Dissecting the Anatomy of the Local File

If the Master File provides a "helicopter" view regarding the business group globally, the Local File is a microscopic lens highlighting specifically the transactions and business activities of the Taxpayer in Indonesia. This document is the most crucial component in proving the fairness of transfer prices during a tax audit.

1. Identity and Business Activities of Taxpayer

This section serves to introduce who the Taxpayer is, how its management structure is, and what its core business is. Mandatory information includes:

• Management & Organizational Structure: Local organizational chart, details of parties having a special relationship (domestic and overseas), and to whom the local management is responsible (reporting line to the group).
• Business Strategy & Operations: Detailed explanation regarding business activities, business strategies (for example market penetration or innovation), as well as involvement in business restructuring or transfer of intangible property occurring in the current year or the previous year.
• Business Environment: Overview of business competition and list of main competitors.

2. Information on Affiliated and Independent Transactions

This section details "what" and "how much" transactions occurred. You are required to present:

• Transaction Scheme: Transaction flow diagram and its explanation.
• Pricing Policy: Explanation regarding the pricing policy applied during the last 5 (five) years.
• Transaction Table: Quantitative data containing:
  • Nominal transaction per type and per transaction counterparty.
  • Name and country of domicile of the transaction counterparty.
  • Product name, quantity, and unit price.
• Copy of Contracts: Agreements or contracts relevant to transactions with significant values.

3. Application of the Principle of Fairness and Business Prevalence (PKKU)

This is the "heart" of the TP Doc, where the Taxpayer proves that its prices are fair. This section is required to contain a step-by-step analysis:

• Industry Analysis: Industry characteristics, market growth, competitors, efficiency, and government regulations affecting performance.
• Function, Asset, and Risk (FAR) Analysis: In-depth description regarding functions performed, assets used, and risks assumed by the Taxpayer and its transaction counterparties.
• Comparability Analysis: Explanation regarding the search for comparables, selection criteria (inclusion/exclusion), and adjustments (adjustments) made to equalize conditions.
• Method Selection: Reasons for selecting the transfer pricing method (e.g., TNMM or CUP) and reasons for rejecting other methods.
• Fair Price Conclusion: Application of the selected method, determination of the tested party (tested party), profit ratio used (PLI), and conclusion on whether the price/profit is already within the fair range (arm's length range).

4. Financial Information

Financial data is the basis of proof. Matters mandatory to be presented are:

• Financial Statements: Taxpayer's financial statements for the relevant tax year. These financial statements are not required to be audited.
• Segmented Financial Statements (Segmented Financials): This is a vital requirement. If the Taxpayer possesses more than one business characterization (for example acting as a manufacturer as well as a distributor), financial statements are mandatory to be separated (segmented) based on said business characterization.
• Comparable Financial Information: Summary of financial data of comparable companies used in the analysis.

5. Non-Financial Events

Explanation regarding occurrences, facts, or non-financial events affecting price formation or profit levels. For example: government policies limiting imports, natural disasters, or labor strikes impacting profitability.

References

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.