IMPLEMENTATION OF ARM’S LENGTH PRINCIPLE IN BUSINESS: A CASE STUDY ON MANUFACTURE COMPANY

• Main Author: Wibisono, Tegar
• Format: Theses
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/61295
• Institution: Institut Teknologi Bandung

Globalization makes the development of the world's economy become more rapid and makes the borders of the country almost non-existent. Multinational companies will also face a problem that is the difference in tax rates. This difference in tax rates makes multinational companies take the decision to make transfer pricing. Transfer pricing raises several issues concerning customs, taxes, anti-dumping provisions, unfair business competition, and internal management issues. The research methodology of this business final project is descriptive quantitative. This method considered as the most suitable to answer the research questions. Descriptive designs collect information about variables without changing the environment or manipulating any variables. So, they do not look at possible cause and effect. Descriptive quantitative method may be used to develop theory, identify problems with current practice, justify current practice, make judgements, or determine what others in similar situations are doing. The data collected from financial information (audit report), interview with JPINS’s Manager from all division, and brainstorm with JPIN’s Manager to create functions & risks analysis. Automotive paints industry in Indonesia is a part of automotive industry. The barriers to entry of this industry are high. The trends in this industry depend heavily on the trend of automotive industry. Along with the economic growth of Indonesia, there shall be more people capable of owning their own cars. Therefore, it is estimated that the number of cars shall grow. To achieve success, JPIN are required to be efficient, innovative, and have a strong network to meet customer demand. This requires industrial players to maintain high quality paints, customer loyalty by providing after-sales service, efficiency in the production process, and a strong network to maintain market share. Based on the analysis, the nature of this industry can be summarized as a developing industry with low level of competition, high barriers to entry, and low regulatory restrictions. The results analysis of functions, assets, and risks, JPIN primarily conducts procurement, production, quality control, and sales and marketing activities of automotive paints and coatings in Indonesia. JPIN assumes risks associated with these activities. JPIN's high value assets consist mainly of machinery and equipment, buildings, land, office equipment, furniture, and fixtures. JPIN does not own or develop any high value intangible assets. All intangible assets related to the know-how of production, process, and technical information as well as trademarks are owned by JPM. JPIN can be characterized as a manufacturer of automotive paints and coatings licensed for the Indonesian market by considering the functions performed, assets used, and risks assumed. JPIN has adopted an ex-ante base, or a fair pricing approach based on other relevant data and information available during or before conducting a controlled transaction to ensure that the transaction pricing is applied on a basis consistent with the arm’s length principles. TNMM is selected as the most appropriate method and ROS is selected as an appropriate PLI to test whether JPIN’s affiliated transactions under review in combination are at arm’s length. The recommendations that will be followed up with an implementation plan are the adjustment of JPIN’s ROS in 2020 should be stated in Transfer Pricing Documentation to prove that JPIN doesn’t have any intention related to tax avoidance; Although the automotive paint industry is in low phase, JPIN’s management should monitor the operational expense to maintain the efficiency of JPIN; and JPIN’s management shall create new marketing strategy to increase sales in the future. The implementation plans that will give real impact for JPIN are to prepare transfer pricing documentation; create cost efficiency SOP and reducing production cost by reducing production process; create new marketing strategy; and monitor & evaluate the impact of Covid-19 outbreak on JPIN's business, financial position, and results of operation.