March 18, 2020, Minister of Finance of the Republic of Indonesia, Sri Mulyani Indrawati signed a new Minister of Finance Regulation regarding Advance Pricing Agreement (APA), which previously has been  amended three times.

APA means a written agreement between the Directorate General of Taxes (DGT) and Taxpayers to agree on the criteria for determining an arm’s length price (fair) or profit in advance. This agreement can also applied between the DGT and the tax authorities of other countries that are partners in the Tax Treaty Agreement.

The agreements are certainly made prior to the transaction an arm’s length price can be determined for future references. The agreement period is no longer than 5 (five) tax years after APA submission.

The APA manuscript contains an agreement between the DGT and Taxpayers regarding transfer pricing determination in advance based on the Arm's Length Principle (ALP) during the APA and Roll-back period. Roll-back is the result of agreement in APA for tax years prior to the APA period. In accordance with its role, APA is divided into 2, namely the Unilateral APA and the Bilateral APA. APA Unilateral is an agreement between DGT and domestic Taxpayers. Meanwhile, Bilateral APA is an agreement between Indonesian Authorized Officials and Authorized Officials of Tax Treaty Partners which is implemented based on a domestic Taxpayers application.

APA aims to provide advice to Taxpayers to resolve transfer pricing issues. The scope of APA includes all or part of the transactions made by Taxpayers with related parties. The special relationship in question is a condition of dependence between one party and another due to ownership or participation of capital, control, or by blood relationship. Income Tax Law Number 36 Year 2008 Article 18 paragraph (4) indicates that there are three types of special relationships.

The first special relationship occurs if there is one or more parties controlling the other party on condition that the Taxpayer has direct or indirect ownership of at least 25% in other Taxpayers.

The second special relationship is due to the domination that occurs in five circumstances. First, one party controls another party or one party is controlled by another party, directly and/ or indirectly. Second, there are two or more parties under the control of the same party directly and/or indirectly. Third, if there are the same people who are directly and/or indirectly involved or participating in managerial or operational decision making for two or more parties. Fourth, parties who are known commercially or financially claiming to be in the same group. Finally, there is one party who claims to have a special relationship with the other party.

The third special relationship is caused by blood relationships within the lineage and/or one degree to the side.

APA provides benefits in the form of legal certainty to Taxpayers. The APA policy is expected to reduce the number of tax disputes related to transfer pricing. In the future, Taxpayers are expected to be able to carry out their tax obligations more easily because of the legal certainty in filing APA independently.

In Indonesia, APA regulation has been amended three times over the past few years. Starting with the DGT Regulation PER-69/PJ/2010 concerning the Transfer Price Agreement (Advance Pricing Agreement). Followed by the Regulation of the Minister of Finance of the Republic of Indonesia Number 7/PMK.03/2015 concerning Procedures for Establishing and Implementing an Advance Pricing Agreement. And the last is Regulation of the Minister of Finance of the Republic of Indonesia Number 22/PMK.03/2020 concerning Procedures for the Formation and Implementation of an Advance Pricing Agreement.

Changes made in APA regulations are aimed to adjust to APA practices internationally. This is because the previous regulations did not include minimum standards in the Action Plan Number 14 of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project. Amendments were also made to improve the effectiveness in providing legal certainty for transfer pricing determination, procedures, timeframes, and follow-up requests for APA implementation.

The most striking difference from some of the previous regulations lies in APA feasibility. Previously, APA required an activity called the pre-lodgement procedure, now Taxpayers only needs to make a formal application (filling stage) through a written application and submitted to the relevant tax authorities. The requirements for this application can be found further in PMK Number 22 / PMK.03 / 2020 Chapter II Article 5.

Changes in APA regulations are expected to make it easier for Taxpayers to carry out their obligations in transfer pricing. It ensures that Taxpayers has followed international best practices and has received legal certainty. Thus, Taxpayers having associated enterprise abroad can reduce their tax compliance costs in adjusting tax regulations between countries.