Indonesia Seeks to Clarify Transfer Pricing Practices with PER 22

Posted by Reading Time: 5 minutes

By Sowmya Varadharajan

Transfer pricing continues to be a critical issue for the Indonesian Tax Office (“ITO”). In an effort to provide much needed clarity on transfer pricing practices, particularly in relation to transfer pricing audits, the ITO issued PER 22[1] to provide guidance to auditors on what they should be focusing on in terms of transfer pricing audits.  Although auditors are the primary audience for PER 22, which came into effect on July 1 2013, taxpayers can rely on this guidance  in order to anticipate the focus and direction of scrutiny in relation to transfer pricing audits in Indonesia. 

PER 22, to some extent, reinforces the already existing transfer pricing provisions and guidelines that have been issued by the ITO in previous years.  At the same time, they also provide additional focus and guidance on specific issues that will be raised during the first part of the process. It is likely taxpayers operating in Indonesia will start seeing some form of consistency in how issues are being dealt with.  The Indonesian Tax Office also hopes to present a much needed principled approach in relation to taxation in order to also help boost its political image.

PER 22 first sets the scene in terms of the audit process.  Before the commencement of a transfer pricing audit, specific forms have been introduced that taxpayers must to complete and provide to the relevant authorities.  The information that is needed to complete these forms is highly detailed – in order for the taxpayer to complete these forms in an accurate manner, it is necessary to have robust transfer pricing documentation already in place. In addition, taxpayers need to have understood the transfer pricing process in order to be able to explain it at ease.  It should be noted that these forms have to be submitted within seven days of receipt – making it very clear that taxpayers have to be prepared with all the supporting documents for transfer pricing – it will not be possible to start thinking of the transfer price policy once the request for information has been received.

RELATED: Declaration Now Required on Transfer Pricing Documentation in Malaysia

In addition to the detailed information gathered in respect to related party transactions, PER 22 also focuses on trying to get an understanding of the group’s value / supply chain.  Form E outlines a very traditional supply chain that starts with research and development, design, procurement, manufacturing, marketing and distribution and requests the taxpayer to allocate a value to each broad activity in the value chain.

However, little guidance is provided on how such a reflection of value should be presented.  In addition, no consideration has been provided for non-traditional business models.  Examples would be companies operating in the digital economy / technology space (i.e., the likes of Apple / Google) which will not have any “core manufacturing” activity and where the value drivers are very different from a traditional brick and mortar company.  Another example is a company operating that basically operates as a service provider – either project finance / financial services / general services.  Companies that operate in this space are not likely to have R&D / design or manufacturing activities.  Again, their core value drivers are completely different from a more traditional company.  Is this likely to mean that taxpayers operating in less traditional business models are less likely to face transfer pricing scrutiny or that they will face more issues as the tax authority does not have a good understanding of their business model.

A third observation is the use of defined terms to characterize the business.  PER 22 expects taxpayers to identify the intensity of the Indonesian’s taxpayers functional, asset and risk profile by labelling the activities as high / medium / low based on “x”s or crosses.  Stemming from this tabulatory depiction, a business characterization of the Indonesian taxpayer is made in line with traditional labels – e.g., contract manufacturer / limited risk distributor, etc.  However these labels only work best in tax efficient structures.  Furthermore, they raise questions as to who should be the “tested party” in cases such as when a full-fledged manufacturer transacts with a full-fledged distributor.  Such considerations and guidance on how to handle these transactions has not been provided as the outcome of this process will also have an implication on who the “tested party” is – i.e. from whose perspective are we trying to test the profitability, thus working back to the value of the related party transaction.

Business characters of the taxpayer is limited to manufacturing and distribution – characterization of other entity types (e.g., services) is not provided and again this may be a stumbling block for taxpayers who adopt non-traditional business models.

Finally, PER 22 also sets out to educate tax auditors on how services and loan transactions should be reviewed.  This is quite interesting as the previous transfer pricing guidelines have been silent on how services and intercompany financing should be treated – with PER 22 tax auditors have been instructed with how these transactions should be evaluated.  Specifically, the ITO is focused on whether the transaction should necessarily have taken place and if there is a benefit to the Indonesian taxpayer – or has the transaction been structured essentially as a “profit shift” transaction.

Overall, although the target audience for PER22 is the tax auditor, PER22 can be viewed as a guide to taxpayers in the event that they face a transfer pricing audit in Indonesia.  In light of the guidelines, although taxpayers will expect a more robust transfer pricing audit process, we are hopeful that a more consistent treatment on transfer pricing matters will be adopted.

[1] Regulation of Director General of Taxes Number PER-22/PJ/2013

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email or visit

Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.

Related Reading

Tax, Accounting, and Audit in Vietnam 2014-2015
The first edition of Tax, Accounting, and Audit in Vietnam, published in 2014, offers a comprehensive overview of the major taxes foreign investors are likely to encounter when establishing or operating a business in Vietnam, as well as other tax-relevant obligations. This concise, detailed, yet pragmatic guide is ideal for CFOs, compliance officers and heads of accounting who need to be able to navigate the complex tax and accounting landscape in Vietnam in order to effectively manage and strategically plan their Vietnam operations.

An Introduction to Tax Treaties Throughout Asia
In this issue of Asia Briefing Magazine, we take a look at the various types of trade and tax treaties that exist between Asian nations. These include bilateral investment treaties, double tax treaties and free trade agreements – all of which directly affect businesses operating in Asia.