THE IMPLEMENTATION OF EX-ANTE APPROACH IN THE PREPARATION OF TRANSFER PRICING DOCUMENTATION

• Main Author: Mulia Dalimunthe, Tigor
• Format: Theses
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/46626
• Institution: Institut Teknologi Bandung

Trade globalization and business efficiency have encouraged multinational companies to conduct cross-border transactions with their related parties. The arm’s length issue in transfer pricing schemes carried out by multinational companies soon catch attention of tax authorities worldwide. The issuance of PER-43/PJ/2010 related to the implementation of arm’s length analysis in transfer pricing has raised the legal requirement for Transfer Pricing Documentation (TPDoc). Tax dispute cases related to transfer pricing have also become the main focus of tax audits conducted by the Directorate General of Taxes (DGT). In 2016, Indonesia issued PMK-213/PMK.03/2016 which required taxpayers to prepare TPDoc using an ex-ante basis. PMK-213 makes the change from ex-post (which is based on profit-testing) to ex-ante (which is based on profit-setting). In this final project, the author will analyze how the ex-ante approach using Transactional Net Margin Method (TNMM) should be implemented by taxpayers in their TPDoc. In this case the author uses the example of XYZ Co. The author will also explain documentation strategy (which pertains to the techniques in preparing a TPDoc), as well as transfer pricing policy strategy to mitigate the risk of a transfer pricing audit. Based on analysis, the author suggests the use of both budget and actual figures in TPDoc. The author also suggests that taxpayers perform benchmarking analysis at the beginning of the year when the budgeted profit is determined. At the beginning of the year, the most updated financial information of comparable companies is the financial data from the previous 2-years. Analysis on the documentation strategy showed that XYZ has formally and technically complied with PMK-213. Formally, XYZ must prepare the TPDoc on an ex-ante basis and submit it to the Directorate General of Taxes (DGT) before the Corporate Income Tax Return deadline. Technically, TPDoc contains the elements required by PMK 213, which cover the information on business activities, related and independent party transactions, application of the arm's length principle, financial information of the taxpayers, and facts affecting the formulation of the profit. Analysis on the policy strategy advises XYZ to increase the sales price to related party in order to maintain a profit that is higher than the median level of comparable companies. This strategy mitigates the risk of a transfer pricing audit and at the same time decreases global tax expense.