Does your business transact with related parties?

Does your Indonesian entity meet any of the below criteria?		Yes	No
REVENUES	IDR 50bn (US$3.7m)
VALUE OF GOODS TRANSFERRED	IDR 20bn (US$1.4m)
VALUE OF OTHER TRANSACTIONS (Interest, Royalties, Services, etc.)	IDR 5bn(US$370k)
TAX RATE OF OVERSEAS COUNTER PARTY	<25%

If you answered YES to ANY of the above in relation to 2016, we recommend that you give serious consideration to the additional requirements set out below^[1]

If your Indonesian entity has any transactions with related parties (shareholders, owners, subsidiaries) and any of the following criteria apply:

Entity revenues above IDR 50bn (annualized)

OR

Value of goods to/from related parties above IDR 20bn

OR

Value of services, interest, royalties to/from related parties above IDR 5bn

OR

Your counterparty is in a country with an income tax rate below 25%

….then by APRIL 2017^[2] you must be prepared to submit a summary (ikhtisar) confirming that additional, contemporaneous, documentation has been prepared to support the pricing of these transactions. This documentation must be in Bahasa Indonesia.

Failure to comply may result in rejection of Corporate Income Tax Return submission and/or a contention that your related party transactions are not arm’s length and are therefore subject to adjustment^[3].

Note that if ANY of the above thresholds are breached, ALL related party transactions must be covered – between Indonesian entities as well as cross border.

The requirements are driven by Action Point 13 from the OECD BEPS project but in certain respects are broader. In-house teams who are working on this at group level on an OECD basis should be made aware of the additional requirements.

You also need to consider pre-existing legislation^[4] – even if the above criteria are not met you may still be required to prepare transfer pricing documentation and/or justify that related party transactions are priced correctly (on an arm’s length basis).

Those entities which are part of larger groups may also need to prepare additional “Country by Country” (CbC) reports. These apply where the group turnover exceeds IDR 11 trillion (US$818m) and where the Indonesian entity has a requirement to consolidate accounts and will not be included in CbC documentation at a higher level. Note that subsidiaries of Hong Kong entities, for example, may currently fall into this category. CbC reports must be available when submitting the 2017 corporate income tax returns.

The standard documentation which any entity satisfying the above criteria must confirm has been prepared is set out in detail in the relevant regulation (see footnote). In brief, this consists of a Master File and a Local File. The documentation itself need not be submitted with the annual tax return but must be available for submission within timeframes set out in the tax regulations – in certain circumstances this may be as little as seven days.

The Master File may be available or in preparation at overseas group level and we recommend that you inform your head office and/or affiliates of the immediate requirements. The required content largely mirrors that set out in OECD BEPS Action Plan 13 (‘AP13’).

As a minimum the information on a Business Group must include:

1. the structure and chart of ownership as well as country or jurisdiction of each member;
2. the business activities conducted;
3. the intangible assets owned;
4. financial and financing activities; and
5. Consolidated Financial Statements of the Parent Entity and taxation information related to an Affiliated Transaction.

The Local File requirements are more extensive than those set out in AP13 and in addition to the information on structure, relationships and transactions between related parties including price setting policies (for five years), detailed information concerning invoicing, functional and comparability analyses of EACH transaction type, segmented financial information and selection and application of transfer pricing methodology for each transaction type. The requirements are too detailed and extensive to

In the event that a Taxpayer has more than one business activity with different business characteristics, the local documents as referred to above must be presented in a segmented manner in accordance with the business characteristics of the entity.

We recommend that these new, more extensive and far-reaching requirements are given serious consideration.

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^[1] From Ministry of Finance Regulation (PMK) 213 issued on 30 December 2016, which is Indonesia’s response to the OECD BEPS project, Action Plan 13
^[2] or four months after the company’s financial year end
^[3] Please note that the Indonesian Tax Office may still contend that your transactions are not arm’s length – this documentation will only be the first line of defense
^[4] Most recently PER-32/PJ./2011