5 Simple Steps to Prepare for A Transfer Pricing Audit
It is interesting to see how the terms "related-party" and "transactions affected by a related party" are further defined in the Minister of Finance Regulation (Peraturan Menteri Keuangan - PMK) Number-22/PMK.03/2020, which regulates the procedures regarding the implementation of the Advance Pricing Agreement (APA). This is because in addition to the regulations governing the APA implementation procedures, Article 4 of PMK-22/2020 further emphasizes the importance of transfer pricing in Indonesia. A related-party transaction is generally considered to exist if one of the three conditions, which are: ownership or equity participation, control through management or use of technology even though there is no ownership relationship, and blood or marriage relations. To further explain the concept of "control" in Article 18 paragraph (4) of the Income Tax Law, Article 4 PMK-22/2020 highlights that "related-party" in more detail.
Indonesia Tax Authority (DGT) is empowered by Article 18 paragraph (3) of the Income Tax Law to investigate whether the arm's length principle is being applied to transactions between parties with unique relationships. Transfer pricing audits are inevitable since it is one of the riskiest areas in terms of compliance and tax planning as transfer pricing regulations and reporting become a more significant aspect of international tax. Indonesia Directorate General of Tax (DGT) is also paying closer attention to transfer pricing, which is a concern for many medium-sized and small enterprises in addition to large multinational corporations.
Sometimes business decisions are made only for operational concerns, which could increase the likelihood of an audit and business might want to avoid tax audit, because there is no magic bullet to guarantee your business will never be audited. So, the best thing you can do is to be prepared in case of a transfer pricing audit. By understanding good preparation, you may limit your risk by following local regulations and filing accurate reports on time. If your business is being audited, make sure you are ready by following these five easy steps:
- Comply with local regulations.
Understand the tax rules that apply in your business jurisdiction, for Indonesia, at the very least, be familiar with 22/PMK.03/2020 on Procedures for Implementing an Advanced Pricing Agreement. Then, make sure that all business-related records that could help you avoid penalties are kept safe for at least 10 years. The laws related to related-party transaction also cover the following:
- Article 18 paragraph (3) of Law Number 36/ 2008 about related-party.
- The Director General of Taxes issued Regulation of the Director General of Tax Number PER-17/PJ/2020 of 2020 concerning Procedures for Completion of Applications, Implementation, and Evaluation of Advanced Pricing Agreements.
- Regulation of the Director General of Taxes Number PER-32/PJ/2011 concerning the Application of the Principles of Fairness and Business Practice in Transactions Between Taxpayers and Related Parties.
- Ensure that intercompany contracts are properly drafted and represent the nature of the business dealings and the risks that the parties have agreed to.
All contracts and their latest amendments related to affiliate transactions must always be kept and prepared including other documents such as agreements, memorandums of agreement or other equivalent documents, since these documents will be highly useful in the event of an audit.
- Be sure to structure, clearly communicate, and make the transfer pricing documents simple to grasp.
the transfer pricing documentation (TP Doc) is the first thing the tax auditor will look for during the transfer pricing audit, so make sure you have it ready and reported no later than four months after the end of the tax year in accordance with Article 4 PMK 213/2016. Additionally, the TP Doc's clarity, simplicity, and user-friendliness might help you avoid basic questions. Also make sure that it contains all elements and clear flows and uses the most updated and appropriate transfer pricing methods.
- Consistent Data
Consistent information and data is very much needed in presenting the reports in transfer pricing audit, because consistent data produces a comprehensive and cohesive flow between the master file, local file and Country by Country Report.
- Pay close attention to transactions of intellectual property (IP).
The transfer of IP between related parties is the main concern of an audit. Ensure that every IP transfer has thorough documentation, including an expert appraisal and a planning report outlining the process and assuming.
Transfer pricing can be complex and confusing, but it doesn’t have to be that way. Take on your particular transfer price difficulty by using the simple five steps above in your intercompany business transactions to reduce audit risk.