Ex-Ante Concept Application Dilemma in Indonesia: Specific Issues in Preparation of Master File and Local File

The ex-ante application in the preparation of the Master File and Local File is mentioned twice in the newly published Indonesian Transfer Pricing regulation, PMK-172/PMK.03/2023 (“PMK-172”). These mentions occur in Article 12, Paragraph 4, and Article 17, Paragraph 1, as follows:

PMK-172 Article 12, Paragraph 4:
“Single-year or multiple-year comparable data shall be the data that is available and closest to the time of the Transfer Pricing determination and/or the occurrence of the Transaction Affected by Special Relationship.”

PMK-172 Article 17, Paragraph 1:
“The Master File and Local File shall be prepared based on the data and information available during the Affiliation Transaction.”

Interestingly, these two paragraphs serve different purposes when applied. The first suggests the specific use of ex-ante when selecting comparable data, which is part of the Local File, while the second suggests using ex-ante during the preparation of Transfer Pricing Documentation (“TPD”) in general.

Differences in Ex-Ante Wording

The wording of the ex-ante elaboration in these two paragraphs is slightly different. The first mentions data closest to the time of Transfer Pricing and/or related party transactions, implying a broader application when selecting comparables. However, PMK-172 does not provide detailed guidelines on applying data closest to the transactions.

Concerns with Single-Year and Multiple-Year Data

Another concern with ex-ante application for selecting comparables is the use of single-year data and multiple-year data in price-based transfer pricing methods. These methods generally consist of the Comparable Uncontrolled Price (“CUP”) and Comparable Uncontrolled Transaction (“CUT”) methods. There are no specific guidelines on applying these methods, leading to speculation that single-year data in CUP/CUT applications refer to data within the same year as the tested party, while multiple-year data includes the prior year’s data. This, specifically the application of single-year data, becomes problematic when applying the ex-ante concept, such as when the tested transaction/price originates from transactions conducted on January 1. In such cases, finding comparables becomes extremely difficult. This concern might be since single-year and multiple-year data are commonly referenced when applying profit-based transfer pricing methods such as the Cost-Plus Method (“CPM”), Resale Price Minus (“RPM”), and Transactional Net Margin Method (“TNMM”).

Timing Issues in Ex-Ante Application

Additionally, applying the ex-ante concept to profit-based transfer pricing methods raises another concern. Consider the following phrase:

“…the time of the Transfer Pricing determined and/or the occurrence of the Transaction Affected by Special Relationship.”

When defining the time of the Transfer Pricing determination (“First Timing”), it is usually defined early in the year, for example, January 1. In contrast, the occurrence of the Transaction Affected by Special Relationship (“Second Timing”) is more challenging to define, as related party transactions occur throughout the year, not just on specific dates. Therefore, they can range from January 1 to December 31 or depend on the taxpayer's accounting period.

Applying the ex-ante concept to single-year data, using the First Timing, means using two-year prior data. For example, if the company’s tested year is FY2021, the comparables’ financial year statement will be FY2019, as the financial data available at the time of Transfer Pricing determination pertains to FY2019.

However, applying the same concept to the Second Timing would mean calibrating single-year data to the latest related party transactions conducted during the year, typically December 31. This would result in using financial data from the previous year, as of that date, the financial data from the previous year is already available. For instance, if the tested year is FY2021, then the financial data for FY2020 would be used.

Preference for Single-Year vs. Multiple-Year Data

When discussing the preference for single-year data when selecting comparables, the statement in Article 12, Paragraph 4, particularly the “and,” complicates the preference for single-year data. The use of “and” along with the First and Second Timing suggests using multiple-year data. Additionally, Paragraph 4 can justify Paragraph 3 in the same article, ultimately giving multiple-year data equal footing with single-year data when selecting comparables. However, the period for multiple-year data in this context is not common, typically being two years instead of the usual three or five years.

Conclusion

In conclusion, the ex-ante application dilemma in Indonesia's transfer pricing regulations, as outlined in PMK-172, presents several challenges for taxpayers. The differences in wording, concerns with single-year and multiple-year data, and timing issues all contribute to the complexity of compliance. While the regulation offers a flexible approach to applying the arm’s length principle, practical experience indicates that this flexibility can lead to varying interpretations by the Tax Office.

To address these challenges, taxpayers should engage in ongoing dialogue with tax authorities, seek professional advice, and stay informed about regulatory changes. By doing so, they can navigate the complexities of transfer pricing regulations and ensure that their related party transactions are conducted at arm’s length. The author hopes that the Tax Office will adopt a reasonable approach when dealing with transfer pricing issues, recognizing the efforts of taxpayers to comply with the regulations and demonstrate that their related party transactions are conducted at arm’s length.