Master File and Local File are some of the documents that must be attached to the Annual Corporate Income Tax Return. These documents will provide details regarding the transfer pricing documents' implementation, provision, and availability dates.
Transfer pricing document must be prepared and kept by Taxpayer as the basis for the implementation of Arms-Length Principle to determine whether transfer pricing made by Taxpayer. Arms-Length Principle is a principle that determines the price or profit in related party transactions are similar and/or comparable to independent party transactions used as comparables.
According to Article 1 Minister of Finance Regulation Number 213/PMK.03/2016, Arms-Length Principle is defined as follows:
“Arms-Length Principles that are not affected by an Associated Enterprises, hereinafter referred to as Arm’s-Length Principle, is principle that govern the terms of conditions in transactions made between related parties are similar or comparable to the conditions in transactions made with independent parties used as comparables, the price or profit in related party transactions must be the same as or within the price range or profit range in transactions made between independent parties used as comparables."
Data and Information in Transfer Pricing Document
Master File (MF) and Local File (LF) must be prepared based on the data and information available at the time of the related-party transaction, while Country by Country Report (CbCR) must be prepared based on the data and information provided until the end of the Fiscal Year.
Taxpayer must include the following information in preparing transfer pricing document:
Master File (MF)
Master File (MF) consists of details as follows:
1. Business group ownership structure and chart as well as countries or jurisdictions of each member, which includes:
- List of shareholders and percentage of share ownership as well as the list of management of each member of the business group;
- Business group ownership chart showing the overall share ownership relationship of business group members; and
- The geographic location (country or jurisdiction) of each business group members.
2. Business activities conducted by business group, which includes:
- List of members and business activities of each business group member;
- Determinants as important role in determining each member of the business group’s profit;
- Explanation and scheme/graph/diagram regarding business chain for the top 5 (five) products and/or services produced by the business group as well as for other products or services produced by the business group with gross revenue of 5 (five) percent or more than total business groups’ gross revenue;
- List and explanation of important contracts or agreements between business group members, including an explanation of business group members’ ability to provide services and transfer pricing policies for costs allocation and price determination in providing related services;
- An explanation of the geographical location (country or jurisdiction) which is the main market for the products and/or services produced by the business group;
- General explanation of the business group functional analysis which includes functions, assets, and risks analysis conducted by the business group. This analysis explains the contribution of each business group member in the formation of value; and
- Explanation of business restructuring, acquisitions and divestments made by business group members in the last 5 (five) years.
3. Intangible assets owned by business group, which includes:
- Explanation of the business group's strategy in developing, owning, and exploiting intangible assets, including the location of Research and Development (R&D) activities in terms of facilities and management;
- List of intangible assets or groups of intangible assets owned by a business group which are important for the analysis of transfer pricing, as well as information on the business group members who are the legal owners of the assets;
- List and explanation of the parties in the business group members who contribute to the development of intangible assets;
- List of contracts or agreements between business group members related to intangible assets, including Cost Contribution Arrangement (CCA) agreements, R&D service agreements and licensing-related agreements;
- Explanation of the business group's transfer pricing policy of intangible asset R&D; and
- Explanation of intangible assets transfer of ownership that occurs between business group members in the relevant Fiscal Year, including the names of business group member, country or jurisdiction, and transfer compensation.
4. Financial and financing activities in the business group, which includes:
- Description of the financing used by business group, including financing agreements with independent lenders;
- Identification and explanation of the business group members functioning as financial/financing centre for business group members, including information on the country or jurisdiction where business group members are established and effective management is located; and
- Explanation of the transfer pricing policy regarding financing agreements between business group members.
5. Parent entity’s consolidated financial statements and tax information related to related-party transaction, which include:
- Business Group’s consolidated financial statements for the relevant Fiscal Year, both prepared for external and internal purposes; and
- List and explanation of the Advance Pricing Agreement (APA) and other tax provisions related to income allocation between business group members.
Local Files (LF)
Local File (LF) consists of details as follows:
1. Identity and business activities conducted, which includes:
- Explanation of management structure, organizational chart, information regarding domestic or foreign parties who are related, and country or jurisdiction of the parties located;
- Detailed business explanation and business strategies conducted, including influence indications of business restructuring involvement or transfer of intangible assets in the business group that is currently or has occurred in the previous year;
- Operational aspects of business activities; and
- Detailed description of the business environment, including a list of major competitors.
2. Information of related-party and independent transactions conducted, which includes:
- Transaction scheme and explanation;
- Pricing policy implemented for the last 5 (five) years;
- Explanation of each transaction and the background of transaction;
- Specified nominal amount per transaction type and per counterparty;
- Information on counterparties in each type of transaction and explanations regarding the relationship of Taxpayer;
- Information in tabular form at least:
1) Invoice number and date;
2) Name of counterparty;
3) Country or jurisdiction of counterparty;
4) Product name;
5) Product specifications or quality;
6) Number of units or quantity;
7) Price per unit (smallest size commonly used); and
8) Date of delivery/shipping of goods (for transactions related to commodity products); and - Copy of agreements/contracts related to significant transactions;
3. Implementation of Arm’s Length Principle, which includes:
- Detailed description of the comparability analysis of each related-party transaction includes:
1) Analysis of product or service characteristics;
2) Functional analysis (function, asset and risk (FAR) analysis);
3) Terms of the contract, business strategy and economic conditions; and
4) Comparability analysis of the difference in conditions with previous years. - Detailed description of business characteristic based on the results of the functional analysis (FAR analysis);
- Explanation of the most appropriate transfer pricing method for each type of related-party transaction, the reasons for selecting the method, and the benefit of the selected method compared to other methods;
- Explanation of:
1) The party selected as the party being tested and the reasons for the selection; and
2) Financial ratios or profit rate indicators used in the implementation of the transfer pricing method, in the case of using the gross or net profit-based method. - Summary of the assumptions used in the implementation of the transfer pricing method;
- Explanation of the reasons for using multi-year analysis if necessary;
- List and explanation of selected internal and/or external comparable transactions, and detailed explanation of the criteria used in the search for comparable data and information sources for the comparable data used;
- Summary of financial statements used in the application of transfer pricing method, including segmented financial statements in the event that the Taxpayer has more than 1 (one) business characteristic;
- Explanation of the implementation of transfer pricing method based on the selected comparable, the range of prices or reasonable profits used, and the reference point within the range of prices or fair profits that become the basis for determining the transfer pricing;
- Explanation of the adjustments made in order to improve comparability;
- Explanation of the conclusion whether or not the transfer pricing is in accordance with Arm’s Length Principle; and
- Copy of APA owned by other business group members and other tax provisions on related-party transactions.
4. Financial information, which covers:
- Audited financial statements for the relevant tax year, or unaudited financial statements in the event that audited financial statements are not yet available;
- The financial statements are segmented based on business characteristic, there are more than 1 (one) business characteristic;
- Information and explanation of the use of information in financial statements related to the implementation of the transfer pricing method; and
- Summary of relevant financial information from the comparable and sources of financial information.
5. Non-financial events/occurrences/ facts that affect price or profit formation.
Country by Country Report (CbCR)
Country by Country Report (CbCR) consists of details as follows:
1. Allocation of income, taxes paid, and business activities per country or jurisdiction of all members of the business group both domestic and overseas, including:
- Name of country or jurisdiction;
- Gross turnover;
- Profit (loss) before tax;
- Income tax that has been deducted/collected/paid by yourself;
- Income tax payable;
- Capital;
- Accumulated retained earnings;
- Number of permanent employees; and
- Tangible assets other than cash and cash equivalents.
2. List of business group members and main business activities per country or jurisdiction.
Availability Period of Transfer Pricing Document
The period of availability of transfer pricing document in the form of MF and LF is set no later than 4 (four) months after the end of the Fiscal Year, while the period of availability of CbCR is no later than 12 (twelve) months after the end of the Fiscal Year.
Furthermore, the Director General of Taxes (DGT) is also authorized to request transfer pricing documents if they are required for compliance supervision, preliminary evidence examination, investigation, objection research, reduction or elimination of administrative sanctions, as well as reduction or cancellation of incorrect Tax Assessment Letters or Tax Collection Letters. Fulfillment of documents in accordance with the request of DGT is important for Taxpayer to pay attention to, considering that the consequences of transfer pricing documents that are not available when requested by DGT will not be considered as transfer pricing document or Taxpayer will be deemed not to fulfill the obligation to prepare and keep transfer pricing document.
Other Terms
Other provisions regarding the preparation of transfer pricing document that must be fulfilled by Taxpayers are as follows:
- Transfer pricing document must be prepared in Indonesian language or in foreign language listed in the permit for the operation of documentation accompanied by translation in Indonesian language if the Taxpayer has obtained the permit for the operation of documentation in a foreign language and currency other than rupiah from the Minister of Finance;
- MF and LF must be summarized as listed in Attachment letter B of PMK Number 213/PMK.03/2016; and
- Evidence of CbCR report must be submitted at the time of reporting corporate income tax return for the next Fiscal Year.
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