Many countries, including Indonesia, are facing international taxation challenges due to globalization. The challenges include tax rate competition to attract investment, digitization of the economy, and even aggressive tax planning scheme. To overcome these, cooperation between countries is needed to develop a fair, efficient and sustainable international taxation system.

Base Erosion Profit Shifting (BEPS) is one of the schemes commonly used by multinational companies or business group to manage their tax payable. Based on Organization for Economic Co-operation and Development (OECD), BEPS refers to tax planning strategies used by multinational companies that exploit gaps and mismatches in tax rules to avoid paying taxes. Companies may shift profits in their home country to jurisdictions with lower tax rates or manipulate their expenses and income to other companies within business group whose income taxes are determined as final tax rates. This can occur in transactions made within associated enterprise, or related-party transactions.

Related-party transactions are not prohibited. However, strict legal provisions are still required to maintain the arm’s length of the transactions and avoid shortfall in state’s tax revenue. Furthermore, the term “associated” can be defined broadly and prone to ambiguity. As a result, tax authority has established the limits of associated enterprise in legislative provisions and derivative rules.

In addition, associated enterprise occurs when there is reliance or attachment to one another as a result of ownership, equity participation, management control, or the use of technology.  In addition, associated enterprise also occurs due to blood relations or marriage.

Associated Enterprise criteria is regulated in article 18 paragraph (4) of the Income Tax Law in Indonesia. The term “associated” exists if one of the following criteria is met:

a. A Taxpayer who owns directly or indirectly at least 25% of equity of other Taxpayers; a relationship between Taxpayer through ownership of at least 25% of equity of two or more Taxpayer, as well as a relationship between two or more Taxpayer concerned;

b. A Taxpayer who controls other Taxpayers; or two or more Taxpayers are directly or indirectly under the same control;

This is further regulated in article 4 paragraph (4) of Minister of Finance Regulation Number 22/PMK.03/2020. An associated enterprise due to control is considered to exist if:

c.  A family relationship through blood or marriage within one degree of direct or indirect lineage.

The term “relationship by blood in one degree of direct lineage vertically” means parents, and son or daughter. The term “relationship by blood in one degree of direct lineage horizontally” means brothers or sisters.  The term “relationship by marriage in one degree of direct lineage vertically” means parents-in-law, and stepsons or stepdaughters. The term “relationship by marriage in one degree of direct lineage horizontally” means relatives in law.

Taxpayers with related-party transactions must be able to prove the arm’s length of their transactions by preparing transfer pricing documentation. The legal basis for transfer pricing documentation and procedures is governed by Minister of Finance Regulation Number 213/PMK.03/2016 and Director General of Taxes Regulation Number PER-43/PJ/2010 as last amended by Director General of Taxes Regulation Number PER-32/PJ/2011.

According to article 2 paragraph (1) of 213/PMK.03/2016, transfer pricing documentation consists of:

However, not all companies having associated enterprises are required to prepare all these documents. Taxpayers prepare transfer pricing documentation when they meet the criteria in accordance with article 2 paragraph (2)-(4) of Minister of Finance Regulation Number 213/PMK.03/2016, which states as follows:

Master file (MF) and local file (LF) are prepared when Taxpayers make related-party transactions with the following conditions:

a. Gross revenue in the previous fiscal year is more than Rp50,000,000,000 (fifty billion rupiah) within one fiscal year;

b. Amount of related-party transactions in the previous fiscal year within one fiscal year:

c. Related parties located in countries or jurisdictions with lower income tax rates than income tax rates in Indonesia.

Country-to-country report (CbCR) is required when Taxpayer, which is the parent entity of a business group has a consolidated gross revenue in the relevant fiscal year at least Rp11.000.000.000.000 (eleven trillion rupiah).

Domestic Taxpayers who are members of a business group, where the parent entity of the business group is a foreign tax subject, must prepare a country-by-country report (CbCR) if the country or jurisdiction where the parent entity is domiciled:

Companies that do not meet the requirements to prepare transfer pricing documentation are still required to apply the arm’s length principle in their related-party transactions, according to the applicable tax laws and regulations.