taxpayers to prepare price-setting documentation before transactions occur; and
• Ex-post testing, where auditors benchmark actual results against arm’s length standards.

This creates tension, as taxpayers must defend policies both prospectively and retrospectively.

Common Transfer Pricing risks in Indonesia

Sale and purchase of goods

Commodity transactions represent a particularly high-risk area in Indonesia, especially given the country's substantial natural resources sector and manufacturing base.

The DGT demonstrates a strong preference for applying the CUP method in commodity transactions, seeking to identify comparable transactions for identical or highly similar products. However, the complexity of global commodity markets, pricing mechanisms, and quality differentials often makes establishing perfect comparability challenging, creating opportunities for dispute.

Manufacturing and distribution arrangements face scrutiny regarding profit allocation and risk assignment. The DGT examines whether Indonesian entities performing manufacturing functions receive appropriate compensation for their activities, particularly when valuable intangibles developed elsewhere in the group contribute to product value. Similarly, distribution arrangements involving sales to related distributors attract attention when profit margins appear inconsistent with functions performed and risks assumed.

Intragroup services (including Low Value-Adding services)

Intragroup services represent one of the most contested areas in Indonesian transfer pricing audits, with particular focus on Low Value-Adding Services (LVAS). While the OECD Guidelines introduce a simplified approach for LVAS with a fixed 5 percent markup, Indonesia has not adopted this framework, requiring full comparability analysis for all service transactions regardless of their nature or complexity.

The DGT applies rigorous preliminary testing (existence test and benefit test) to verify that claimed services were performed and provided genuine economic benefits to Indonesian recipients. Services failing these tests face complete disallowance, resulting in non-deductible expenses and significant tax adjustments. Common service categories under scrutiny include management fees, technical services, administrative support, and shared cost arrangements.

Financing arrangements (intragroup loans and guarantees)

Intercompany financing arrangements face intensive examination regarding both interest rates and debt capacity analysis. The DGT evaluates whether interest rates charged on intragroup loans reflect arm's length terms by considering factors such as borrower creditworthiness, currency, term, security, and prevailing market rates. Excessive interest payments to low-tax jurisdictions attract particular scrutiny as potential base erosion mechanisms.

Debt-to-equity ratios and debt capacity analysis have become increasingly important, with the DGT examining whether Indonesian borrowers could obtain similar financing terms from independent lenders. Implicit support from group membership and guarantees from parent companies complicate this analysis, requiring careful consideration of credit enhancement effects on pricing.

Royalties and intangibles

Intellectual property transactions present complex valuation challenges that frequently result in disputes with Indonesian tax authorities. The DGT examines royalty rates for technology, trademarks, know-how, and other intangible assets to ensure alignment with arm's length principles. Hard-to-value intangibles (HTVI) pose particular challenges, as ex-post outcomes may differ significantly from ex-ante projections used in pricing decisions.

The allocation of intangible development costs and the identification of legal and economic ownership create additional complexity. Indonesian entities contributing to intangible development through manufacturing activities, market penetration, or local adaptations may claim entitlement to residual profits beyond routine returns, leading to disputes over profit allocation.

Red flags for Tax Authorities

Persistent losses despite significant revenue

Companies that consistently report losses while generating substantial revenue are immediately flagged as high audit risks. Such patterns often suggest that profits may have been shifted to related parties in other jurisdictions.

The DGT pays particular attention to cases where Indonesian operations appear to shoulder disproportionate risks or costs compared to their share of group profits, especially when independent companies in similar circumstances remain profitable. Persistent losses combined with large volumes of related-party transactions are almost guaranteed to trigger audit inquiries.

Auditors will closely assess whether transfer pricing policies properly compensate Indonesian entities for their role in value creation and whether the allocation of risks reflects genuine economic reality rather than tax-driven arrangements

Profit shifting to low-tax jurisdictions

Dealings with entities in jurisdictions that apply corporate tax rates lower than Indonesia’s 22 percent rate automatically attract enhanced documentation requirements and heightened scrutiny.

The DGT uses advanced analytics to identify signs of profit shifting, examining factors such as profit margins, return on assets, and effective tax rates across the group. Common warning indicators include:

• Unusual or opaque pricing arrangements;
• Excessive service fees;
• Inflated royalty charges; and,
• Artificial risk allocations to affiliates in low-tax countries.

The presence of group entities in tax havens or preferential regimes without meaningful business activity increases the likelihood of a group-wide audit.

Aggressive use of intangibles and IP migration

The transfer or migration of intellectual property to low-tax jurisdictions, followed by licensing arrangements with Indonesian entities, is another major red flag.

The DGT examines whether such transfers occurred at arm’s length values and whether subsequent royalty payments fairly reflect the benefits derived from the intangibles. Timing also matters: IP transfers made shortly before significant value appreciation are closely scrutinized under anti-avoidance principles.

Consistent with OECD guidance, Indonesia places growing emphasis on the DEMPE functions—Development, Enhancement, Maintenance, Protection, and Exploitation. This ensures that entities performing these value-creating activities receive an appropriate share of profits, regardless of legal ownership structures.

Business restructurings without substance

Corporate restructurings that lack genuine commercial substance are aggressively challenged by the DGT. Particular attention is given to restructurings that shift profit potential abroad while day-to-day operations remain in Indonesia.

Auditors will assess whether Indonesian entities have been adequately compensated for the transfer of functions, assets, or risks, and whether new arrangements reflect arm’s length conditions. Transactions perceived as primarily tax-motivated are likely to face adjustments.

Sector-specific risks

Certain industries in Indonesia are subject to heightened TP risks:

• Natural resources. Mining and oil & gas companies are scrutinized for pricing of commodities, cost recovery, and allocation of profits across exploration, development, and production phases. Volatility in commodity prices and production-sharing contracts to add further complexity.
• Contract and toll manufacturing arrangements, as well as distributor structures, are frequently examined to ensure that Indonesian entities receive fair returns for their functions. Compensation for marketing contributions and the use of group intangibles are common audit issues.
• Digital economy. Online platforms and digital service providers face emerging challenges as Indonesia develops rules on profit allocation in the absence of physical presence. Traditional TP approaches often struggle to capture the value created in these models, requiring more innovative analyses.

Transfer Pricing documentation requirements

Indonesia applies a three-tiered documentation regime aligned with OECD BEPS Action 13, but with stricter thresholds and local requirements:

• Price-Setting Documentation (ex-ante): prepared at fiscal year start to justify intercompany pricing policies. Retained by taxpayers and provided during audits.
• Master File and Local File: required if revenue ≥ IDR 50 billion, or if related-party transactions exceed IDR 20 billion (goods) / 5 billion (services), or involve low-tax jurisdictions. Both must be prepared in Bahasa Indonesia within four months after year-end.
• Country-by-Country Report (CbCR): required for groups with consolidated turnover ≥ IDR 11 trillion, or where the parent’s jurisdiction does not exchange CbCR with Indonesia.

Failure to maintain documentation exposes taxpayers to administrative penalties, deemed profit assessments, and weakened audit defence

Penalties for non-compliance

Administrative fines

Failure to maintain proper transfer pricing documentation exposes taxpayers to progressive administrative penalties. These sanctions are designed both to encourage timely compliance and to impose proportionate consequences for violations.

For example, the late submission of a Country-by-Country Report (CbCR) may cause the annual corporate tax return to be treated as incomplete, potentially triggering estimated tax assessments and further administrative measures. Continued non-compliance can escalate the consequences, leading to formal warning notices, additional compliance deadlines with associated costs, and ultimately deemed profit assessments based on DGT estimates rather than taxpayer-declared figures.

Potential tax adjustments and disputes

 Insufficient documentation seriously undermines a taxpayer’s position in a transfer pricing audit. In practice, this often results in acceptance of DGT’s proposed adjustments or adverse outcomes in dispute resolution.

Failure to provide requested documents within the statutory timeframes also means taxpayers lose the right to present those materials at later stages of the audit or appeal process—a rule that significantly shifts the balance of power toward the tax authority.

In Indonesia, the evidentiary weight of contemporaneous documentation cannot be overstated. Courts and administrative bodies consistently place high value on well-prepared, timely TP files, often making them the decisive factor in determining the outcome of disputes and in shaping settlement negotiations.

How the DGT identifies high-risk taxpayers

Data analytics and benchmarking

The Directorate General of Taxes increasingly relies on Compliance Risk Management (CRM) systems tailored to transfer pricing. The CRM-TP programme uses advanced data analytics to spot potential non-compliance by comparing taxpayer-reported information against industry benchmarks, transaction volumes, and profitability indicators.

Algorithms evaluate multiple factors simultaneously: the scale of related-party transactions relative to overall business activity, dealings with low-tax jurisdictions, persistent loss-making despite revenue growth, and deviations from industry-standard profit margins. Based on these inputs, the system generates risk scores that guide audit selection and determine the scope of examination.

Industry risk profiling

Complementing its data-driven approach, the DGT also develops detailed industry risk profiles that capture sector-specific characteristics, business models, and typical transfer pricing structures.

• Natural resources. Mining and oil & gas companies face heightened scrutiny due to the potential for commodity price manipulation and the complexity of production-sharing arrangements.
• Manufacturing. Examinations often focus on contract manufacturing margins, tolling arrangements, and the use of intangibles.
• Technology and digital economy. Businesses with significant intangible assets or cross-border service delivery models attract close attention.
• Financial services. Particular risks arise around intercompany guarantees, funding structures, and risk allocations that may not align with economic substance

Transfer Pricing audit trends

Recent TP audits in Indonesia highlight a persistent tension between ex-ante and ex-post approaches. Under PMK-172/2023, taxpayers must establish TP policies in advance (ex-ante), based on prospective analyses and available data. Yet in practice, auditors often test compliance retrospectively (ex-post), benchmarking actual results against arm’s length ranges.

This methodological inconsistency creates compliance challenges. Taxpayers may find that policies defensible at the time of transaction are later questioned when compared against outcomes influenced by changing market conditions. While regulations emphasize forward-looking documentation, the DGT’s technical guidelines continue to favor ex-post analysis, leaving businesses to navigate a delicate balance between the two.

Mitigating Transfer Pricing risks

 Managing TP risk in Indonesia requires more than basic compliance. Key strategies include:

• Developing robust TP policies that align with business substance and Indonesian requirements.
• Implementing strong internal controls and monitoring systems to ensure consistent application.
• Entering Advance Pricing Agreements (APAs) to obtain prospective certainty; bilateral APAs are particularly valuable in avoiding double taxation.
• Maintaining consistent and commercially realistic intercompany agreements.
• Regularly updating benchmarking studies to reflect market changes and regulatory expectations.

Engaging proactively with the DGT through early consultations, ruling requests, and transparent communication.