Fundamentals of transfer pricing and

associated enterprises
Konsep dasar perpajakan
internasional

David Dorson
Deloitte Tax Solutions
01 October 2014

What is transfer pricing?

Introduction
Transfer prices are significant for both taxpayers
and tax administrations because they determine in
large part the income and expenses, and therefore
taxable profits, of associated enterprises in different
tax jurisdictions

OECD Transfer Pricing Guidelines for Multinational

Enterprises and Tax Administrations 2010

Introduction

It is estimated that global trade of tangible goods

exceeded USD 36 trillion during 2013

Its further estimated that more than 65% of all

global trade occurs within multinational groups
International Trade Centre

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Introduction

Enforcement did not begin in earnest until the release of

US transfer pricing regulations in 1994, which were
consistent with the OECD Guidelines later released in
1995

The US rules were published largely as a result of transfer

pricing policies applied by Japanese automotive
companies which began to dominate the American market
during the 1980s

Japanese distribution entities of Toyota, Honda, Nissan

and others grew revenues and obtained larger portions of
market share but reported net operating losses year-onyear due to high transfer prices set from manufacturing
entities in Japan to related party distribution entities in the
US.

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Introduction

The primary trading partners of the US published transfer pricing documentation

regulations through the mid 90s, followed by a wave of countries within the last
10 years.

In Asia, Taiwan issued rules effective from 2005, China from 2008, and
Indonesia for 2010 (PER-43/PJ/2010).

Most recently, the Philippines and Iceland have issued regulations bringing the
number of countries with active transfer pricing enforcement to more than 60.

Singapore is expected to formalize its documentation legislation later this year.

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Regulatory background

Indonesias Income Tax Law of 1983 granted the

Directorate General of Taxation power to re-determine
income and expenses of an enterprise or debt as equity
when the transactions are affected by special
relationships.
In 2009, the Income Tax Law of 1983 was amended by
Income Tax Law Number 36/2008 included methodologies
to be applied in determining prices for transactions
entered into between related parties.

Regulatory background

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Tax Circular SE-04/PJ.7/1993, Directives for the

Handling of Transfer Pricing Cases

Article 16 of Government Regulation No. 80/2007

Circular Letter S-153/PJ.04/2010, Guidelines for

Audits of Fairness of Related Party Transactions

Regulation PER-43/PJ/2010, Application of the

Arms Length Principle in Transactions between
Taxpayers and Related Parties

Regulation PER-32/PJ/2011, Amendment on the

DGT Regulation PER-43/PJ/2010

Regulation PER-22/PJ/2013, Guidelines for Audits

of Taxpayers with Special Relationships

SE-50/PJ/2013, Technical Instructions for Audits of

Taxpayers with Special Relationships
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Associated enterprises
Transfer pricing deals with the terms and pricing of transactions entered into between
associated enterprises (i.e. related parties).
Indonesias Income Tax Law UU PPh No. 7/1983, Article 18 (3) defined the following
as constituting special relationships:

25% direct or indirect capital participation

Direct or indirect control (through management or technology)
Family relationships

Arms length principle

According to Article 9 of the OECD Model Convention:
[where] conditions are made or imposed between the two
enterprises in their commercial or financial relations which differ
from those which would have been made between independent
enterprises, then any profits which would, but for those conditions,
have accrued to one of the enterprises, but, by reason of those
conditions, have not so accrued, may be included in the profits of
that enterprise and taxed accordingly

But what does the statement above really mean?

Arms length principle

The overarching premise of the arms length principle is that
arrangements entered into between associated enterprises (in a related
party transaction) should be the same as arrangements that would have
been entered into between independent enterprises (in third party
transactions).

Types of related party transactions

Some examples of related party transactions:

Tangible goods (commodities, raw materials,
intermediate products/ components, finished goods)
Services (head office, technical support, information
technology)
Intangible assets (production know-how, product
formulations, trade marks, brand names)
Financing (intercompany loans and guarantee fees)

Applying the arms length principle

How to apply the arms length principle?

The arms length nature of intercompany transactions
can typically be documented or established through
reference to arrangements entered into between
independent enterprises and quantified through a
comparison of either:
1. Prices (or royalty or interest rates)
2. Gross profit margins
3. Net profit margins

Comparability
The arms length principle uses the behaviour
of independent enterprises as a guide with
comparability a fundamental concept in most
analyses.
Section 1.36 of the OECD Guidelines lists the
following five comparability factors:
Characteristics of transacted products or
services;

Functions, risks, and assets of a taxpayer;

Contractual terms;
Economic circumstances,; and
Business strategies.

Transfer pricing methods

PER-32/PJ/2011 specifies the following methods for use in establishing and
evaluating the arms length nature of related party transactions:
Transactional methods
Comparable uncontrolled price method - compares prices
Resale price method - compares gross margins
Cost plus method - compares gross margins

Profit methods
Transactional net margin method - analyzes net profits
Profit split method identifies aggregate profits generated from a transaction or
transactions and splits them based on contribution

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Applying the arms length principle

The arms length principle can raise difficult

issues in practice.

What happens when dealings occur between

related parties that are not observable in the
open market between independent parties?

Why dont tax administrations rely on a global

apportionment formula approach?

Is there an impact from consolidated national

filing vs. entity level filing?

Changes on the horizon

Significant changes to the international transfer

pricing landscape will likely result from the
OECDs Action Plan on Base Erosion and Profit
Shifting, commonly referred to as BEPS

It is anticipated that Indonesias transfer pricing

legislation will be updated to reflect positions
advocated in materials to be formalized by the
OECD later this year with implementation
guidelines scheduled for release in January
2015

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Transfer pricing in Indonesia

Action 13 of BEPS sets out to develop rules on transfer pricing

documentation to enhance transparency for tax administrations, taking into
consideration the compliance costs for business.

A three-tied approach to transfer pricing documentation is anticipated:

1.
2.
3.

Country-by-country reporting file

Global or regional masterfile
Local file

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Questions, white board

examples and case study
discussions

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