From: A.M Oktarina Counsellors at Law
Contributors: Ethania Surinitulo Duha, S.H., Pramudya Yudhatama, S.H., C.L.A.
Reviewer: Noverizky Tri Putra Pasaribu, S.H., L.L.M (Adv).
- Background
A business activity must be inseparable from the transaction, both with parties who have a special relationship and with parties who do not have a special relationship. Often entrepreneurs look for loopholes to be able to manipulate prices far from reasonable limits. Due to the prevalence of these events, the Directorate General of Taxes of Indonesia issued regulations as a preventive measure to reduce or even eliminate these acts of price manipulation. Entrepreneurs in their capacity as taxpayers also have an obligation to comply with existing tax regulations. One way to counter such price manipulation is to establish the Arm’s Length Principle (“ALP“). Basically, ALP applies when there is a transaction that is affected by a special relationship. However, what is this special relationship meant by? And what kind of transactions require ALP?
- Legal Basis
- Government Regulation Number 55 of 2022 concerning Adjustment of Arrangements in the Field of Income Tax; (“PP No.55/2022“)
- Regulation of the Ministry of Finance of the Republic of Indonesia Directorate General of Taxes Regulation of the Director General of Taxes No. Per-32/PJ/2011 concerning Amendments to the Regulation of the Director General of Taxes No. Per-42/PJ/2010 concerning the Application of the Principles of Fairness and Business Practices in Transactions between Taxpayers and Parties with Special Relationships; (“PMK No. Per-32/PJ/2011“)
- Regulation of the Minister of Finance of the Republic of Indonesia Number 172 of 2023 concerning the Application of the Principles of Fairness and Business Practices in Transactions Influenced by Special Relationships; (“PMK No.172/2023“)
ALP is a principle that regulates that if the conditions in the transaction carried out between the parties who have a special relationship are equal to or comparable to the conditions in the transaction carried out between the parties who do not have a special relationship, the price or profit in the transaction carried out between the parties who have a special relationship must be within the price or profit range in the transaction carried out between the parties who do not have a special relationship as a comparison as explained in Article 1 number 5 of PMK No. Per-32/PJ/2011 that:
Article 1 number 5 of PMK No. Per-32/PJ/2011:
“The Arm’s length principle (ALP) is a principle that regulates that if the conditions in the transaction conducted between the parties who have a Special Relationship are the same or comparable to the conditions in the transaction carried out between the parties who do not have a Special Relationship that is comparable, then the price or profit in the transaction made between the parties who have a Special Relationship must be equal to or within the the price range or profit in transactions made between parties who do not have a Special Relationship that is a comparator.”
What kind of special relationship then that the parties have? A special relationship means that the parties are in a state of dependence or have attachments caused by ownership or participation of capital, control, or blood or family relationships that result in one party being able to control the other party or resulting in the other party not standing independently in carrying out business activities as explained in Article 33 paragraph (1) of Government Regulation No.55/2022 and Article 2 paragraph (2) of PMK No.172/2023 that:
Article 33 paragraph (1) of Government Regulation No.55/2022:
“A special relationship as referred to in Article 32 paragraph (3) is a state of dependence or attachment of one party to another caused by:
- ownership or participation of capital;
- mastery; or
- blood or blood family relations,
which results in one party being able to control the other or not standing independently in running a business or carrying out activities.”
Article 2 paragraph (2) PMK No.172/2023:
“A special relationship as referred to in paragraph (1) is a state of dependence or attachment of one party to another caused by:
- ownership or participation of capital;
- mastery; or
- claret or blood family relationship.”
Then what kind of transaction requires ALP? Transactions that require ALP are transactions that are affected by a special relationship as explained in Article 4 paragraph (6) of PMK No.172/2023 that:
Article 4 paragraph (6) PMK No.172/2023:
“Transactions Affected by Certain Special Relationships as referred to in paragraph (5) include:
- service transactions;
- transactions related to the use or right to use intangible property;
- financial transactions related to loans;
- other financial transactions;
- property transfer transactions;
- business restructuring; and
- cost contribution agreement.“
The purpose of the ALP is to determine a reasonable transfer price when there is a transaction that is affected by the existence of a special relationship and its application is carried out by comparing the conditions and indicators of transaction prices affected by the special relationship with the conditions and price indicators of the same or comparable independent transaction as explained in Article 3 paragraph (2) and paragraph (3) of PMK No.172/2023 that:
Article 3 paragraph (2) PMK No.172/2023:
“The principles of Fairness and Business Practices as referred to in paragraph (1) are applied to determine a reasonable Transfer Price.”
Article 3 paragraph (3) PMK No.172/2023:
“The principle of Fairness and Business Practices as referred to in paragraph (2) is applied by comparing the conditions and price indicators of Transactions Affected by Special Relationships with the conditions and price indicators of the same or comparable Independent Transactions.”
Therefore, it is necessary to know the stages of implementing ALP before making transactions that are affected by special relationships as explained in Article 4 paragraph (1) and paragraph (4) of PMK No.172/2023 that:
Article 4 paragraph (1) PMK No.172/2023:
“The application of the Principles of Fairness and Business Practices as referred to in Article 3 paragraph (3) must be carried out:
- based on the actual circumstances;
- at the time of the Transfer Pricing and/or at the time of the Transaction Affected by the Special Relationship; and
- in accordance with the stages of application of the Principles of Fairness and Business Practice.”
Article 4 paragraph (4) PMK No.172/2023:
“The stages of the application of the Principles of Fairness and Business Practices as referred to in paragraph (1) letter c include:
- identify Transactions Affected by Special Relationships and Affiliated Parties;
- conducting industry analysis related to the Taxpayer’s business activities, including identifying factors that affect business performance in the industry;
- identify commercial and/or financial relationships between the Taxpayer and the Affiliated Party by analyzing the transaction conditions;
- conducting a comparative analysis;
- determine the method of Transfer Price Determination; and
- apply the Transfer Pricing method and determine a reasonable Transfer Price.”
- Conclusion
If in a transaction the parties are in a state of dependence or have attachments caused by ownership or participation of capital, control, or blood or family relations that result in one party being able to control the other party or resulting in the other party not standing freely in carrying out business activities, then the transaction requires the existence of ALP. Because basically the purpose of ALP in the transaction is to determine a reasonable transfer price by comparing the conditions and price indicators of the transaction affected by the special relationship with the conditions and price indicators of the same or comparable independent transaction.
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