Dynamics of Ex Ante and Ex Post in Transfer Pricing Analysis: Bridging Expectations and Reality

In the application of the Principle of Fairness and Business Prevalence (Arm’s Length Principle), there are two time perspectives that often become a subject of debate between Taxpayers and tax authorities: when should the fairness of the transfer price be determined? Is it at the time the transaction is planned (ex ante), or at the time the fiscal year ends and actual results are known (ex post)?

Proper understanding of these two approaches is crucial, especially with the enactment of the latest regulation in Indonesia, MoF Regulation (PMK) 172 of 2023, which aligns domestic provisions with global standards such as the OECD Transfer Pricing Guidelines 2022 and UN TP Manual 2021.

Conceptual Definitions

Ex Ante Approach (Price-Setting Approach)

This approach focuses on price setting before the transaction occurs. In this approach, Taxpayers determine the transfer price based on data, assumptions, and financial projections available at that time. Independent parties in fair conditions will make business decisions based on information available at that time (reasonable efforts), not based on information only known in the future.

The OECD TP Guidelines refer to this as the "arm’s length price-setting approach", where Taxpayers strive to comply with the fairness principle at the time the transaction is carried out based on information reasonably available at that point.

Ex Post Approach (Outcome-Testing Approach)

This approach focuses on testing the results after the transaction occurs, usually at the time of year-end book closing or when filing the Annual Tax Return. This approach tests whether the actual result (e.g., operating profit margin) obtained by the Taxpayer falls within the arm's length range of comparable companies.

The OECD TP Guidelines and UN TP Manual acknowledge that Taxpayers often test the actual results of their transactions to prove consistency with the fairness principle as part of the Annual Tax Return preparation process.

Regulations in PMK 172 of 2023

The implication of this article is that Taxpayers in Indonesia are expected to have a clear pricing policy (pricing policy) from the beginning of the year (ex ante). However, final compliance will be assessed based on data available at the time the transaction is carried out, which must be documented in the TP Doc.

Article 17 of PMK 172/2023 further strengthens the concept of contemporaneous (simultaneity), which mandates that Transfer Pricing Documentation (Master File and Local File) be organized based on data and information available at the time the Affiliated Transaction is performed.

The Challenge of "Hindsight" in Tax Audits

One of the biggest issues in transfer pricing disputes is the use of hindsight (future data/rear-view mirror) by tax authorities. Often, business projections (ex ante) do not match reality (ex post) due to unforeseen market factors.

Both the OECD TP Guidelines and the UN TP Manual affirm that tax administrations should not use data that only becomes available after the transaction occurs to correct pricing decisions made by Taxpayers in the past, except in certain conditions.

• OECD TP Guidelines: States that valuation uncertainty at the time of the transaction does not justify ex post adjustments without considering what independent parties would have done.
• UN TP Manual: Emphasizes that if Taxpayers have made reasonable efforts to set prices ex ante, differences between actual results and projections do not automatically mean the price is unfair.

In audits in Indonesia, Article 36 paragraph (5) of PMK 172/2023 grants authority to the DGT to re-determine transfer prices. However, if Taxpayers can prove that their price determination process (ex ante) was robust and based on valid data at that time, this argument can be used to counter the unreasonable use of hindsight by auditors.

In the modern transfer pricing landscape under PMK 172/2023, Taxpayers cannot choose either ex ante or ex post; both are a unified compliance cycle:

• Ex Ante: Taxpayers must formulate a pricing policy at the beginning of the year to prove "good faith" and the validity of business assumptions.
• Ex Post: Taxpayers monitor actual results and conduct documentation at the end of the year to ensure results remain within the arm's length range.

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).