Indonesian tax office building in Gatot Subroto, Jakarta. (Photo: Directorate General of Taxation)

JAKARTA (TheInsiderStories) – Indonesia has revised its tax rules for transfer pricing
documentation to conform to global standards and curb tax avoidance, in the hope of
optimizing state revenue.

This will require companies with overseas subsidiaries and domestic affiliated transactions to complete specific reports in compliance with country-by- country (CbC) reporting standards, as stipulated by the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action 13.

This action is taken to forestall tax manipulation by corporate taxpayers or foreign corporations that become parent companies of business groups with a gross turnover of Rp11 trillion (US$770 million) or more.

Transfer pricing is customarily worked by affiliated companies to appear to reduce profits, so that taxes levied and dividend payments promised will be lower.

A number of countries have suffered losses from such legal-but- unethical transfer pricing manipulations, since they artificially shrink corporate income tax bases. In fact, 20 -30 per cent of the revenues of some countries are derived from multinational companies’ activities, according to Indonesian Deputy Finance Minister Mardiasmo.

Tax expert Yustinus Prastowo observed how a transfer pricing modus may involve sale’s purchase prices, overhead costs, shareholder-loan interest, sales enacted through special purpose companies and others. He added that international tax avoidance has a great potential to reap tax revenues.

“Tax revenues could potentially reach Rp 25 trillion (US$1,8 billion),” Prastowo observed.

In addition, subsidiaries will also be required to conduct CbC reporting, as long as the
countries in which corporations are based have not concluded a cooperative agreement with Indonesia, or do not require business entities to create CbC reports.

A tax office spokesman, Hestu Yoga Saksama, said a rough estimate of companies affected by the CbCR ruling is considerable. He said the tax office will list related countries on its official website.

At least 200 companies will fall into this category, including ones from Singapore, which does not require CbC reporting.

“However, the number of subsidiaries in Indonesia that will have to cooperate could reach into the thousands,” he said.

Unfortunately, there is as yet no significant penalty in Indonesia for companies that fail to complete a transfer pricing document, while some countries levy a US$1,000
fine on those who fail to comply with the rule.

Written by Staff Writer, edited by Elisa Valenta, email : Elisa.valenta@theinsiderstories.com

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