In the era of increased global tax scrutiny, Transfer Pricing (TP) compliance is not merely a discretionary best practice - it is obligatory. Regulators are tightening their grip all around the world, including Indonesia. With an increase in tax audits and adjustments, businesses operating in the country must recognize that outdated documentation methods can results in serious financial and legal implications. 

What is the key issue? 

The strict use of the ex-ante principle in transfer pricing documentation. 

Understanding the Ex-ante Principle

The ex-ante principle requires that transfer pricing documents be based on data available at the time of the transaction, ensuring that pricing decisions consistent with the arm’s length principle before transactions occur. The OECD Transfer Pricing Guidelines 2022 (OECD TPG) define two approaches to time in data collection:

  • Ex-ante (Arm’s Length Price-Setting Approach) requires taxpayers to document conformity with the arm’s length principle before undertaking intra-group transactions using data available at the time.
  • Ex-Post (Arm’s Length Outcome-Testing Approach): After the fiscal year closes, some taxpayers evaluate the actual outcomes of controlled transactions to ensure they follow the arm’s length principle.

Indonesia strongly supports the ex-ante principle, as outlined in the Ministry of Finance Regulation No. 213/ 2016 (PMK-213) and strengthened by Ministry of Finance Regulation No. 172/ /2023 (PMK-172). Article 4 (1.b) of PMK-172 expressly stipulates that transfer pricing documentation must be developed using information available at the time related-party transactions occur. Failure to comply enables the Director General of Taxes (DGT) to reassess income and deductions, resulting significant tax adjustments under Article 36.5 of PMK-172. Non-compliance with the application of the ex-ante principle will result in loopholes and can serve as an “entry point” for tax adjustments. It is no longer a trivial oversight; it is a clear request for tax adjustments.

The Dangerous Gap in Compliance

It is known that many companies and transfer pricing practices collect comparable data after the fiscal year ends, which the DGT believes contradict the ex-ante principle. As a result there has been an alarming surge in transfer pricing disputes, with the ex-ante principle, which requires taxpayers to establish and document arm’s length pricing before executing related-party transactions being major focus for tax auditors. 

In recent years, there have been numerous cases of companies undergoing tax audits of affiliated transactions and experiencing adjustments due to the use of this ex-ante principle. Tax auditors are increasingly scrutinizing the timing of data collection and benchmarking and requesting evidence from taxpayers to support it. 

For better understanding, we provide a simulation for 2025 Transfer Pricing Documentation. If comparable and benchmarking are collected in 2026 or later, the DGT is likely to consider it as non-compliance with ex-ante principles, increasing the risk of exposure to tax adjustments and l subsequent penalties. As a result, the company will face higher tax adjustment from the DGT, as well as longer and more expensive disputes with tax authorities.

Immediate Action: Ex-ante Data Collection and Operational Transfer Pricing

A fundamental part of the ex-ante principle is the utilization of reliable and timely data for comparable data collection and benchmarking. To remains ahead of regulatory scrutiny and avoid costly tax adjustments, companies must radically change their approach to data collection and benchmarking. For example, for 2025 Transfer Pricing Documentation, comparable data collection and benchmarking must be conducted at the beginning of 2025 or throughout the year, prior to any related party transactions. This ensures full compliance with ex-ante principles requirements. Thus, business should implement operational transfer pricing, which monitors affiliated transactions on a regular basis, in order to reduce and mitigate the risk of non-arm’s length results in the previous year.

Furthermore, taxpayers who rely on external consultants for transfer pricing documents must secure engagement letters well in advance. The date of the engagement letter from the service contract becomes important because it can be used as supporting evidence, together with the date of data collection, for taxpayer’s ex-ante application.

CONCLUSION

To summarize, timely implementation of benchmarking is paramount to ensuring conformity with ex-ante principles, safeguarding taxpayers against potential disputes and penalties. It is strongly recommended that taxpayers adopt this practice and conduct data collection and benchmarking before engaging in related party transactions. 

The message is clear: plan ahead of time, document everything in real-time, and safeguard your business. The era of reactive transfer pricing has ended—adapt or pay the price.

 

By T Qivi Hady Daholi & Rindhaswari Laretna S, Tax Practice