HOW INDONESIA PREPARE ON FACING TRANSFER PRICING ISSUE DUE TO COVID-19 PANDEMIC
The COVID-19 Pandemic not only threatens health and isolates a large part of the world's population, but also forces economic activity in almost all countries to halt. The impact of the Covid-19 pandemic also affects the tax authorities and taxpayers. Therefore, Taxpayers must anticipate and adjust to be able to survive during a pandemic, one of which is by minimizing potential disputes with the authorities.
The Covid-19 outbreak has also seriously disrupted the global supply chain. This condition has a serious impact to overall business operations, resulting a significant decline in Company revenue and profitability. In this situation, companies who gain loss may have the potential to be exposed. Therefore, companies with low profits or even losses, need to carry out a transfer pricing analysis using the right economic indicators in order to present a hypothetical operating profit if there is no Covid-19 outbreak.
Taxpayers who carry out transfer pricing analysis using the Comparable Uncontrolled Price (CUP) method must pay attention to commodity market price movements, especially in the midst of the Covid-19 pandemic. When a product or service has dropped in sales or even showing loss result, the taxpayer needs to present an accurate analysis based on five comparability factors so that the transfer pricing analysis can produce correct conclusions. The five comparability factors consist of characteristics of:
- Products and/or services offered during pandemic.
- Functional analysis (any re-allocation on functions performed, assets employed and risk assumed).
- Contractual terms (any new arrangements whether there’s new conditions, amended or terminated due to Covid-19).
- Economic conditions that affect the Company business operation.
- Business strategy (any changes due to Covid-19).
Meanwhile, the application of the Transactional Net Margin Method (TNMM) analysis becomes more challenging in justifying the application of Arm’s Length Principle for affiliated transactions conducted by taxpayers during the year of Covid-19 pandemic. The TNMM analysis compares the operating profit level of the tested party with similar comparison firms, which are generally obtained from commercial databases. After the pandemic ends, the obstacle that the taxpayers will likely to be dealing with is finding valid comparative data to be able to carry out a transfer pricing analysis appropriately, given the different impacts of the economic crisis faced by companies, industries, and other market players due to Covid-19.
Therefore, in order to compile a proper transfer pricing documentation, Taxpayers are also responsible for preparing supporting documents to support the adjustment of the transfer pricing analysis, such as :[1]
- Adjusting the Criteria of the Comparable to the reality of business circumstances during COVID-19 pandemic
When determining the search criteria of the comparable from the database in order to compile the Transfer Pricing Documentation for the year of 2020, Taxpayer should adjust to the reality of business activities and circumstances during the pandemic year, such as companies that experience losses or companies that experience a decline in sales.
---------------------------------------------
[1]https://news.ddtc.co.id/ini-saran-praktisi-soal-dokumen-transfer-pricing-saat-pandemi-Covid-19-24577?page_y=1496
- Using the available financial information the public companies provide on their official websites or other official financial sources.
When searching for comparable, Taxpayer can use the financial statements of public companies whose financial report publications are available earlier than the database. Taxpayer may look on their official websites or other official financial sources like www.idx.co.id.
- Comparing business performance between pre-Covid-19 and during Covid-19.
When analyzing the business performance of a Company, Taxpayer will be needed to prepare the profit and loss analysis before the Covid-19 pandemic to be compared with the sales during the pandemic in 2020.
4. Preparing Advance Pricing Agreement (APA)
The OECD Guidelines (1995) define APA as a pre-arranged schema of a transaction between related parties with appropriate criteria (such as methods, comparisons and estimates, as well as assumptions about future conditions) to determine the transfer price between the related parties for a specified period of time.
In the viewpoint of tax authority, APA is an alternative that is responsible for transfer pricing issues and is also a tool to avoid confrontation between tax authorities and taxpayers and prevent disputes between the tax authorities of a country and other tax authorities.
To make it easier for taxpayers to prepare APA, tax authorities have made policy changes to respond to the impact of Covid-19 by releasing the Directorate General of Taxes Regulation No. PER-17 / PJ / 2020. This regulation has already included the procedures for completing, applying, implementing, and evaluating the APA.
Since Indonesia has been focusing on Advance Pricing Agreement (APA), considering the Covid-19 may affect the settlement or negotiating of the APA. The Tax Authority will seek more information whether the APA is proposed by the following circumstances, such as :[2]
- The related party transaction lacks economic motive
- The economic substance of related party transaction
- The related party transaction is undertaken with the purpose of minimizing tax burden
- Information and/or evidence submitted by taxpayer is not accordance with the actual condition
- Information and/or evidence requested by the DGT for the purpose of material testing is not provided within 14 days from the date of the written request
- The tax years covered in the proposed APA period or roll-back years has been issued with Assessment Letter.
-------------------------------------------
[2] RSM Webinar – Transfer Pricing
Here are the attachments of the new Guideline on APA application and implementation released by the Tax Authority in respond to the impact of Covid-19, the Directorate General of Taxes Regulation No. PER-17 / PJ / 2020.
Definitions :
Peredaran Usaha = Sales
Harga Pokok Penjualan = Cost of Goods Sold (COGS)
Laba Kotor = Gross profit
Biaya Operasi = Operating Costs
Laba Operasi = Operating profit
Penghasilan/Beban lain-lain = Other income / expenses
Laba Bersih = Net profit
Rasio Keuangan (%) = Financial Ratio (%)
Laba Kotor/ Peredaran Usaha = Gross Profit/Sales (Gross Profit Margin)
Laba Kotor/HPP = Gross Profit/COGS (Gross Mark- Up)
Laba Operasi/Peredaran Usaha = Operating Profit/Sales (Return on Total Sales)
Laba Operasi/(HPP+Biaya Operasi) = Operating Profit/(COGS+Operating Cost) (Return on Total Cost)
Filling Instructions:
Number (1): Filled with the element of the financial statements in the 1st year of the APA Period which shows that the proposed transfer price is affected by COVID-19.
Number (2): Filled with the element of the financial statements in the 1st APA Period with adjustments to normal conditions.
Number (3): Filled with the element of the financial statements in the 2nd year of the APA Period which shows that the proposed transfer price is affected by COVID-19.
Number (4): Filled with the element of the financial statements in the 2nd APA Period with adjustments to normal conditions.
Number (5): Filled with the element of the financial statements in the 3rd year of the APA Period which shows that the proposed transfer price is affected by COVID-19.
Number (6): Filled with the element of the financial statements in the 3rd APA Period with adjustments to normal conditions.
Number (7): Filled with the element of the financial statements in the 4th year of the APA Period which shows that the proposed transfer price is affected by COVID-19.
Number (8): Filled with the element of the financial statements in the 4th APA Period with adjustments to normal conditions.
Number (9): Filled with the element of the financial statements in the 5th year of the APA Period which indicate that the proposed transfer price is affected by COVID-19.
Number (10): Filled with the element of the financial statements in the 5th APA Period with adjustments to normal conditions.
Definitions :
|
Penjelasan Penyesuaian pada Kondisi Normal Terkait Peredaran Usaha
|
=
|
Explanation of Adjustments to Normal Conditions Regarding Sales
|
|
Penjalasan Penyesuaian pada Kondisi Normal Terkait Harga Pokok Penjualan
|
=
|
Explanation of Adjustments to Normal Conditions Regarding Cost of Goods Sold
|
|
Penjelasan Penyesuaian pada Kondisi Normal Terkait Biaya Operasi
|
=
|
Explanation of Adjustments to Normal Conditions Regarding Operating Costs
|
|
Penjelasan Penyesuaian pada Kondisi Normal Terkait Penghasilan/Beban lain-lain
|
=
|
Explanation of Adjustments to Normal Conditions Regarding Other Income / Expenses
|
Conclusion
So in order to compose a transfer pricing documentation during pandemic, Taxpayer needs to present an accurate analysis based on five comparability factors so that the transfer pricing analysis can produce correct conclusions. The five comparability factors consist of Characteristic of products and/or services, Functional Analysis, Contractual terms, Economic Conditions and Business Strategy. The purpose of this analysis is to compare the business performance of the Company before and after Covid-19 and to analyze the factors that affecting the Company’s business operations and income during Covid-19.
Other than that, as it becomes more challenging in justifying the application of Arm’s Length Principle for affiliated transactions conducted by taxpayers during pandemic. The obstacle that the taxpayers will likely to be dealing with is finding valid comparative data to be able to carry out a transfer pricing analysis appropriately.
Lastly, to avoid confrontation between tax authorities and taxpayers and prevent disputes between the tax authorities of a country and other tax authorities, The Indonesian tax authority has released the Directorate General of Taxes Regulation No. PER-17 / PJ / 2020. This regulation has already included the procedures for completing, applying, implementing, and evaluating the APA.