Exploration of "Other Methods" in Transfer Pricing: Solutions for Complex and Intangible Transactions

In the world of transfer pricing, Taxpayers are often faced with situations where traditional methods (such as CUP, Resale Price, or Cost Plus) cannot be applied due to the absence of reliable comparable data. Furthermore, modern business complexity—such as unique intangible property transactions (unique intangibles) or business restructurings—demands a more sophisticated approach than merely comparing routine profit margins.

In Indonesia, Regulation of the Minister of Finance Number 172 of 2023 (PMK 172/2023) provides a flexible legal framework by recognizing the "Other Methods" group. This group covers profit-based methods that are already common (such as TNMM and Profit Split) as well as specific valuation-based methods.

Definition and Scope of "Other Methods"

Based on Article 9 paragraph (1) letter d of PMK 172/2023, transfer pricing determination methods other than the three traditional methods (CUP, RPM, Cost Plus) are categorized as "Other Methods".

Article 9 paragraph (4) of PMK 172/2023 details that Other Methods include:

1. Profit Split Method (Profit Split Method).
2. Transactional Net Margin Method (Transactional Net Margin Method / TNMM).
3. Comparable Uncontrolled Transaction Method (Comparable Uncontrolled Transaction Method).
4. Method in Tangible and/or Intangible Asset Valuation (Tangible/Intangible Asset Valuation).
5. Method in Business Valuation (Business Valuation).

While TNMM and Profit Split are often discussed separately as "Transactional Profit Methods" in OECD guidelines, Indonesian regulations group them under the umbrella of "Other Methods". However, this article will focus on the last three methods (Points 3, 4, and 5) which often become the ultimate solution for hard-to-value transactions (hard-to-value).

Comparable Uncontrolled Transaction Method (CUT Method)

This method, often referred to as Comparable Uncontrolled Transaction (CUT), bears resemblance to the CUP method but focuses on specific commercial bases other than goods prices.

Definition and Application

Based on Article 10 paragraph (6) of PMK 172/2023, this method is carried out by comparing the price or profit of a transaction against a specific basis between an affiliated transaction and an independent transaction. Article 9 paragraph (8) clarifies that this method is suitable for transactions that are commercially valued based on bases such as:

• Interest rates (for loans).
• Discounts.
• Provisions or commissions.
• Royalty percentages against sales or operating profit.

In OECD TPG 2022, this method is often considered a variant of CUP, especially in the context of determining royalty rates for intangible assets. The OECD emphasizes that external royalty rates (from commercial databases) can serve as a comparable (CUT) to determine the fair price of inter-company licenses, provided the profit potential of such assets is comparable.

Asset Valuation Method (Asset Valuation)

This method becomes very crucial in the digital economy era where intangible assets become the main value drivers.

When is it Used?

Based on Article 9 paragraph (9) of PMK 172/2023, the asset valuation method is suitable for:

• Transfer of tangible or intangible assets (e.g., sale and purchase of used factory machinery or patents).
• Rental of tangible assets.
• Use of intangible asset rights (royalties).
• Transfer of financial assets.
• Transfer of mining, plantation, or forestry concession rights.

Valuation Techniques

In practice, this method often uses internationally recognized valuation techniques, such as Discounted Cash Flow (DCF).

• OECD TPG 2022 (Paragraph 6.153) acknowledges that valuation techniques, specifically those based on income (income-based valuation techniques) such as DCF, are very useful when no reliable comparables exist for the transfer of intangible assets.
• This technique projects expected future cash flows from the asset and discounts them to present value (present value) using a discount rate appropriate to the asset's risk.

Application Challenges

The main challenge is the validity of assumptions. OECD TPG 2022 (Paragraph 6.155) warns that valuations for accounting purposes (e.g., Purchase Price Allocation) cannot always automatically be used for transfer pricing purposes due to differences in standards and accounting conservatism. Taxpayers must prove the fairness of financial projection assumptions, growth rates, and discount rates used.

Business Valuation Method (Business Valuation)

This method views an entity or business function as a single valuable package, not merely a collection of separate assets.

When is it Used?

Based on Article 9 paragraph (10) of PMK 172/2023, the business valuation method is suitable for:

• Business Restructuring: For example, the transfer of full manufacturing functions to contract manufacturing involving the transfer of assets, risks, and personnel.
• Transfer of assets other than cash as a substitute for shares (inbreng).
• Transfer of assets to shareholders.

In business restructuring cases, often there is "profit potential" (profit potential) that is also transferred. OECD TPG 2022 Chapter IX emphasizes that if restructuring involves the transfer of something valuable (such as ongoing concern or goodwill), then there must be fair compensation. The Business Valuation Method is used to calculate the value of such compensation.

Position of "Other Methods" in the Most Appropriate Method Principle

Indonesia no longer adheres to a rigid method hierarchy, but rather the The Most Appropriate Method principle. However, there is a preference regulated in Article 9 paragraphs (12) and (13) of PMK 172/2023:

1. Highest Priority: CUP and Comparable Uncontrolled Transaction Method (CUT) are prioritized if their reliability is equal to other methods.
2. Second Priority: Traditional transactional methods (RPM, Cost Plus) are prioritized over profit-based methods (TNMM, Profit Split).
3. Valuation Methods: Used when the methods above cannot be applied reliably, specifically for unique transactions such as the transfer of intangibles or business restructuring where no comparable market data is available.

Case Study: Application of Valuation Method on Intangible Transfer

The "Other Methods" category in PMK 172/2023, specifically asset valuation and business valuation methods, acts as an important bridge to handle increasingly complex and unique transactions. Although not the first priority methods, these methods become very essential when traditional methods and TNMM fail to capture the true economic value. The key to successful use of these methods lies in the quality of projection data and the validity of assumptions used in the valuation model, which must be supported by strong documentation and in-depth industry analysis.

References

1. Ministry of Finance of the Republic of Indonesia. (2023). Regulation of the Minister of Finance of the Republic of Indonesia Number 172 of 2023 concerning the Application of the Principle of Fairness and Business Prevalence in Transactions Influenced by a Special Relationship.
2. OECD. (2022). OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022. OECD Publishing, Paris.
3. United Nations. (2021). Practical Manual on Transfer Pricing for Developing Countries (2021).