PRESIDENT UNIVERSITY

Internship Report

for

Transfer Pricing

Laura Tunggal Management in International Business 011200800046

January 2011 August 2011

PREFACE

I would like to acknowledge Mr. Carlo Navarro for offering me an internship opportunity at Ernst&Young. He has been a mentor to me, teaching me valuable life values, especially in working with other people in the corporate community.

I would like to acknowledge Mr. Joakim Kokomaking for his time and advice throughout the period.

It was also essential to acknowledge the contribution of Mr. Daniel Laoh who has put aside his time giving me great lectures and teachings. Thank you for your challenging questions, your demanding deadlines, your hows and whys, and your why-nots. You have been significant in my career planning, as well as guiding me closely during my internship days.

For Ms. Adelina Putri, Janice Shiejova, and Elvina; my classmates and colleagues. I would like to thank them for being there. They have always reminded me to be grateful of what I have and do not give in. This internship period would not be such a blessing without all of them.

For Transfer Pricing Team. Olivia Ramli, Felic, Stephan, Margareth, Kiki, Parven, Heydi, Bobby, Yura, Ghea, Wulan, Ayas, Winnie, Mbak Alin, Mbak Juju, Mbak Dian, Pak Agung, Pak Micky, Pak JJ, and my fellow interns (Gracia, Febby, Christian,who helped edit this report, Gita, Kevin, and Wasim); thank you for the joyful memories.

CHAPTER I INTRODUCTION

In the modern world, education plays an important role in determining success. Those with higher and better education have improved opportunities to be accepted into their companies of choice and excel in the race to the top. However, students require a platform that would prepare them to a professional career related to their major. Internships remain an important milestone in achieving a students desired career path that provides the necessary hands-on, real-world experience within a professional work setting.

Being a compulsory program for final year students, the internship was intended to mature students both personally and professionally. Furthermore, this program is meant to deepen the students understanding of the profession in their specific field of study.

Todays undergraduates aspire to do more than the mindless tasks traditionally assigned to interns. Students are willing to put into practice theories which have been learned from the years spent in university. The President University encourages students to be well prepared in determining their most suitable field of work, assigning them a mentor who provides guidance, advice and the necessary support during the entire internship period.

By doing an internship, students are expected to meet the objectives, namely: Experience the importance and relevance of ideas learned in classroom work. Develop the students abilities to achieve performance goals based on the responsibilities and duties. Develop the students ability to assess and direct achievement of specified performance goals. Get a bird-eye view of how a company is running and interact with and learn from industry professionals. Give the student the experience of working within a group or team. Enable the cooperating organization to receive the benefits of the special talents and background of the student.

Increase interaction between the University and the cooperating organizational to educate and produce good quality graduates. Apply, in an appropriate and professional work setting, theories, concepts, and philosophies learned through previous academic and other experiences. Develop decision-making and problem-solving skills through the formulation, implementation and evaluation of alternative solutions to problems and approaches to issues.

Gain an understanding of the overall company organizational structure and their corporate culture and clientele base, as well as their position to other local, national and/or global competition in the market place.

Identify and address personal strengths and weaknesses in light of demands and expectations of employment in the various roles and responsibilities assigned in a work setting.

Develop a network of industry professionals that can be used when seeking fulltime employment. Share the internship experience and special project with other PU interns, faculty and staff.

CHAPTER II COMPANY PROFILE

History Ernst & Young started in the 19th century of the two people who had one vision. Arthur Young and Alwin C Ernst understood the importance of people and their quality in an organization. Their philosophies were brought together when the firms combined to create Ernst & Young (EY) and created a global organization which is recognized as one of global leader in Assurance, Tax, Transaction and Advisory services among The Big 4.

Values People who demonstrate integrity, respect, and teaming People with energy, enthusiasm, and the courage to lead People who build relationships based on doing the right things

These values are the fundamental beliefs of EY global organization which define the people. They guide each actions and behavior in a way that influence the way they work with each other and the way they serve the clients as well as engage with the communities.

These values are considered as the same principles that help the people to make decisions throughout EY global organization.

Ernst & Young globally In order to be efficient and effective, EY has organized its legal entities into 29 similarly sized business units in terms of both people and revenues. These business units, almost all of which are purposely not single countries, are grouped into four geographic Areas:

Americas Asia-Pacific Europe, Middle East, India and Africa Japan

With its presence in 140 countries and having more than 141,000 people around the world, EY aims to have positive impact on business and markets as well as society as a whole. Partners and principals are engaged in partnership across the member firms of EY organization in one strong global leadership that sets one single global strategy and agenda.

Ernst & Young in Indonesia Address: Indonesia Stock Exchange Building Tower 1, 14th Floor Jl. Jend. Sudirman Kav. 52-53 Jakarta 12190, Indonesia.

Indonesia has more than 1,600 professionals based in two major cities: Jakarta and Surabaya. It merged with local public accountant firm, PSS (Purwantono, Suherman & Surja) and gives EY a strong local base to deal with local companies as well as multinational companies.

Service Ernst & Young is a global leader in Assurance, Tax, Transactions and Advisory services.

Assurance service provides audit and accounting services to the clients. The service ensures clients accounts comply with the requisite audit standards and provide a robust and clear perspective to audit committees and critical information for stakeholders. It has five sub-service lines: External Audit, Financial Accounting Advisory Services (FAAS), Climate Change and Sustainability Services (CCaSS), Accounting Compliance and Reporting (ACR) and Fraud Investigation & Dispute Services (FIDS).

Tax service helps the clients understand and manage their tax compliance and reporting obligations responsibly and proactively. EY help them assess, improve and monitor their tax functions processes, controls and risk management and maintain effective relationships with the tax authorities. It has five sub-service lines which cover a wide range of issues: Business Tax Services, Human Capital, Indirect Tax, International Tax Services and Transaction Tax.

TAS (Transaction Advisory Service) helps businesses drive competitive advantage by proactively managing clients capital agenda which determines how they strategically raise, invest, preserve and optimize their capital. This service facilitates the clients to evaluate opportunities, make transactions more efficient and help achieve the strategic goals. It has three sub-service lines: Transaction Support, Capital Transformation and Transaction Tax.

Advisory service deals with management and operational challenges. Advisory helps clients protect their business, improve performance and enable change. This service measures gains and identifies where the strategies are delivering the value of clients business need. It has three sub-service lines (Performance Improvement, Risk and IT Risk and Assurance) with deep competencies in risk, finance, supply chain, customer and information technology.

Industries EY is engaged in 16 principal industry sectors. In addition to gain more revenues, these various industries enhance EY brand and reputation. They present EY perspective on today's business issues and help account teams link EY services to these issues. The industries are:

Asset Management; Automotive; Banking & Capital Markets; Cleantech; Consumer Products; Financial Services; Government & Public Sector; Insurance; Life Sciences;

Media and Entertainment; Oil & Gas; Power & Utilities; Private Equity; Real Estate (includes Construction, Hospitality & Leisure);

Technology; and Telecommunications.

CHAPTER III SUMMARY OF ACTIVITIES 08.30 am 05.30 pm (8 Hours) PSS Consult International Tax Service: Transfer Pricing Assistant (Intern Grade-1) Mr. Stephan Kadim

Working Hours Department Job Title On-Site Supervisor

: : : :

Principally, transfer pricing is the priced charge for the transfer of goods, services, assets, intangibles between related parties. This section shall summarize the responsibilities that I held during my internship at Ernst & Young Transfer Pricing (TP) Department, as part of International Tax Services and global specialty service Line. Within this department, the teams main projects are: 1. To provide Transfer Pricing documentation. Transfer Pricing documentation is the most common service, which is performed for clients in conformance to the 2008 DGT Regulations that require every private and public listed entity to submit and update their annual related-party transactions.

2. To provide Transfer Pricing advisory services such as: 2.1. Design study, which is performed to develop and design a transfer pricing system for a given set of inter-company transactions; 2.2. Audit defense, which is performed in case where tax authorities do not agree with a clients transfer pricing policy. The team helps clients to defend the methodology adopted and the pricing applied in the past; 2.3. Planning study, which is performed when clients are considering relocating an activity or setting up new operations? The teams helps clients to optimally allocate functions and risk, and hence returns, among group companies; 2.4. Advance Pricing Agreement (APA), which is performed before the selection of TP methodology and the making of TP documentation between tax authorities and multinational companies; 2.5. Any related transfer pricing issues to meet the needs of clients due to significant developments in the transfer pricing area. 8

In addition to the OECD (Organization of Economic Cooperation and Development) Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations that most countries follow, Indonesian tax law requires companies engaged in related party transactions to maintain documentations outlining the said activities and transactions. The regulation is specifically stipulated in PER-43/PJ/2010 regarding Application of Arms Length Principle in Transactions between Taxpayers and Parties Having Special Relations. The fundamental basis that underlies the Transfer Pricing documentation is the arms length principle. It is the international standard that OECD member countries have agreed should be used for determining transfer prices for tax purposes. Article 9 of the OECD Model Tax Convention sets forth as follow: conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be 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.

The phases of TP projects are described in the following figure:

PURSUE

Understand client's need Develop proposal

Plan project Mobilize team INITIATE Engage with client Fact finding Analysis PERFORM Reporting Sign-off Knowledge sharing COMPLETE Performance review

The content of a typical TP documentation is divided into two main sections, factual and technical sections. The figure below describes the sections.

Company Analysis

Industry Analysis

Transaction Description

Functional analysis

Economic Analysis

In the following sections, the details of each section will be elaborate.

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Company Analysis Objective: To analyze the clients strategy and business model

Activities: To state legal evaluation of client; To discuss recent changes in clients structure or business activities; To describe the ownership structure of the clients; including its parent company and local or regional affiliates; To describe clients operational structure, including its business units or division as well as descriptions of each divisions daily operations and responsibilities; To describe clients product segmentation and describe the main products which generates majority of revenue; To describe the proportion of products distribution to related and third party; and To describe the differences in the product, quality, volume of production, specification, any related information.

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Industry Analysis Objective: To provide background as well as identifies and evaluates relevant factors in the industry

Activities: To discuss factors that affected the global and Asia Pacific market in the year in question, both positive and negative factors; To provide the global and Asia Pacific market performance in the year in question; To discuss government regulations of the industry in Indonesia; To discuss the major factors that affected the industry in the specific year in question in Indonesia; To discuss the performance of the Indonesian market in general; To discuss the market competitors and respective shares in the market; To illustrate value supply chain for the clients industry; To discuss market factors that contributed to the success of players in clients industry; To discuss risk encountered by the market players in clients industry; and To provide the Porters five model of clients industry.

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Functional Analysis Objectives: To understand the impact of the functions, risks, and asset of client and see how these contributes the profit it earns.

Activities: To discuss who among the entities (related parties) perform each function; To describe the nature (description) of tangible and intangible assets; To describe the location of tangible assets; To provide the market value of tangible assets; To provide information on the ownership of tangible and intangible assets; To provide information on the protection and use of intangible asset; To discuss type of exposure to risk resulted from the functions in which client carries; and To determine entity characterization based on the evaluation of the functions, risks and assets borne or assumed by client.

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Economic Analysis Objective: To elaborate the selection of the most suitable methods (This aims to describe the main OECD transfer pricing method and identify the key comparability requirement for each method). To elaborate the step of comparables search (This aims to understand the role of comparable company search). To define the Profit Level Indicator used.

Activities: To elaborate the five main five generally accepted methodologies by OECD Guidelines that may be used to establish the arms length nature of the related party transactions; To explain why each method applies or does not apply in clients case; To make elimination criteria that was used in order to find comparables and achieve the highest level of comparability; To elaborate the application of each criterion and total number of companies were eliminated; To review manually the remaining companies set to find accepted comparables; To elaborate the methodology applied to the financial information of the accepted comparable companies; To elaborate the PLI chosen as the most appropriate profit level indicators; To calculate the inter-quartile ranges of three years weighted average financial information of the accepted comparable companies; and To conclude whether clients PLI sit within range or outside the range to demonstrate arms length principle.

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CHAPTER IV PERSONAL RESULTS AND EVALUATIONS

1. Personal Results

This internship has broadened my perspective about corporate life as well as my views on career. It helped me grow both as a person and as an employee. Meeting many colleagues from different backgrounds has taught me many things. Many of my colleagues at EY are foreign graduates and have many valuable international exposures that allow me to leverage upon. Being a local graduate from President, this has given me the opportunity to gain new insights and views, as well as to learn from them. This has also strengthened my interpersonal skills and increased my effectiveness in communication. For instance, I have learnt to be more tactful when working with older seniors and be brave enough to ask insightful question in order to leverage on their expertise as much as I can during my internships. Most importantly, working with Mr. Carlo has provided me with valuable business network that I trust would be useful in my future endeavors.

I also believe interning at EY has equipped me tremendously as an employer. One of the most precious lessons that I have gained is the importance of being able to work under pressure and to meet tight deadlines. No less important is the ability to work with demanding seniors and managers to be able to match their demanding work standards and results. My written and oral English have also improved tremendously. This is due to the fact that most, if not all of the reports and assignments that were assigned to me were done in English. Being able to work with many clients from different and wide-ranging industry has also broadened my industry knowledge, interest, as well as the ability to have a deep understanding in analyzing the available information.

Overall, this internship has been an eye-opening and challenging experience for me. It has strengthened me as a person and as an employer and I believe that this experience will make me a more marketable employee in my future career .

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2. Evaluations

Based on my colleagues review regarding my work-related performance, I realized that there are things that I need to improve.

One of my major issues is the need to increase ability to expose my capabilities. I do also need to increase my leadership skills and initiative in working through problems and issues. I should try and convey my opinions more in group discussions or tasks given to me. As an intern, though it is not required to make decisions, it would be a plus point to have the capability to be involved in helping the seniors to make decisions. Moreover, I also need to be more effective and focus when doing tasks.

My true potential has not been achieved due to my lack of ability to push beyond my comfort zone. When I am able to do so, the team believes that I have the capability in completing projects with increased complexity beyond those assigned to me at present. I believe that my lack of self confidence in work environment is the main motive which put off me for being better.

Nevertheless; the ability to demonstrate a very good attitude in approaching the work being assigned, by showing interest and ask for any queries along the way, proves my willingness to excel in my work. The teams also see me as a person with integrity, respect for the team, commendable work ethics, eagerness to learn, and receptive to instructions and comments.

In conclusion, I believe my inter-personal skills combined with technical skills will be able to help me cope with problems I may encounter in working environments.

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CHAPTER V CONCLUSION AND RECOMMENDATIONS

1. Conclusion

This internship has been significant in my career plan especially to a particular field I want to be deal with for the next years. Transfer pricing has been experiencing significant development this current year which exposed the team to various issues. I find them very interesting and I am keen to know further. Technically, I was also able to apply what I have learnt in classroom into what I do at work.

I believe that my experience in the internship will not only be to my advantage but will also be beneficiary for other people through my future activities.

2. Recommendations

Ernst & Young Indonesia is a global accounting firm which honors its Quality in Everything We Do motto. Hence, employees as well as interns are required to work and make differences while dealing with clients and communities, simultaneously. However, interns are not allowed to go to client and working overtime. This fact hinders interns to develop their capabilities and make differences. Thus, it will be much appreciated if the policies are being considered so that interns can also deliver qualified and better service to the company. Moreover, Ernst & Young Indonesia stand for the companys branding which require consistency in particular format when constructing TP documentation. The fact that most of the assistants in charge are illiterate of Microsoft Office skills, especially features of Microsoft Word and Excel, most interns assist them to do the formatting rather than having interns to do analytical works. It will be much appreciated if the team are being trained for these branding need so that intern can gain more knowledge in analytical matters.

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REFERENCES

PU Internship Handbook Transfer pricing in the Asia Pacific Area TP Training Ernst & Young Indonesia 2010 (13-15 December)

Director General of Taxation Regulation Number PER-43/PJ/2010 regarding Application of Arms Length Principle in Transactions between Taxpayers and Parties Having Special Relations.

OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration (July 2010 Edition)

Director General of Taxation Regulation Number PER 69/PJ/2010 regarding Advance Pricing Agreements

Direktorat Jenderal Pajak - Direktorat Pemeriksaan dan Penagihan, March 31 2010, S-153/PJ.04/2010 mengenai Prinsip Kewajaran Transaksi Afiliasi dan Kelaziman Usaha yang tidak Dipengaruhi Hubungan Istimewa

http://www.ey.com/

http://eyhome.ey.net/

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