TAXES
LAW
10
PT Roedl Consulting
T
he Indonesian government is now putting significant
attention on transfer pricing (TP) practices. In December
2016, the Minister of Finance issued a regulation governing
taxpayers under specific circumstances to maintain TP
documentation to meet the arm’s-length principle (ALP) for any
related party transactions. Even if taxpayers do not fall under the
criteria required to maintain TP documentation, they must be
able to demonstrate observance of ALP in every related party
transaction.
In TP methodology, it is common to use the profit level
indicator (PLI) of operating margin in comparing a company
with independent comparable companies from a commercial
database provider; also called as transactional net margin
method. If a company’s PLI is profitable and falls within the
interquartile range of the comparables, it means that the
company has been consistent with ALP. But what happens if the
company suffer losses in the period?
Operating loss could trigger the profit level indicator to fall
outside the interquartile range, even after adjustments. The tax
I
nterest from a loan transaction is now in the loop of Indonesian
transfer pricing (TP) practices. In accordance with the Minister
of Finance Regulation No 213/PMK.03/2016, if a company
incurred interest in the preceding fiscal year exceeding IDR 5
billion, it is required to prepare TP documentation in the current
year. The documentation should allow to examine the existence
of the loans, the debt-to-equity ratio (thin capitalization rule), and
the nature of arm’s-length principle (ALP).
Determining the ALP for a loan transaction is practically not
easy. It is not sufficient to only compare the rate quoted in the
loan agreement with the domestic bank reference rate or any
other market rates. In some cases, even if the affiliated rate is
higher than the reference rate, this does not necessarily mean
that the transaction has been consistent with the ALP.
Theoretically, an interest rate is comprised of a base rate and
lending margin. From TP analysis standpoint, the lending
margin should be used as comparable factor rather than the
whole interest rate. The lending margin itself is reflecting the
risk associated with a company, and may vary for different
companies.
Tomy Harsono
Licensed Tax Advisor
+ 62 537 6225
authority has the right to adjust operating margin to return the
profit inside the interquartile range and issue a tax assessment.
However, the loss situation can be of normal business cycle. A
negative PLI doesn’t always mean that the company violates
the ALP. However, a taxpayer must formulate argumentation
to be disclosed in the documentation, by reference of the
prevailing OECD TP Guidelines, that the loss is attributable to
factors outside the company’s control and is not intentionally-
repeatedly made.
When analyzing the ALP, the Comparable Uncontrolled Price
(CUP) method is commonly selected as most appropriate
method for loan transactions. It compares the affiliated rate
with comparable independent rates from unrelated parties,
which can be obtained from a commercial database provider.
Different conditions of the comparables may arise, such as loan
term, amount, currency, tenor, and country. As the CUP method
requires a high degree of comparability, OECD has imposed that
reasonably accurate adjustments can be made to eliminate the
material effects of such differences. In addition, a borrower’s
credit rating also plays an important role when searching the
comparables, making it necessary to determine the credit
rating in the very beginning. In conclusion, taxpayers should
now pay more attention to disclose its arm’s length nature for
intercompany loan transactions.
Wahyu Indradi
Licensed Tax Advisor
+ 62 537 6225
Transfer Pricing
Transfer Pricing Documentation for Loss-making Companies
Intercompany Loan
from Transfer Pricing Perspective
Transfer Pricing
8
th
Edition | December 2017
