Transfer Pricing

SUBJECT MATTER EXPERT

Transfer Pricing

Taxindo Prime Consulting • 31 Juli 2025

Fundamental Concept of Transfer Pricing
Transfer pricing is the determination of prices for transactions involving goods, services, or intangible assets (kekayaan tak berwujud) that occur between two or more companies with a special relationship or affiliation (hubungan istimewa atau afiliasi). Simply put, it is the price charged by one business entity to another within the same corporate group. This concept is crucial for multinational companies operating in various countries as it allows them to strategically allocate resources and profits across their global operations.

Objectives, Legal Basis, and Key Principles
The main goal of transfer pricing is to effectively manage profits and tax burdens within a group of companies. For instance, a company might set a higher price for products sold to its subsidiary in a high-tax jurisdiction. This strategy reduces that subsidiary's profit and, consequently, its payable tax. Conversely, the profit is shifted to another subsidiary located in a low-tax country, thereby increasing the overall net profit for the corporate group. However, this practice is often scrutinized by tax authorities due to its potential to reduce a nation’s tax revenue.

Legal Basis and the Arm's Length Principle
The legal framework for transfer pricing globally is founded on the principle of fairness, known as the Arm's Length Principle. This principle dictates that the transfer price set between affiliated companies must be the same as the price that would have been agreed upon by two unrelated parties or independent parties (pihak independen) under comparable circumstances. This principle serves as the benchmark to ensure that internal transactions are not manipulated for tax avoidance purposes. Without it, companies could freely set unreasonable transfer prices to shift profits to low-tax jurisdictions.

In Indonesia, this principle is regulated in various tax regulations, including Minister of Finance Regulations (PMK) and Director General of Tax Regulations. These regulations align with the guidelines issued by the Organisation for Economic Co-operation and Development (OECD), which is a widely recognized international standard. Indonesian tax authorities are strict in ensuring that companies adhere to this principle and will conduct audits to verify that the transfer prices used are consistent with fair market prices. Non-compliance can lead to tax corrections, fines, and penalties.

Transfer Pricing Methods
To prove that the transfer price adheres to the arm's length principle, companies can use several internationally recognized methods. The selection of a method should be based on the type of transaction, data availability, and functional analysis. One of the preferred methods is the Comparable Uncontrolled Price (CUP) Method (Metode Perbandingan Harga Pasar). This method compares the price of an affiliated transaction with the price of a similar transaction conducted by an independent party. If an affiliated company sells a product for $50, and an independent party sells the exact same product for $50, the transfer price is considered at arm's length.

If comparable data from independent parties is unavailable, companies can use other methods, such as the Resale Price Method (Metode Harga Jual Kembali) or the Cost Plus Method (Metode Biaya Plus). The Resale Price Method works by deducting a reasonable gross profit margin from the resale price of the product to an independent party. Meanwhile, the Cost Plus Method determines the price by adding an appropriate profit markup to the cost of production. Furthermore, there are also Transactional Profit Methods, such as the Transactional Net Margin Method (TNMM) (Metode Marjin Bersih Transaksional) and the Profit Split Method (Metode Pembagian Laba), which focus on comparing net profit levels or the combined profit split from the transactions carried out by the affiliated companies.

Compliance and Documentation
Compliance with transfer pricing rules is not only about setting fair prices but also about documenting them completely and transparently. Companies are required to prepare Transfer Pricing Documentation (TP Doc) (Dokumentasi Harga Transfer). This document is crucial evidence that demonstrates how the company set its transfer prices and why those prices are considered fair. Without adequate documentation, a company will face difficulties in defending itself when audited by tax authorities.

This documentation generally consists of three tiers:

Master File: Contains general information about the corporate group, including its organizational structure, business model, and global transfer pricing policy.
Local File: Contains more detailed information about specific affiliated transactions in a country, as well as the comparability analysis and the method used.
Country-by-Country Report (CbCR): A report that includes the allocation of income, taxes paid, and business activities in every jurisdiction where the corporate group operates. This report provides a clear overview to tax authorities on how profit and tax are distributed worldwide.

Risks and Disputes
The primary risk of non-compliance with transfer pricing rules is a tax correction (koreksi pajak) by the authorities. If the tax authorities find that the transfer price does not conform to the arm's length principle, they can adjust the price to the market level, which will result in an increase in taxable income and, consequently, additional tax payments along with penalties. The financial impact of such corrections can be significant, especially if the correction is made in two different countries, which can lead to double taxation on the same income.

To mitigate disputes and risks, companies can utilize mechanisms such as the Mutual Agreement Procedure (MAP) (Prosedur Persetujuan Bersama) or the Advance Pricing Agreement (APA) (Kesepakatan Harga Transfer Awal). MAP is a procedure where the tax authorities of two countries cooperate to resolve a transfer pricing dispute. Conversely, an APA is an agreement made between the taxpayer and the tax authority before the transactions occur, which stipulates the agreed-upon transfer pricing method for several years into the future. Using an APA can provide legal certainty and reduce the risk of future disputes.

;

Arm’s Length Principle (ALP)

EN Transaksi afiliasi lintas negara

EN Analisis fungsional (FAR: fungsi, aset, risiko)

EN Analisis kesebandingan

EN Rentang kewajaran

EN CUP, Resale Price, Cost Plus

EN Profit Split, TNMM

EN Metode lain sesuai OECD Guidelines

EN Master File & Local File

EN Country by Country Report (CbCR)

EN Sanksi jika tidak menyusun TP Doc

EN Pemeriksaan transfer pricing

EN Advance Pricing Agreement (APA)

EN Mutual Agreement Procedure (MAP)

Transfer Pricing

Subject Matter Expert

Corporate Income Tax