JURNAL AKUNTANSI PEMERINTAH

Vol. 3, No. 1, Oktober 2008

Hal 13 – 44

TRANSFER PRICING REGULATIONS IN INDONESIA:

SOME THOUGHTS FOR REFORM

Kristian Agung Prasetyo∗

GradCertTax, PGradDipCom, MTax

Bambang Widjajarso∗∗

Abstract

The twenty first century has witnessed an ever increasing rate of international trade as
a result of globalisation and especially, the development of advanced information tech-
nologies. As a result, transfer pricing policy plays a significant role, particularly in many
multinational enterprises (MNEs). The term transfer pricing itself refers to the pricing
policies in relation to goods or services exchanged between related business units.
As part of their domestic anti-avoidance provisions, most revenue authorities have
transfer pricing regulations in place to prevent the price manipulation and profit
shifting to avoid taxation. The Organisation for Economic Co-operation and
Development (OECD) has been involved in setting out guidelines and principles in
addressing transfer pricing issues, which have been adopted widely.
Like other countries, Indonesia is also faced with the ever increasing rate of global
trade. However – unlike others – the Indonesian taxation authority does not seem to
have adequate provisions to tackle international transfer pricing abuse. Even though
the principles of related-party transactions regulations are set out in the income tax
legislation (currently being amended), they are broad and simple in nature and are not
accompanied by detailed and up-to-date guidelines for taxpayers and its field auditors.
This fact seems peculiar as companies are taxed progressively with the highest marginal
rate of 30% (it has been proposed that it will be changed into a flat rate of 30%). In

∗
The author is a tax practitioner in Jakarta. He received a scholarship to study at a postgraduate level in
Australia, where he earned his graduate certificate, postgraduate diploma, and master specialising in
taxation law.
∗∗
The author is a lecturer in Public Finance for the Sekolah Tinggi Akuntansi Negara. Other publications
included textbooks of “Public Finance”, “Government Finance Statistics” and “Governmental
Accounting: Theory and Practice”; all published by the Institute for Public Finance and Governmental

13
JAP Vol.3, No.1, Oktober 2008

relation to this, concerns regarding the lack of transfer pricing guidelines have been
raised by members of parliament involved in the amendment process.
This paper is intended to show that transfer pricing has become an important issue
worldwide and it is likely that it will stay that way. Consequently, it is crucial for
Indonesia to have strong transfer pricing regulations, especially as the Indonesian
taxation authority is responsible for more than 70% of total government expenditure.
The OECD transfer pricing guidelines will be used as a point of reference along with its
application in Australia. In the end, it is expected that this paper will:
1. Show the importance of international transfer pricing and present some basic
principles necessary to address its abuse;
2. Demonstrate that the Indonesian taxation authority does not have an adequate
arsenal to deal with transfer pricing issues. Some possible suggestions will also
be presented based on the OECD guidelines and Australia’s experience.

14

I INTRODUCTION
The avoidance of taxes is the only
intellectual pursuit that still carries any
reward.
– John Maynard Keynes –
The twenty-first century has witnessed
an ever-increasing rate of international
trade as a result of globalisation. Stiglitz
defines globalisation as:
the closer integration of the countries
and peoples of the world which has
been brought about by the enormous
reduction of costs of transportation
and communication, and the breaking
down of the artificial barriers to the
flows of goods, services, capital,
knowledge, and (to lesser extent)
people across borders.1
As part of economic decision-making,
taxation is also affected by the globali-
sation.2 Simon James argues that techno-
logical changes play an important role in
shaping the future global tax environ-
ment. 3 The most important event asso-
ciated with globalisation is the rapid
development of the internet and the
World Wide Web. This phenomenon has
led to the birth of electronic commerce
that enables goods and services to be
exchanged across borders almost instantly,
especially when the contents can be
digitised, like music, films, and services.
In addition, electronic commerce may
cause problems as the flow of funds
cannot easily be traced.
1
Joseph Stiglitz, Globalization and Its
Discontents (2002).
2
Taxation is affected by a number of factors
including social, economic, and political
aspects.
3
Simon James, 'The Future of International Tax
Environment' in Andrew Latymer and John
Hasseldine (eds), The International Taxation
System (2002) 105.
Transfer Pricing Regulations in Indonesia:
Some Thoughts for Reform
The revolution of information technology
has enabled multinational enterprises
(MNEs) to allocate their resources across
nations easily. This phenomenon can be
identified by the presence of MNEs
worldwide to maximise their profit. This
includes the tax minimisation motive, even
though it certainly is not the only reason.
The allocation of more profits to countries
with lower tax rates can result in the
minimisation of the worldwide tax payable
and in turn, may lead to a higher net
profit. This practice is widely known as
transfer pricing, although that term actually
is neutral in nature. 4 Obviously, tax
systems have also taken advantage of this
technological revolution. A noticeable
example is the use of internet technology
in tax return lodgement by taxpayers as
applied in Australia, Canada, the USA,
the Netherlands and – to some extent –
in Indonesia.5
A. The Importance of Transfer
Pricing
The history of transfer pricing provisions
can be traced back to the World War I.
As the war needed money, higher taxes
and tighter regulations to discourage
companies from entering into tax avoidance
schemes by diverting profits away from
high-tax countries are required. 6
Following the economic contraction in
the 1930s, many developed nations came
to understand that they might have
problems in preserving their tax base
4
Jill C Pagan and J Scott Wilkie, Transfer
Pricing Strategy in Global Economy (1993).
5
Liane Turner and Christina Apelt,
'Globalisation, Innovation, and Information
Sharing in Tax System: The Australian
Experience of the Diffusion and Adoption of
Electronic Lodgement' in Rodney Fisher and
Michael Walpole (eds), Global Challanges in
Tax Administration (2005) 221.
6
Pagan and Wilkie, above n 4, 17.
15
JAP Vol.3, No.1, Oktober 2008
due to the rapid development of
communication technologies in the 1970s.
They responded by fine tuning their
expertise in transfer pricing and attacking
the use of tax havens using controlled
foreign corporation provisions.7
Before the advent of globalisation and
the advancement of communication
technologies, most companies were
restrictted to certain jurisdictions, taking
advantage of specialisation and geogra-
phical benefits. The reason is simple: they
had more understanding of local markets.
Later, they realised that they failed to take
advantage of economies of scale and
suffered losses due to duplication of
resources. To be efficient, an MNE must
consider centralising certain functions of
their business such as research and
development, financial management, and
marketing. Also, they must be ready to
set up the manufacturing functions in
any place that offers cost-efficiency or an
abundant, well-trained labour.8
When the choice of location involves
different tax jurisdictions, the transfer
pricing process comes into play. If a
company has branches and subsidiaries
across countries, the transfer pricing process
does not only concern internal matters,
but also involves other parties as well. A
business unit that has facilities located in
different tax jurisdictions has to take into
account various aspects to arrive at the
liability of tax that has to be paid in each
jurisdiction. 9 Therefore, there may be a
motive to minimise the net profits of the
business units located in high-tax juris-
diction by shifting their profits elsewhere.
7
Ibid 17.
8
Ibid 25.
9
Jamie Elliott and Clive Emmanuel,
'International Transfer Pricing' in Andrew
Latymer and John Hasseldine (eds), The
International Taxation System (2002) 157.
16
As a result, the overall net profit of the
MNE could be increased.
In today’s context, transfer pricing plays
an increasingly important role. The need
to address the income allocation between
countries for tax purposes cannot be
neglected as more tax jurisdictions are
trying to have a ‘reasonable’ proportion
of an MNE’s taxable income. Many
governments address this problem by
using a formal approach to legislate for
transfer pricing provisions. 10 It indicates
that revenue authorities regard transfer
pricing important and consider it potential
to increase tax-based revenue.
The significance of transfer pricing be-
comes more evident by looking at the
fact that 60% of the world trade takes
place within MNEs. 11 Additionally, a
study of the taxable income of several
companies in the USA point out that the
taxable income of foreign-controlled
companies operating in the USA is
generally lower compared to those of the
USA-controlled companies. This indicates
that there are reasons to believe that the
profits are shifted out of the USA, perhaps
through transfer pricing arrangements.12
10
The countries that have recently put transfer
pricing regulatory and administrative rules in
place include Malaysia, Thailand, Taiwan,
and India. Other countries like the USA and
Canada tighten their transfer pricing
regulations by issuing newer technical
guidelines or imposing more audits. For
further information, see Ernst and Young
Global Transfer Pricing Survey available for
download at
www.ey.com/transferpricingsurvey.
11
John Neighbour, Transfer Pricing: Keeping it
at Arm's Length (2002) OECD Observer
<http://www.oecdobserver.org/news/printpag
e.php/aid/670/Transfer_pricing:_Keeping_it_at
_arms_length.html> at 4 January 2006.
12
Willi Leibfritz, John Thornton and Alexandra
Bibbee, Taxation and Economic Performance
(1997).

The Ernst and Young 2005 global transfer
pricing survey reveals several findings: 13
1. More than 90% of the respondents
consider transfer pricing an important
issue.
2. Approximately 31% of the respon-
dents believe that transfer pricing
will be absolutely critical over the
next two years.
3. More than 60% of the respondents
have undergone transfer pricing
audits in the last three years and
40% resulted in tax adjustments.
4. More than 80% of the respondents
plan to devote more efforts for
transfer pricing issues in 2006.
5. More than half of the respondents set
aside a provision for transfer pricing
risks in their financial statements.
6. More than 80% of the respondents
believe that their transfer pricing
policies have a high probability
(more than 60%) of being challenged
by tax authorities within two years.
Similar facts can be found in the 1995
and 2000 survey.14 This is also consistent
with the 2003 survey that shows that
most Australian outbound companies 15
(76%) believed that transfer pricing is
one of the most important tax issues that
they may face over the period of the next
13
The latest survey was conducted in May and
June 2005 involving 108 financial institutions
in a wide range of countries including
Australia, Canada, Continental Europe, Hong
Kong, Japan, Singapore, South Africa, United
Kingdom and the USA. The reports are
available for download at
www.ey.com/transferpricingsurvey.
14
Marika Toumi, 'Anti-Avoidance and Harmful
Tax Competition: From Unilateral to
Multilateral Strategies?' in Andrew Latymer
and John Hasseldine (eds), The International
Taxation System (2002) 83.
15
An outbound company refers to an
Australian-controlled company that operates
overseas.
Transfer Pricing Regulations in Indonesia:
Some Thoughts for Reform
two years. The percentage figure rises
significantly compared to the 2001 survey
results which reveals that transfer pricing
is considered important by only 36% of
the respondents. The 2003 survey also
indicates that the risk of a transfer pricing
adjustment audit, the potential penalties,
and possible double taxation, needed to
be managed in the overall company’s
risk management strategies.16
The overall transfer pricing goal of an
MNE is beyond tax minimisation per se.
Abdallah reports that at least a transfer
pricing policy serves a range of objectives,
namely reducing the worldwide income
tax burden, reducing tariffs, minimisation
of foreign exchange risks, and avoiding
potential conflicts with host govern-
ments. 17 As a consequence, transfer
pricing decisions are subject to various
internal and external factors that may
have competing objectives. Choi and
Mueller identified four factors that may
be responsible for the difficulties asso-
ciated with a transfer pricing decision: 18
1. It occurs in a large scale environ-
ment at an international level.
2. It is affected by various factors.
3. It varies from companies, indus-
tries, and countries.
4. It affects social, economic, and
political relationship aspects.
In relation to Indonesia, the significance
of transfer pricing is apparent. In the
2006 fiscal year, the Directorate General
of Taxes (DGT) – the Indonesian taxation
authority – is responsible for more than
75% of the total Indonesian Government
revenue. It represents a figure of
Rp402.1 trillion (13.4% of the GDP).
This is a continuing increase from 11.3%
16
David Lewis and Diane Lane, 'Transfer
Pricing: Recent Practices, Perceptions, and
Trends' (2004) 7(5) The Tax Specialist 249.
17
Elliott and Emmanuel, above n 9, 162.
18
Ibid 161.
17
JAP Vol.3, No.1, Oktober 2008
in 2003, 11.6% in 2004, and 12.6% for
the last year’s figure.19
In spite of this, the DGT does not seem
to have adequate provisions to tackle
international transfer pricing abuse. Even
though the principles of related-party
transactions regulations are set out in the
income tax legislation (currently being
amended), they are broad and simple in
nature and are not accompanied by
detailed and up-to-date guidelines for
taxpayers and its field auditors. This fact
seems peculiar as companies are taxed
progressively with the highest marginal
rate of 30%, one of the higher rates in
Asia (it has been proposed that it will be
changed into a flat rate of 30%).
However, the effective rate in reality is
higher. The World Bank states that
Indonesia has an effective tax rate of
38.8% of profits and ranks 19th out of 25
countries.20
As noted earlier, tax minimisation is one
aspect of MNEs overall profit maximisation
efforts. As a result, an inadequate anti-
avoidance provision could be exploited.
In relation to this, the Indonesian Finance
Minister in November 2005 claimed that
there were approximately 750 loss-making
foreign companies that had evaded taxes,
possibly through the use of transfer
pricing arrangements. 21 Furthermore,
Dradjad H Wibowo – a member of the
Special Committee on Taxation Legislation
19
Nota Keuangan dan Rancangan Anggaran
Pendapatan dan Belanja Negara Tahun
Anggaran 2006 (2005)
<http://www.depkeu.go.id/Script/DirectLink.a
sp?url=http://www.djapk.depkeu.go.id/APBN/
NK%20RAPBN%202006.pdf> at 14 March
2006.
20
The Economist Intelligence Unit Ltd.,
Indonesia Risk: Tax Policy Risk (2006) Dow
Jones Reuters Business Interactive LLC
<http://global.factiva.com.dbgw.lis.curtin.edu.
au/ha/default.aspx> at 27 March 2006.
21
Ibid.
18
Amendments of the House of
Representatives – stated that a number of
foreign-owned companies from at least
five countries – including South Korea,
the USA, Japan, Australia, and some
European countries – have been involved
in transfer pricing abuse. He added that
the problem lied in the fact that there
were no comprehensive technical guide-
lines regarding the accounting and
auditing procedures on transfer pricing
arrangements.22
The transfer pricing regulations in
Indonesia were first introduced in the
1983 income tax legislation as part of
the general anti-avoidance provisions.
Last amended in 2000 and beginning its
implementation in 1 January 2001, the
current income tax legislation sets out
the transfer pricing provisions in Article
18(3) of the Law Number 17 of 2000 on
Income Taxation. 23 In essence, this
article provides that the Director General
of Taxes is authorised to reallocate
income or expenses to assure that the
transactions between related parties
resemble those of between independent
parties. The methods for reallocating
income and expenses include the use of
comparable data, profit allocation based
on function or participation of related
taxpayer, and other methods.
The operation of Article 18(3) of the Law
Number 17 of 2000 on Income Taxation
is explained further by a brief circular
letter number SE-04/PJ.7/1993 which
seems to refer to the 1979 OECD transfer
pricing guidelines. 24 In addition,
22
'PMA Nakal Harus Dikenai Sanksi Pidana
Penghindaran Pajak Melalui Pola Pengalihan
Keuntungan', Kompas (Jakarta), 28 November
2005.
23
Law Number 17 of 2000
24
Gunadi, 'Mampukah ASW Atasi Transfer
Pricing?' Bisnis Indonesia (Jakarta), 30 January
2006.

commencing from 1 January 2002, tax-
payers have been required to attach a
statement related to their related party
transactions in their tax returns. The
information to be disclosed includes the
type and value of the transactions, the
transfer price, and the methodology that
has been used to determine the transfer
price. 25 There is also a provision in
Article 18(3a) regarding the Advance
Pricing Agreements (APA). This article
authorises the Director General of Taxes
to conclude an APA unilaterally –
between a taxpayer and the DGT – or
multilaterally, where the APA is
concluded with a competent authority of
a treaty country concerning the taxpayers
of that country.26
However, the only technical guideline
for transfer pricing provisions is the
aforementioned circular letter, which is
unfortunately old and predates the current
legislation. As a result, there are many
‘grey areas’ that maybe subject to
multiple interpretations. For example,
taxpayers are likely to face considerable
difficulties in fulfilling the disclosure
requirements, especially with regard to
the transfer pricing methodologies applied
in each of the related-party transaction.27
Moreover, there are no detailed proce-
dures to be used to settle a transfer
pricing conflict between taxpayers and
the DGT.28
25
Ernst and Young, Transfer Pricing Global
Reference Guide (2005) Ernst and Young
<www.ey.com/transferpricingreferenceguide>
at 27 March 2006.
26
Above n. 23.
27
PricewaterhouseCoopers, Indonesian Tax
Flash (2003) PricewaterhouseCoopers
<www.pwc.com/id> at 27 March 2006.
28
Darussalam and Danny Septriadi, 'Upaya
Menangkal Praktik Penghindaran Pajak',
Bisnis Indonesia (Jakarta), 12 December 2005.
Transfer Pricing Regulations in Indonesia:
Some Thoughts for Reform
B. The OECD Transfer Pricing
Guidelines
In the 1970s, the OECD published three
reports regarding transfer pricing. 29 The
first document – ‘Transfer Pricing and
Multinational Enterprises’ – was published
in 1979. This report outlined the arm’s
length principle and the economic
analysis underlying that concept. After
being approved by the Committee on
Fiscal Affairs, it was published in 1995
as ‘Transfer Pricing Guidelines for
Multinational Enterprises and Tax Admi-
nistrations’ (hereinafter the Guidelines),
which is based on the arm’s length
principle. Other reports discussed spe-
cific issues within transfer pricing. These
reports – ‘Transfer Pricing and Multinational
Enterprises - Three Taxation Issues’ and
‘Thin Capitalization’ – were published
respectively in 1984 and 1987.
The Guidelines are ‘intended to help tax
administrations … and MNEs by indicating
ways to find satisfactory solutions to
transfer pricing cases, thereby minimizing
conflict among tax administrations and
between tax administrations and MNEs
and avoiding costly litigation’. 30
According to Neighbour, it can be said
that the purpose of the Guidelines is to
‘help corporations to avoid double taxation’
and to ‘help tax administrations to receive
a fair share of the tax base of
multinational enterprises’. 31 As a result,
the Guidelines can be regarded as an
international standard in transfer pricing
that the OECD members have agreed to
be used.
29
OECD, Transfer Pricing Guidelines for
Multinational Enterprises and Tax
Administration (2001).
30
Ibid.
31
Neighbour, above n 11.
19
JAP Vol.3, No.1, Oktober 2008

II THE PRINCIPLES OF TRANSFER overpriced, the profit of the buyer in the

PRICING
A. Transfer Pricing Defined
Elliott and Emmanuel define transfer
pricing as ‘the pricing policies and
practices that are established when
physical goods, intangible property, and
services are charged between business
units within a group’. 32 As has been
noted, a transfer price itself is actually a
neutral concept. The Guidelines itself
defines transfer prices as ‘the prices at
which an enterprises transfers physical
goods and intangible property or
provides services to associated enter-
prises’. 33 Therefore, a transfer price is
agreed between two business units and
the structures are governed by commercial
considerations34. A transfer price has to
be able to motivate and guide managers
in choosing their inputs and outputs. 35
As a result, it plays many important roles
ranging from securing competitive
advantage for a new subsidiary to
managing foreign currency fluctuations.36
A transfer pricing policy does not
necessarily mean a tax fraud or a tax
avoidance scheme, even though it can
be used for such purposes. However,
this term often has negative meaning
because it induces the idea of a
systematic price manipulation to reduce
profits artificially, create losses, and
avoid taxes or duties.37As explained, the
overall goal of such scheme is to achieve
the maximisation of after-tax profits by
minimising worldwide tax payable. If
goods, services or intangibles are
32
Elliott and Emmanuel, above n 9, 158.
33
OECD, above n. 29.
34
Pagan and Wilkie, above n. 4, 15.
35
Ahmed Riahi-Belkaoui, Significant Current
Issues in International Taxation (1998).
36
Elliott and Emmanuel, above n 9, 172.
37
Riahi-Belkaoui, above n 35, 96.
group is reduced but the profit of the
seller is increased (at the expense of the
buyer). Nonetheless, the overall group
profit is not affected because what
happens is only a profit shift between
members within that group.
B. Transfer Pricing Channels
Figure 1 Payment channels within an MNE.
Source: Plasschaert (1979)
Plasschaert modifies the model presented
by Robbins and Stobaugh to describe the
various channels in which money can
flow within an MNE (figure 1).38 Channel 1
represents the payment of goods or
services which is often regarded as the
main financial flow as a result of a real
commodity transfer. Channels 2 and 3
describe the payments related with the
investment from the parent company. In
essence, they consist of the initial invest-
ments in the form of trade credits (channel
2) and equity contributions (channel 3)
and then the subsequent dividend
payments from the subsidiary (channel 4).
Nevertheless – as dividends are paid from
after-tax profits and therefore are not
deductible – most companies tend to
finance their subsidiaries using debts
38
Sylvain R.F. Plasschaert, Transfer Pricing and
Multinational Corporations: an Overview of
Concepts, Mechanisms, and Regulations
(1979).

20

which are more flexible. 39 These are
depicted in channel 5 (loans) and 6
(interests on loans). Lastly, channels 7 to 9
portray costs incurred in the parent
company that are charged to the
subsidiaries. They represent fees for
intangible properties (channel 7), fees for
specific and divisible services (channel 8),
and overhead costs (channel 9). They are
often unique in nature and hence, it can
be difficult to find comparable transactions.
As a result, it is usually hard for tax
authorities to prevent transfer-pricing abuses
for such payments. A more in-depth
discussion on these specific channels
(channel 7 to 9) will be covered in the
next sections.
This model also reveals the possibility
for a parent company to repatriate profits
through the various channels. For example,
rather than paying profits in the form of
dividends, a subsidiary may prefer to use
excessive payments for the transfer of
goods and services transferred by the
parent company, provided that the tax
treatment is more favourable in the parent
company’s host country. This abuse is
continuously being challenged using
transfer pricing provisions, which are
mainly based on the arm’s length
principle.40
C. Intangible Property
The payment for intangible property
(channel 7) usually manifests in the form
of royalty for the use of information,
expertise, and know-how. 41 It includes
39
Even though using loans to finance a
subsidiary seems advantageous, it may attract
the operation of thin capitalisation rules if it is
used excessively.
40
There are some countries — Brazil for
instance — that do not rely on the arm’s
length principle.
41
Pagan and Wilkie, above n 4, 115.
Transfer Pricing Regulations in Indonesia:
Some Thoughts for Reform
rights to use industrial assets such as
patents, trademarks, trade names, designs
or models. 42 The main concern is its
deductibility. In addition, it also has to
be determined that the payments are for
the use of the property and that they
correspond to its real value.
The problem in applying the arm’s
length standard is the availability of
comparables. Furthermore, this is
exacerbated by the related developments
in e-commerce where an increasing
amount of value is both specialised and
intangible. In this situation, an industry
standard can be used. Adjustments can
be made in respect of:
1. The prevailing industry rates.
2. The license terms.
3. The characteristics of the property.
4. The availability of supplementary
assistance, rights, and information.
5. Any profit potential for the licensee.
6. The benefits for the licensor.43
From the transferor’s view, it has to be
examined at what price a comparable
independent party is willing to transfer a
similar property in a similar situation.
From the transferee’s point of view, an
independent entity may or may not be
willing to pay for the transfer. It depends
on whether the intangibles would have
the sufficient value or usefulness for the
transferee’s business.44
D. Intra-Group Services
As noted, the main reason behind the
choice to be an MNE is to achieve
synergistic effects. Therefore, it is common
that some functions within an MNE are
centralised to take advantage the
economies of scale and then the parent
42
OECD, above n 29.
43
Pagan and Wilkie, above n 4, 115.
44
OECD, above n 29.
21
JAP Vol.3, No.1, Oktober 2008
company charges the subsidiaries for
services provided centrally by the parent
company. There are two main issues that
have to be taken into account. Firstly,
determining whether such services are
actually provided and secondly, deter-
mining the arm’s length charges.45
In the first instance, it has to be deter-
mined whether such services have the
value to enhance the recipient company’s
position. Sometimes, this can be easily
analysed, such as in a situation where
intra-group services are provided to meet
a specific need of a group member
(channel 8). One example would be in
cases where the parent company provides
maintenance and support for the manu-
facturing equipments of a group member.
In other cases (channel 9), it is more
difficult. This is true in the case of what
the Guidelines refer as ‘shareholder
activity’. This type of activity includes
the costs relating to the juridical structure
of the parent company (e.g. parent
company’s shareholder meeting, super-
visory board costs, and share issuance in
the parent company), costs relating to
the reporting requirements of the parent
company, and costs of fund raising. They
are performed for the whole members
even though some members may not
need them. In this situation, a charge to
those recipient companies certainly cannot
be justified. Moreover, a charge also
cannot be justified if the recipient company
only receives incidental benefits. One
example would be in event like group
reorganisation, acquisition of a new
member, or a termination of a division.
However, any centralised-administrative
costs and some ‘on-call’ services would
be justifiable. 46 Once it has been
45
Ibid.
46
An on-call service is eligible if a parent
company or a group service centre is on hand
to provide certain services – such as
technical, legal, financial or managerial
22
recognised that a service has been
rendered, it is necessary to examine
whether independent entities in similar
situations would agree to such arrange-
ments so that they can be constituted as
arm’s length. 47 In this case, there are
some aspects that need to be considered:
1. The basis for allocating expenses
has to be reviewed in a regular basis.
2. The expenses have to in proportion
with the benefits received by the
chargee.
3. The review has to be able to be made
available to the tax authorities.48
E. The Arm’s Length Principle49
One of the problems in setting a transfer
price is that there are various bases for
determining an applicable transfer price.
A transfer pricing policy may rely on the
internal accounting system (internal costs)
or on market prices (external prices). The
question arises as to which approach is
preferred and how to reconcile the internal
requirements with those of tax authorities.
In addition, there are also problems when
the business units within an MNE are
located in different tax jurisdictions. This
is because the tax base of one country may
be increased at the expense of another.
In this situation, an abusive transfer pricing
occurs as income and expenses are
improperly allocated with the purpose of
reducing taxable income. It is this shift
that is being challenged by many tax
authorities using various transfer pricing
provisions in their income tax legislation.
support – at any time because they would
have the staff or equipments always available
for that purpose.
47
OECD, above n 29.
48
Pagan and Wilkie, above n 4, 113.
49
This section draws heavily from the OECD
1995 Transfer Pricing Guidelines.
 Transfer Pricing Regulations in Indonesia:
Some Thoughts for Reform

The basis of these provisions is substituting being examined (e.g. price or margin)
the transfer price with a market value significantly. In addition, the effects of
between a willing seller and a willing those differences can be eliminated using
buyer that are unrelated to each other.50 accurate adjustments.54
The substituting price is commonly known
In establishing the degree of comparability
as the arm’s length price, which is a
and making adjustments, it is important
result of an arm’s length transaction: a
to compare the attributes of the transact-
transaction between parties each of
tions. These include:
whom acts in their best interest. 51 The
authoritative statement regarding the 1. Characteristics of property or services
arm’s length principle is set out in
Differences of characteristics of
Paragraph 1 of Article 9 of the OECD
property or services are often
Model Tax Convention.52 This paragraph
responsible for differences in their
states that if conditions between related
market value. Similarity is important
enterprises are different from those between
when comparing prices but can be
independent enterprises, profits which
less important when comparing
have accrued by reason of those conditions
profit margins. Some characteristics
may be included in the profits of that
to be considered include: the physical
enterprise and taxed accordingly. 53
features, quality and reliability, the
Members of an MNE are treated as if they
availability and volume of supply
were separate entities rather that a part of a
(in case of tangible property), the
single unified business unit. As a result, it
nature and extent of the service (in
enables taxpayers or tax administrations
case of services), the form of
analyse whether the results of those
transaction (e.g. licensing or sale),
controlled transaction are comparable to
the type of property (e.g. patent or
those of between independent enterprises.
trade mark), the duration and
1 Comparability Analysis degree of protection, and the
anticipated benefits (in case of
The principle of the arm’s length principle
intangible property).
is the use of comparisons using information
from transactions between independent 2. Functional analysis
entities. For this to work, the characteristics
In essence, this analysis tries to
of the transactions should be sufficiently
identify and compare the activities
similar so that both the controlled and
and responsibilities undertaken.
uncontrolled transactions could be
The functions that might need to be
considered comparable. This means that
considered include design, manu-
the differences do not affect the condition
facturing, assembly, or other
functions. If one party provides a
range of functions, it is the economic
50
Unlike other countries, the Brazilian transfer significance of these functions that
pricing system is not based on a specific arm’s matters.
length standard. Taxpayers are free to choose
any methods specified in the regulations so Another important aspect is the risk
long as they have the required information. assumed by the parties. If the
51
OECD, above n. 32. differences in risks are so significant
52
The explicit statement on the commitment to that appropriate adjustments cannot
the arm’s length principle is actually set out in
Article 7 of the OECD Model Tax Convention.
53
OECD, Model Tax Convention on Income
54
and Capital (2005). OECD, above n. 29.

23
JAP Vol.3, No.1, Oktober 2008
be made, then that transaction will
not be considered comparable. The
types of risks to be taken into
account include market risks – such
as price fluctuations and failure in
research and development – and
financial risks, such as exchange rate
fluctuation, interest rate variability,
credit risks, and so forth.
3. Contractual terms
The contractual terms define the
behaviour of the parties including
the division of responsibilities,
risks, and benefits between parties.
In addition to the written contracts,
these terms usually can also be
found in the communications or
correspondence between the parties.
If there is no written contract, the
relationship can be deduced using
their conducts and the economic
principles that generally govern
such relationship.
4. Economic circumstances
These factors include geographic
locations, the size of the markets,
competition, the availability of a
substituting product, consumer
purchasing power, costs of
productions, and so forth.
5. Business strategies
This includes innovation and new
product development, diversification,
risk aversion, assessment of political
changes, and other aspects including
a market penetration scheme. As
an example, an entity claiming a
market penetration strategy may
have low income because it charges
a lower price and high penetration
expenses (e.g. advertising).
It is possible that the application of the
arm’s length principle results in a range
of figures. This is because it approximates
the conditions between unrelated entities
24
or when several methods are applied to
evaluate a certain controlled transaction.
If the relevant conditions fall within this
range, there will be no adjustment
required. On the other hand, if the
relevant conditions indeed fall outside
the range asserted by the tax administration,
the taxpayers have to demonstrate that
their conditions satisfy the arm’s length
principle. However, a substantial deviation
among points indicates that the
comparables being used in the analysis
are probably not reliable.
2 The Acceptable Methods
As discussed, there are several methods
preferred by the OECD. These methods
are grouped into two categories: the
traditional transactional methods and the
transactional profit methods. The
Guidelines express a preference over the
first group and state that the profit-based
methods should only be applied if there
are practical difficulties that prevent the
use of the transaction-based methods.
(a) Traditional transactional methods
The arm’s length condition can be
established by substituting the price in
the controlled transaction with the price
of the comparable uncontrolled transaction.
However – as valid comparables are not
always available – sometimes it is necessary
to use the less direct approach – such as
gross margin comparison – to reflect the
arm’s length conditions.
(1) Comparable uncontrolled price
method (CUP)
In essence, the CUP compares the prices
in a controlled transaction with the prices
charged in an uncontrolled situation
with similar circumstances. This method
produces the most reliable result but
requires a high degree of comparability
in term of products and functions.
Therefore, it is suitable in situations where
there are the same or at least very similar
products are sold to both related and
 Transfer Pricing Regulations in Indonesia:
Some Thoughts for Reform

unrelated parties. They have to be similar party for $1.50. If another independent
that any differences have no effect on its distributor charges 10% for the sale and
price or if such differences exist, they purchase of similar products, the arm’s
can be addressed using a number of length transfer price would be $1.35
adjustments. ($1.50 less 10% commission).
Nevertheless, it is difficult to find (3) Cost plus method (CPM)
comparable uncontrolled transactions
This method works based on the gross
because differences may cause significant
profits by comparing the full costs plus
effects on its price. As a consequence,
mark-up of a controlled transaction with
some adjustments are usually required to
the comparable uncontrolled transactions.
reflect such differences in term of product
The arm’s length price equals the cost of
quality, contractual terms, embedded
production plus a gross profit percentage
intangibles, and foreign currency
from comparable uncontrolled transactions.
fluctuations.
The result is then adjusted to reflect any
For example, an Australian company differences.
sells fruit juice to its Indonesian subsidiary
For example, the cost of manufacturing
for $1 for each package. That company
the fruit juice in previous example is
also sells the same product to an
$.95 per package. If another company
unrelated Malaysian company for $1.50
produces similar product earns a gross
per package. Using the CUP, it is likely
profit mark up of 20%, then the arm’s
that the transfer price for the Indonesian
length price is $1.14 (being $.95 plus
contract will be changed into $1.50 per
20% mark up).
package.
(b) Transactional profit methods
(2) Resale price method (RPM)
The transactional profit methods consist of
The RPM can be applied to the transfer
the Profit Split Method and Transactional
of both tangible of intangible property,
Net Margin Method. Most countries
especially when intangible property is
usually prefer the Profit Split Method
sublicensed to a third party. The analysis
because it considers both parties and
is based on the gross margin obtained in
hence, generates a less extreme result.
comparable uncontrolled transactions.
The transfer price is the uncontrolled (1) Profit split method (PSM)
resale price less an appropriate mark up
This method is applied if the transactions
to cover costs and profits. Therefore, the
are so closely interrelated that they cannot
arm’s length price would be an
be analysed on transaction-by-transaction
applicable resale price less adjusted
basis. There are two analysis under this
mark up percentage obtained comparable
method, namely contribution analysis and
unrelated transactions. The result is
residual analysis. In the contribution
adjusted to reflect any existing differences.
analysis, the profit/loss in a controlled
This method is suitable in situations
transaction is split based on the proportion
where the reseller does not add a
of the contribution of each party. As it
substantial value to the products (simply
does not depend on the analysis of
a distributor).
comparables, it can be used in situations
For example, an Australian company where there is no comparables. The
sells fruit juice to its wholly-owned residual analysis works similarly with the
Indonesian subsidiary for $1 for each contribution analysis but it requires a
package which resales it to an unrelated highly profitable intangible.

25
JAP Vol.3, No.1, Oktober 2008
(2) Transactional net margin method
(TNMM)
This method examines the net profit
margins in a controlled transaction relative
to an appropriate base (sales, costs, or
assets). The result is then compared with
the net profit margins earned by a taxpayer
in an uncontrolled situation or with the
net profit margin earned by independent
entities. As net profit margin is less
affected by transactional differences, it is
more tolerant to functional differences
than gross profit margin.
3 The Appropriateness of the Arm’s
Length Principle
(1) Theoretical and practical difficulties
The arm’s length principle contains both
theoretical and practical problems.
Firstly, it fails to acknowledge that an
MNE’s business tends to be:
1. Highly integrated;
2. Conducted predominantly by
control rather than by contract;
3. Many risks and costs are
internalised.55
The first feature is critical to achieve
synergy through economies of scale.
However, the arm’s length principle does
not recognise this. Instead, it assumes that
entities within an MNE are capable of
acting as if they were unrelated. It fails to
acknowledge that an entity chooses to
operate as an MNE because this
structure enables it to achieve more as a
whole compared to the aggregate of
what all member-entities earn if they
operate independently. 56 In Jerome
55
Jinyan Li, 'Global Profit Split: An Evolutionary
Approach to International Income Allocation'
(2002) 50(3) Canadian Tax Journal 823.
56
Lindsay C. Célestin, The Formulary Approach
to the Taxation of Transnational Corporations:
a Realistic Alternative? (Ph.D. Thesis,
University of Sydney, 2000).
26
Hellerstein’s words, the OECD’s arm’s
length principle turns reality into fancy
and then pretends that it is the real word.
It pretends that the integrated parts of an
MNE are separate entities transacting
independently.57 In short, the arm’s length
principle ignores the synergistic effects
which are fundamental within an MNE.
In the second feature, it is recognised
that the relationship between members
of an MNE is governed by control rather
than by contract. Even if a contract exists,
it cannot be effectively enforced. It can
even be changed according to the will of
the parent company. As a result, accepting
such contract is questionable.
Lastly, internalisation of costs and risks
makes an MNE able to operate efficiently
and achieve synergy. A comparable arm’s
length transaction will be very difficult to
be found as the MNE drives away its
competitors.58 As Lester notes, multinational
companies are increasingly involved in
transactions where there is simply no
comparable uncontrolled transaction,
especially in highly specialised services
such as multinational banking industry.
The problem is exacerbated by the fact
that there is a lack of rules in setting an
arm’s length price where there is an
absence of comparables or in situations
when related parties are involved in
transactions that independent entities
would not undertake.59
Furthermore, the traditional arm’s length
methods fail to account for profits that
arise as a result of integration within an
57
Kerrie Sadiq, The Fundamental Failing of the
Traditional Transfer Pricing Regime - Applying
the Arm’s Length Standard to Multinational
Banks Based on a Comparability Analysis
(2003)
<http://pandora.nla.gov.au/pan/23524/20030
305/Kerrie%20Sadiq.doc> at 28 April 2006.
58
Li, above n 55, 834.
59
Sadiq, above n 57.
 Transfer Pricing Regulations in Indonesia:
Some Thoughts for Reform

MNE. As mentioned, an MNE operates situation. This is because the nature of

in an integrative way so that it can current trade that consists of more
achieve more as a whole compared to specialised information which is unique
the aggregate of what all member-entities and indivisible in nature. As a result, the
earn if they operate independently. If this CUP – which is based on transaction-by-
situation is approached using comparable transaction basis – would be unsuitable.65
unrelated transactions, the residual profit
In addition, it is often difficult to find the
as a result of integration and economies
exact comparables in internal uncontrolled
of scale cannot be recognised as such
comparables, which is undertaken between
profit does not occur in uncontrolled
members within an MNE or between an
transactions. 60 In addition, transfer-pricing
MNE and an independent party. For
arrangements increasingly become more
external comparables – transactions
complex as they involve services,
between two unconnected parties – two
intangibles, and unique properties. 61
problems arise. Firstly, the MNE often
Further, Li adds that the arm’s length
does not have access to detailed
principle violates internation equity
information on such transactions and
principle 62 – as it tends to favour the
secondly, there are only few markets
parent company’s country of resident –
where external comparisons exist. This is
and inter-taxpayer equity 63 as it may
because an MNE operates in a way that
cause over-taxation due to inconsistent
can maximise the integration and risk
application or under-taxation if there is a
protection effects; if an MNE does not
transfer-price abuse. It also fails to satisfy
have an internal comparable, it is
the neutrality principle as a result of its
unlikely that its competitor does.66
subjectivity and uncertainty.64
(3) Resale price method (RPM) and
(2) Comparable uncontrolled price
cost plus method (CPM)
method (CUP)
The RPM or CPM methods can be used
Viewed as the most direct way to arrive
in situations where the application of the
at the arm’s length price, this method is
CUP is either unrealistic or impossible.
not without its flaws. Developed based
As discussed, these methods basically try
on the manufacturing of raw materials
to arrive at the arm’s length price by
into finished goods which prevailed from
calculating gross margins from comparable
the mercantile era in the eighteenth century
transactions and then apply these margins
until the mid of twentieth century, this
to the controlled transactions. The RPM
method might be unsuitable for today’s
deducts the margins from the selling
price whereas the CPM adds the margins
to the costs of sales.
60
Li, above n 55, 834. Célestin identifies several limitations of
61
Ibid, 835.
62 both methods.67 Firstly – as they are based
Inter-nation equity refers to a fair allocation of
tax revenue between countries. on comparable uncontrolled transactions
63
Inter-taxpayer equity deals with the – they are subject to the limited
distribution of tax burden among taxpayers. It availability of detailed information of the
is based on ability-to-pay considerations comparisons, the same as the CUP
which is analysed in terms of horizontal
equity (taxpayers with similar situations
should be taxed approximately the same) and
65
vertical equity (taxpayers with higher incomes Célestin, above n 56, 63.
66
should pay higher taxes). Pagan and Wilkie, above n 4, 105.
64 67
Li, above n 55, 838-42. Célestin, above n 56, 64-6.

27
JAP Vol.3, No.1, Oktober 2008
method. Secondly, they tend to be one-
sided solutions because they allocate
risks (profits or losses) on the hand of the
purchaser (the RPM) or the supplier (the
CPM). Finally, there are other difficulties:
1. It is difficult to convince that the
uncontrolled transactions being
used to calculate the mark-ups are
adequately comparable.
2. The cost base calculation is often
surrounded with uncertainties.
3. The problems in making the
appropriate adjustments.
4. In relation to the arm’s length
range, specific issues will still need
to be solved.68
In relation to the CPM, additional
problems may also arise regarding the
nature of the relationship between the
parent company and subsidiary. This
kind of relationship can be seen as a
continuum. On one end of the continuum,
the subsidiary may only be a contract
manufacturer which is subject to a strict
technical and managerial assistance
from the parent company. All products
of the subsidiary are absorbed by the
parent company. On the other hand, the
subsidiary may have a degree of
independence in relation to the technical
control, management, and choice of sale
outlets for the products. In this situation,
the gross margins applicable for the
more independent subsidiary should
clearly be higher to cover the commercial
risks. 69 Such risk differences have to be
taken into account in calculating the
appropriate margins.
68
Ibid.
69
Pagan and Wilkie, above n 4, 107.
28
III INDONESIA: SOME THOUGHTS
FOR REFORM
A. Current Transfer Pricing Regulation
As discussed, the Indonesian transfer
pricing provisions were first introduced
in 1983. Article 18(3) Law Number 17 of
2000 authorises the Director General of
Taxes to reallocate income or deductions
between related parties and to characterise
debt as equity. This article is explained
through SE-04/PJ.7/1993 which seems to
refer to the 1979 version of the OECD
transfer pricing guidelines. The definition
of related party is explained in Article
18(4) to include:
1. A direct or indirect ownership of at
least 25% of equity in other
taxpayers;
2. A taxpayer who controls other
taxpayers or two or more taxpayers
are controlled by the same person;
3. A family relationship through blood
(for example parents and children)
or marriage (for example parents in
law, and stepson or stepdaughter).
In SE-04/PJ.7/1993, the Director General
of Taxes states that non-arm’s length
transactions may occur in the form of:
1. Selling price;
2. Buying price;
3. Allocation of administration expenses
and overhead cost;
4. Burden of interest on extending
loan by shareholder loan;
5. Payment of commission, license,
franchise, rental, royalty, repayment
on management services, repayment
on technical services and another
repayment services;
6. Buying of enterprise property by
shareholder loan or party who has
lower special relationship than
price market;
7. Selling to overseas party through third
party who has lack/not business
substantial (example dummy company,

letter-box company or re-invoicing
centre).
This circular letter confirms that the
transfer pricing provisions can apply to both
domestic70 and cross-border transactions
between related parties, especially if the
other party is located in a tax-haven
country.71 It then provides some examples
in how to work out the arm’s length price
for each of the above category which
basically refer to the CUP, CPM, or RPM. It
also recognises the use of ‘comparable
profits’ or ‘return on investment’ from
comparable industries.
In relation to documentation, there is no
formal documentation requirement
although taxpayers are required to disclose
their related-party transactions. The
information to be disclosed includes the
type and value of the transactions, the
transfer price, and the methodology that
has been used to determine the transfer
price.72 In addition, there is no specialised
audit that especially deals with transfer
pricing issues. There are also no guidelines
that characterise which taxpayers that
may subject to a transfer-pricing audit.
From a practical point of view, however,
it is believed that taxpayers with the
following characteristics may be subject
to a transfer-pricing related audit:
1. A large number of related-party
transactions;
70
The transfer pricing provisions apply to
domestic transactions between related parties
because grouping of tax losses is not
recognized in Indonesia.
71
Tax haven is defined in this circular letter as a
country which does not collect tax or collects
a lower tax than Indonesia. According to the
OECD, a tax haven has characteristics that
include: no or only nominal taxes, lack of
effective exchange of information, and lack of
transparency in the operation of the
legislative, legal or administrative provisions.
72
Ernst and Young, above n 25.
Transfer Pricing Regulations in Indonesia:
Some Thoughts for Reform
2. Losses for a period longer than two
consecutive years;
3. A significant gross revenue without
a considerable net profit increase;
4. Irregular profits and losses history;
5. Associated parties in tax havens;
6. A lower profit compared to the
industry average or other similar
enterprises.73
B. Some Thoughts for Reform
Pagan and Wilkie argue that there are six
aspects that need to be considered in
searching for appropriate transfer pricing
provisions:
1. The rules apply to which taxpayers.
2. The type of transactions that are
affected.
3. The basis to analyse the fair price.
4. Whether the transactions and/or
the price be adjusted.
5. Whether the focus is on flexibility
or certainty.
6. The compliance requirements.74
Each aspect will be discussed in the
following sections.
1 The Taxpayers
This first aspect addresses the type of
taxpayers to which the transfer pricing
regulations apply. This usually can be
found in the definition of related-party
transactions. Generally, there are several
patterns that emerge:
1. The rules apply to taxpayers that
conduct business activities, for
instance corporations, partnerships,
or individual owning such structures.
2. Both foreign and domestic entities
are included, although sometimes
the rules may be limited to apply
only to international transactions.
73
Ibid.
74
Pagan and Wilkie, above n 4, 43.
29
JAP Vol.3, No.1, Oktober 2008
3. There are rules that define whether
one or more entities are considered
to be related parties so that the
transfer pricing rules can be
applied.75
In relation to Indonesia, the related-party
transaction rule applies to taxpayers defined
in Article 18(4) of the Law Number 17 of
2000 to include:
1. A direct or indirect ownership of at
least 25% of equity in other
taxpayers;
2. A taxpayer who controls other
taxpayers or two or more taxpayers
are controlled by the same person;
3. A family relationship through blood
(for example parents and children)
or marriage (for example parents in
law, and stepson or stepdaughter).76
Whilst the first condition clearly requires
an equity ownership, the second condition
is to wider. The elucidation of the Article
18(4) explains that a dependency relation-
ship may be the result of an ownership
of share or equity (condition 1), family
relationship (condition 3) or a participation
in management or technology (condition 2).
By contrast, the Australian definition of
the associated party is wider. It can be
found in Division 13 Part III section
136AD of the Income Tax Assessment
Act 1936 (Cth) (ITAA 1936). 77 This
division was introduced in 27 May 1981
to replace the former s. 136 which was
repealed following the decision in FCT v
Commonwealth Aluminium Corporation
Ltd (1980) 11 ATR 42. 78 Division 13
does not self-executable even though it
does not require a tax-avoidance motive.
Additionally, it can be applied to any
75
Ibid, 46.
76
Above n 23.
77
Income Tax Assessment Act 1936 (Cth)
78
RL Deutsch et al, Australian Tax Handbook
2004 (2004).
30
transactions with various purposes in
addition to tax motives.79
The related-party concept is defined in s.
136AD ITAA 1936 to include ‘any
connection’ between any two or more of
the parties to the agreement. The phrase
‘any connection’ is much wider compared
to direct or indirect control contained in
the Indonesian definition because it allows
a facts and circumstances approach.80
It can be seen here that the Indonesian
definition of related party requires an
evidence of control, whether through an
equity ownership, family relation, or
managerial/technological presence. On
the other hand, it is possible to use a wider
approach that does not need such
evidence, like the Australian version. Even
though some may argue that it might be
somewhat harsh, it covers more taxpayers.
2 The Transactions
Here, there are two strategies. Firstly, the
general approach that covers as wide
transactions as possible and then it is at
the discretion of the tax authority to
bring the transfer pricing provisions into
play. Secondly, a specialist provision
can be constructed for a certain type of
industry, for instance the mining or
financial industry. 81 There are several
problems associated with the first approach.
The first difficulty is that an MNE may
continue its operation even if it is not
profitable. For example, a leading computer
software manufacturer may still operate
in a country with high rate of software
piracy to strengthen and preserve its
brand and customers’ loyalty. If its
customers from other country with low
piracy rate – which is the MNE’s target
market – conduct business in this high-
79
Ibid.
80
Pagan and Wilkie, above n 4, 48.
81
Pagan and Wilkie, above n 4, 49.

piracy country, the MNE can expect that
these customers may still use the MNE’s
products. Furthermore, the MNE can
also expect that these customers would
not switch to competitors’ products in
their business in other parts of the world
because they get the same level of
service anywhere. If the MNE’s head
office provides assistance – say by
providing loan with a lower interest rate
– to this type of non-profitable offices,
the tax authority may see it as an abuse.
As a result, the transactions may be
adjusted and the taxpayer suffers. This
example shows a tax authority’s incomplete
understanding of an MNE’s operation
and a failure to understand the benefits
of such operation in term of employment
and transfer of knowledge.82
The second problem arises where the
adjustment is only targeted to situations
where taxpayers’ profitability can be
increased. This can be achieved in two
ways: by drafting the legislation in such
a way that it will only be applied if it
results in an increased of profitability or
granting the tax authority discretion to
exercise the transfer provisions. It is
likely that a tax authority will only use
this power if it believes that profitability
– and hence, taxable income – can be
increased. In either situation, there is a
failure to recognise that in the long run,
two unrelated business entities doing
business together tend to average out
even though in the short run, one entity
may be less profitable than another.
Such entities may face problems if tax
authorities invoke transfer pricing
adjustments in times when profits are
lower. That taxpayer may argue that for
a certain period of time – say ten years –
there is no substantial profit shift, but the
result is often uncertain.83
82
Ibid.
83
Ibid, 52.
Transfer Pricing Regulations in Indonesia:
Some Thoughts for Reform
Regarding the specialised provisions for
a certain industry, the choice depends
on the nature of economic activities in
that country. For example, a country like
Norway that depends on the oil industry
may have specialised tax provisions for
the oil industry including specific transfer
pricing rules. Other countries that depend
on different type of industries like finance
may also have similar rules.
In essence, the Indonesian transfer pricing
provisions conform to the general approach
to cover more transactions. The rules in
Article 18 of the Law Number 17 of 2000
are basically the general anti-avoidance
provisions. In addition, there are also
specialised rules in relation to the taxation
in mining ‘Contracts of Work’ (CoW),
but the emphasis is on the applicable tax
rates. The rates are locked over the life of
investment and thus are protected against
changes in income and royalty taxes. For
example, the eighth-generation contract
– beginning in 2000 – includes a tax rate
of 30%.84
Article 18(3) grants the Director General
of Taxes discretion to make the necessary
adjustments to bring the transfer price to
an arm’s length price. Of course the
adjustments are likely to be made only if
it can be assured that the new price increases
taxable income. As a consequence, it is also
subject to the problems outlined previously.
In such situations, the Director General of
Taxes has to base his review on a premise
that the taxpayers – not the Director
General of Taxes – are the expert in their
business. Hence, Director General of Taxes
has to deal with the facts and circum-
stances as they exist and not as if they were
conducted differently. The transfer pricing
84
The Economist Intelligence Unit Ltd.,
Indonesia: Tax regulations (2006) Dow Jones
Reuters Business Interactive LLC
<http://global.factiva.com.dbgw.lis.curtin.edu.
au/ha/default.aspx> at 27 March 2006.
31
JAP Vol.3, No.1, Oktober 2008
provisions should only be used to substitute
the transfer price and not the taxpayers’
business judgements.85
3 The Fair Price Determination
As discussed, the arm’s length principle
endorsed by the OECD is the de facto
standard adopted by most countries.
However, there are differences in the
details. There are two patterns that emerge:
a practical businesslike approach and a
detailed provisions approach.86 The first
method chooses to approach the arm’s
length principle on a case-by-case basis
without the need to rely too much on
detailed provisions. The statutory restrictions
are kept at a minimum level but the tax
officials are usually well-trained and aware
of an abuse. In addition, it is usually
complimented with continuing discussions
between the tax authority and taxpayers to
arrive at a common understanding on the
acceptable transfer pricing policy. By contrast,
the detailed-provisions approach arms tax
officials with lengthy and detailed rules on
what constitutes an arm’s length transaction.87
The main advantage of the first approach
is that it is more flexible. It can be
effective if the tax officials have good
knowledge on the commercial practice
of transfer pricing policies. Otherwise,
they may be heavily exploited and as a
result, the nation’s potential revenue
could be harmed. On the other hand,
the detailed-provisions approach may be
inflexible but it can provide the tax
authority the necessary arsenal to tackle
a transfer pricing abuse. However, there
is a growing trend in countries with a
flexible approach to publish detailed
guidelines and circulars that do not have
the force of law. Australia for example
published a range taxation ruling in
85
Pagan and Wilkie, above n 4, 89.
86
Ibid, 55.
87
Pagan and Wilkie, above n 4, 55.
32
relation to its transfer pricing regulations
(Div. 13 ITAA 1936).88
In Indonesia, Article 18(3) of the Law
Number 17 of 2000 authorises the Director
General of Taxes to ‘…assure that the
transaction are those which would have
been made between independent parties’
(emphasis added). Furthermore, the
elucidation of this Article says that the
methods to be used include ‘…comparable
data, profit allocation based on function
or participation of related Taxpayer and
other methods’.
Whilst it is believed that the problem lies in
the details of the tax laws,89 the practical
approach is unclear. The fact that Indonesia
does not have detailed provisions on transfer
pricing – other than a short circular letter
SE-04/PJ.7/1993 – is possibly because it
prefers to use the business like approach.
The circular letter number SE-04/PJ.7/1993
is meant to be the implementing regulation,
but its day-to-day practicality still faces
difficulties, especially in relation to the
availability of comparables.90
By comparison, the Commissioner of
Taxation in Australia (the Commissioner)
provides the following guidance in
choosing the appropriate arm’s length
methodology.91
88
The Commissioner of Taxation has published
a number of public rulings including TD
92/103 (inter-company loan), TR 94/14 (basic
concepts of Div. 13), TR 97/20 (transfer
pricing methodologies) and other transfer-
pricing related rulings.
89
Urip Hudiono, 'Tax laws still complicated,
have grey areas: Analysts', The Jakarta Post
(Jakarta), 16 November 2005.
90
Gunadi, above n 24.
91
Australian Taxation Office, TR 98/11: Income
tax: documentation and practical issues
associated with setting and reviewing transfer
pricing in international dealings (1998) The
Australian Taxation Office
<http://law.ato.gov.au/pdf/tr98-11.pdf> at 30
April 2006.

Figure 2 Which methods?
Source: TR 98/11
This chart provides taxpayers ideas in
choosing the appropriate methodology
that is suitable for their situations. It can
be contrasted to the Indonesia’s situation
where taxpayers are ‘left in the dark’.
A weak provision in tax law against tax
abuse and inadequate technical training
for tax auditors evident in many developing
countries are the main weaknesses which
may cause failure to prevent profit diversion
by foreign investors. 92 Therefore, it is
essential for Indonesia to have more
guidelines so that taxpayers as well as
tax officials have common understanding
and to reduce different interpretations.
For taxpayers, the guidelines are important
as a starting point in fulfilling the legal
requirements. Tax officials also need
such guidelines as guidance for transfer-
pricing auditing activities. If they have
common understanding and ‘speak with
92
Vito Tanzi and Howell Zee, Tax Policy for
Developing Countries (2001) International
Monetary Fund
<http://www.imf.org/external/pubs/ft/issues/iss
ues27/index.htm> at 27 March 2006.
Transfer Pricing Regulations in Indonesia:
Some Thoughts for Reform
the same language’, it is possible to
reduce future disputes and at the same
time, safeguard the national income.
4 Price or Transaction Adjustments
There are several ways for adjustments
to be made:
1. Only the price that is adjusted.
2. The transaction is adjusted to
arrive at a fair price.
3. Interest payments are recategorised
as dividends.
4. Non arm’s length payments are
not deductible under other
provisions.93
(a) Price-only adjustment
If goods or services are transferred at
below an arm’s length price, the tax
authority usually makes an upward
adjustment. Hence, profitability and taxable
income is increased. This approach is
also preferred by Article 18(3).
93
Pagan and Wilkie, above n 4, 60.
33
JAP Vol.3, No.1, Oktober 2008
(b) Transaction adjustment
In this instance, the tax authority tries to
change the nature of the agreements as if
the commercial agreements are conducted
in different ways. For example, if an
MNE grants an offshore company a
licence to manufacture a product and
then buy most of those products, this
approach basically recategorise such
transactions to be a contract manufacturing
agreement as if the offshore company
carries a very limited risk and completely
dependent to the MNE. It does not take
into account the actual terms of the
contract and the independence level of
the offshore company.94
(c) Interest payments are recategorised
as dividends
In essence, these provisions treat excessive
interest payments to associated-non resident
company as dividend and therefore, not
deductible. Such rules are also present in
Indonesian anti-avoidance articles.
Article 18(3) of the Law Number 17 of
2000 does not clearly states it, however,
its elucidation provides that the Director
General of Taxes is authorised to
characterise debt as equity and hence,
interest payment is treated as dividend.
Nevertheless, there is no further explanation
on how its practical mechanism and as a
result, its application is unclear.
94
An example of this approach can be found in
Sunstrand Corporation v Commisioner, a US
case where the Internal Revenue Service (IRS)
recharacterised the contract between
Sunstrand Corporation and SunPac — its
Singaporean subsidiary — to be a contract
manufacturing agreement. The Court rejected
the IRS’s contract manufacturing theory on
the basis that the actual contract did not
oblige the parent company to purchase the
subsidiary’s products.
34
(d) Non-Arm’s length payments under
other provisions
Whilst a transfer pricing provision clearly
denies a non-arm’s length payment, it is
possible that there may be other provisions
in income tax legislation that also provides
that such payments are not deductible.
In such situation, taxpayers have to be
aware the advantage of using one rule
over another.
5 Certainty or Flexibility
Certainty means that taxpayers are able
to know in advance what tax consequences
they may face in relation to a certain
business transaction. On the other hand,
flexibility approach focuses on the facts
and circumstances surrounding the
transactions and therefore, it leaves a
degree of freedom to an agreeable arm’s
length transfer price.95 As a result, certainty
and flexibility sometimes conflict. A
country that emphasises certainty tends
to have a detailed arm’s length provision
compared to the shorter provisions in the
flexible approach. However, as discussed
previously, there is a tendency that
flexible-focussed country begins to provide
more detailed guidelines that do have
the force of law. Such guidelines are
merely aimed at providing guidance on
the important aspects in a transfer pricing
inquiry. This is usually accompanied
with well-trained tax officials.
In this situation, the Indonesian approach is
unclear. It does not have detailed
transfer pricing provisions – which may
be indicated as focusing on flexibility –
and is without more detailed transfer
pricing guidelines. 96 This may cause
‘grey areas’ that may be subject to
multiple interpretations. This needs to be
reduced. 97 Without strong legislative
95
Pagan and Wilkie, above n 4, 64.
96
Gunadi, above n 24.
97
Hudiono, above n 89.

provisions and a proper training for tax
officials, it is likely that developing
countries – like Indonesia – are unable
to prevent profit diversion.98
6 Compliance Requirements
There are two concerns relating to
compliance requirements: the reporting
requirements and a non-compliance
penalty. 99 The first instance, some
countries may require taxpayers to
complete separate documentation listing
all of the related-party transactions.
Other countries may only rely on the
annual standard tax return form. In
relation to penalties, usually there are
two types of penalties: a flat-rate
monetary penalty and a percentage-
based penalty.100 While the first type of
penalty is usually insignificant in term of
its monetary value, the second type of
penalty can be more material.
In Australia for instance – in Taxation
Ruling TR 98/11 – the Commissioner
states that there are four reasons why
documentation is important:
1. Statutory requirements;
2. Relevance to penalty considerations;
3. The burden of proof which rests
with taxpayers;
4. Practical advantages in reducing
the risk of tax audits and adjust-
ments and in communicating your
position to the ATO.101
The documents to be prepared extend
from budgets, business plans and
financial projections to all other documents
required in preparing tax return. In
addition, the ATO requires taxpayers to
have contemporaneous documentation
in relation to transfer pricing, especially
98
Tanzi and Zee, above n 92.
99
Pagan and Wilkie, above n 4, 67.
100
Ibid, 70.
101
Above n 91.
Transfer Pricing Regulations in Indonesia:
Some Thoughts for Reform
to justify the outcome of the transactions
against the arm’s length principle. There
is also a disclosure requirement for
related-party transactions under
Schedule 25A. The information to be
disclosed includes:
1. Industry classification code;
2. Transaction type;
3. Amounts per transaction type;
4. Countries;
5. Percentage of transactions covered by
contemporaneous documentation;
6. Transfer pricing methodologies
selected and applied.
In Indonesia – even though the DGT
may require taxpayers to produce
invoices or agreements – there is no
formal documentation requirement.
However, commencing 1 January 2002,
there is a disclosure requirement for the
type of transaction, the value of the
transaction, the transfer price and the
methodology used to determine the
transfer price.102 There is no deadline for
documentation preparation and
submission, leaving taxpayers with
uncertainties as to what and when the
documentations are required.
In relation to penalty, the applicable
rates in Australia are as follows:
1. A penalty of 50% of the tax
avoided for transfer pricing
arrangements entered into with
the sole or dominant purpose of
enabling a taxpayer to pay no or
less tax; reduced to 25% if the
taxpayer has a reasonably arguable
position (RAP) (s. 225(1)(d) ITAA
1936); or
2. A penalty of 25% of the tax
avoided for other transfer pricing
arrangements; reduced to 10% if
the taxpayer has a RAP (s.
225(1)(e) ITAA 1936).
102
Ernst and Young, above n 25.
35
JAP Vol.3, No.1, Oktober 2008

The penalty can be increased by 20% if appropriate method is selected and a

a taxpayer prevents or hinders the ATO’s proper outcome is produced.
transfer pricing audit (s. 226C(b)(i) ITAA
By contrast, the Indonesian transfer
1936) or has been penalised under a
pricing provisions are silent on such
scheme section in previous year (s.
matters.
226C(b)(ii) ITAA 1936). However, the
penalty may be reduced by 20% if the The elucidation of Article 18(3) states
taxpayer makes a voluntary disclosure that there are some methods to allocate
after an audit is informed (s. 226D ITAA income and expenses including
1936). There is also an 80% reduction if comparable data, profit allocation based
the voluntary disclosure is made before on function or participation of related
the release of an audit notice (s. 226E Taxpayer, and other methods and SE-
ITAA 1936). 04/PJ.7/1993 provides some examples.
However, the overall process remains
In Indonesia, there is a penalty of 2% per
uncertain.
month up to a maximum of 48% for an
underpayment (Article 13(2) of the Law
Number 16 of 2000 on General
Provisions and Tax Procedures). 103
However, there is no penalty reduction
for taxpayers who make a voluntary
disclosure. As a result, taxpayers are likely
to wait the results of the DGT’s audit
because making a voluntary disclosure
in the event of an audit does not make
any difference. Introducing a penalty
reduction may increase taxpayers’
compliance.

C. Other Considerations
1 Transfer-Price Tests
Associated entities often deal with each
other surrounded by motives other than
pursuing commercial interests. As a
result, it is necessary to evaluate whether
the transfer prices are set in a fair manner.
In Australia, choosing the appropriate
methodology is part of a four-step
process (figure 3). 104 This chart shows
that step 1 to step 3 do not flow linearly
and is open to possible movements
among these steps until the most

103
Law Number 16 of 2000 .
104
Above n 91.

36
 Transfer Pricing Regulations in Indonesia:
Some Thoughts for Reform

Figure 3 The ATO’s four-step process.

Source: TR 98/11

2 Audit-Risk Assessment
standard.105 The ATO may proceed to an
Transfer pricing is complex and its audit
audit if it found that the dealings are
involves an analysis of a wide range of
structured in such a way that it is
factors. As it may threaten the national’s
reasonable to believe that there may be
potential income, transfer pricing abuse
a tax avoidance scheme. Some factors
may attract harsh penalties. A dispute
taken into account include:
between taxpayers and tax authorities
may end-up in court litigations, which 1. The use of tax havens where little
are usually long and costly. As a result, or no economic value is added;
an assessment of a transfer pricing audit 2. The use of back-to-back arrangements
risk is important. In this context, to conceal the full consideration;
taxpayers often require guidelines on 3. Complex and circular arrangements
how a tax authority approaches related- with little or no business purpose.
party transactions they may have.
The following chart illustrates the ATO’s
The Australian approach in this matter approach.106
can be found in TR 98/11. In this ruling,
the Commissioner states that the ATO’s
resources are allocated based on the
perceived risk of taxpayers’ non-
compliance with the arm’s length
105
Ibid.
106
Ibid.

37
JAP Vol.3, No.1, Oktober 2008

Figure 4 The ATO’s approach to arm’s length compliance.

Source: TR 98/11

The chart below shows the ATO’s risk

guidelines in relation to a transfer
pricing audit that may be faced by
taxpayers.107

107
Ibid.

38
 Transfer Pricing Regulations in Indonesia:
Some Thoughts for Reform

Figure 5 Audit risk assessment.

Source: TR 98/11

In Indonesia, there is no specialised

transfer pricing audit. Transfer pricing D. Alternative Methods
investigations are conducted as part of
regular tax audits. However, it is unclear 1 Cost-Based Approach
at what situation a taxpayer face a higher In this approach, the fair transfer price is
risk of transfer pricing audit and how it calculated based on its cost. Chalmers
will be approached. suggests the following formula:
Minimum
Additional outlay costs per unit incurred Opportunity costs per unit to
+ = transfer
to the point of transfer the supplying division
price108

108
Kerrie Chalmers, International Transfer Pricing - Determining an Arm's Length Price (2003)
<http://pandora.nla.gov.au/pan/23524/20030304/CHALMERS.doc> at 19 April 2006.

39
JAP Vol. 3, No. 1, September 2008
He further adds that there are four
scenarios that may be encountered:
1. The appropriate transfer pricing
methodology is the full cost if
there is a competitive intermediate
market and the supplying division
has no idle capacity.
2. The transfer price consists of
variable costs plus a negotiated
portion of fixed costs if there is a
competitive intermediate market
and the supplying division has
idle capacity.
3. The transfer price also consists of
variable costs plus a negotiated
portion of fixed costs if there is no
market for the intermediate
products.
4. If there is no competitive inter-
mediate market and the supplying
division has idle capacity, the
aforementioned formula cannot
be used. In such situations, a
market has to be created possibly
by reducing the price.109
2 Global Formulary Apportionment
and Global Profit Split
The traditional arm’s length approach
has both theoretical and practical
difficulties and the formulary apportion-
ment methodology could be an appro-
priate alternative. This is because it
accepts the firm-integration concept and
proposes a workable solution that provides
each jurisdiction with tax revenue based
on economic activities that take place in
that jurisdiction. Additionally, it can be
used as a mean to solve the ‘source-state
base erosion’ by employing factors such
as sales in the jurisdiction of
consumption. 110 Moreover, it offers
certainty and simplicity.111
109
Ibid.
110
Arthur J. Cockfield, 'Formulary Taxation
Versus the Arm’s-Length Principle: The Battle
40
However, the formulary apportionment
may not be the universal remedy, as
evident for income from intangible
properties. In addition, it is also argued
that the formulary apportionment can
lead to more aggressive tax planning
activities. For example, a firm may hire
independent contractors to exclude
salary and wages in the calculation of a
profit portion for a jurisdiction. In
addition, determining what constitute a
unitary enterprise can be difficult and
may increase compliance and enforce-
ment burden.112 It may not be accepted
on tax-sovereignty basis as well as it
would oblige participants to comply
with formulas and tax rules set at a
supranational level. It is often unrealistic
to expect that a country would willingly
abandon its self-interests for the benefits
of others.113
Broadly, the mechanic is as follows:
1. The entire net income for a whole
MNE is computed.
2. Income not related to the unitary
business is deducted from the
entire income.
3. The remaining is the taxable
income to be apportioned among
jurisdictions.
In relation to this, Jinyan Li proposes the
‘Global Profit Split’ (GPS) which is
similar to the formulary apportion-
ment. 114 The term ‘global profit split’ is
chosen to avoid the use of ‘formulary
taxation’ which is considered ‘dirty’ in
some international tax circles.115
Among Doubting Thomases, Purists, and
Pragmatists' (2004) 52(1) Canadian Tax
Journal 114.
111
Célestin, above n 56, 379-80.
112
Cockfield, above n 110, 117-8.
113
Ibid, 120.
114
Li, above n 55, 844.
115
Cockfield, above n 110, 116.

Under the GPS, an ‘integrated business’
has to be identified first. This definition
is crucial as it provides the parameters of
profit to be split. Li states that there are
two tests available for this purpose: the
flow-of-value test and the operational-
interdependence test. A business is
integrated under the first test if there is a
flow of value among associated entities.
Under the latter, a business is integrated
if there is a significant amount of
‘interdependent basic operations’ under-
taken in different jurisdictions.
Once an ‘integrated business’ has been
defined, the ‘global profit’ needs to be
determined. The global profit ascertains
the size of profit to be split among
participants. Only revenue derived from
independent third-parties that would be
included. Lastly, the profit is allocated
among participants based on a certain
formula. The variables to be used may
include payroll, sales, tangible and/or
intangibles assets. Each participant has a
portion of the global profit represented
as a percentage in proportion to its share
of payroll, sales, tangible property, and
other intangibles.
Li argues that the GPS is superior
compared to the existing system because
it promotes inter-nation equity, it is
consistent with economic theory, it can
overcome the tax haven problems, and it
supports the simplicity principle. 116
However, she also recognises that it also
has the weaknesses of traditional
formulary apportionment.
Firstly, there is a potential double
taxation if a consensus on the definition
of ‘integrated business’ and ‘global
profit’ or on the measurement and
location of the variables in the formula
could not be reached. Secondly, it
endorses an arbitrary allocation, and
116
Li, above n 55, 851.
Transfer Pricing Regulations in Indonesia:
Some Thoughts for Reform
lastly, there may be transitional
difficulties because it requires changes in
legislations and international treaties. In
addition, it requires strong political will.
Li asserts that the first problem could be
dealt with by improving uniformity. The
second weakness can also be addressed
using a well thought-out design of the
apportioning formula. However, the last
difficulty could be more complicated as
it involves a strong political will.
Nevertheless, Li believes that the current
application of formulary apportionment
in Canada and the USA and the
adoption of a global accounting standard
have provided some precedents. Further,
she believes that if formulary apportion-
ment were adopted in European Union
countries, others would certainly follow.
Besides, the GPS actually stems from the
historical evolution of the arm’s length
principle and the application of the
existing formulary apportionment in
many situations. These conditions would
support the implementation of GPS
internationally.117
In summary, the formulary apportion-
ment is a compromised approach. To be
applied successfully, it requires signifi-
cant international efforts. 118 As for
Indonesia, one possible way would be to
bring it forward through the ASEAN level.
IV CONCLUSION
Recent international surveys have shown
that transfer pricing issues are
considered fundamental by most
respondents. Transfer pricing is defined
as the pricing policies and practices that
are established when physical goods,
intangible properties, and services are
117
Ibid, 855-7.
118
Célestin, above n 56, 303.
41
JAP Vol. 3, No. 1, September 2008
charged between business units within a
group. Within an MNE, transfer prices
take several forms: payments of goods,
trade credits, equity contribution,
dividend payments, loans, interests, fees
for intangible property, fees for specific
divisible services, and overhead costs.
Originally carrying a neutral meaning,
transfer pricing is often perceived
negatively as it induces an idea of profit
diversion.
The OECD transfer pricing guidelines
plays a significant role in this matter
which is based on the arm’s length
principle. These guidelines introduce
several methods in analysing related-
party transactions. Broadly, these methods
can be grouped into the traditional
transactional methods (CUP, RPM, and
CPM) and transactional profit method
(PSM and TNMM). The OECD expresses
its preference on the first group.
Increasingly adopted as the de facto
standard, the arm’s length principle is
not without weaknesses. The main flaw
is that it ignores the synergistic effects
within an MNE. In addition, it relies
heavily on comparable transactions. As
long as the comparable are available,
the arm’s length principle can result in
an unbiased and precise standard.
However, finding such comparables is
often difficult. Moreover, the application
of the RPM and the CPM tend to
produce one-sided solutions as they
allocate risks (profits or losses) on the
hand of the purchaser (the RPM) or the
supplier (the CPM).
Analysing transfer pricing provisions in
income tax legislation generally involves
a discussion of a number of factors: the
taxpayers, the transactions, the fair price
determination, the price or transaction
adjustments, certainty and flexibility issues,
and the compliance requirements. In
addition, there may other factors to be
considered including the transfer price
42
tests, risk assessment, and its application
in banking and financial industry. A
number of proposed suggestions include
a wider definition of related-party
transaction, reducing ‘grey area’ that
may be subject to multiple
interpretations, and a penalty reduction
to increase taxpayers’ compliance. It is
also suggested that the DGT introduces
its approach on transfer pricing audits to
gives taxpayers more certainty and
knowledge on what to expect in the
event of such audits. Additionally, a
guideline that enables taxpayers to
assess their own situations in relation to
a transfer-pricing audit risk may be
necessary.
In cases where comparables are
unavailable, it has been shown that the
traditional arm’s length methods may not
apply. In this case, it is argued that other
methods should be applied. The
Australian Commissioner of Taxation
chooses to approach such transactions
using profit based method or other
indirect arm’s length methods, even
though he asserts his preference over the
traditional arm’s length methodologies.
By contrast, the Indonesian approach is
unclear. However, the elucidation of
Article 18(3) opens a possibility to use
methods other that the traditional
approaches. In such situations, the
formulary apportionment method or
cost-based method can be considered.
In conclusion, while transfer-pricing
regulations are clearly not new for
Indonesia, it is the view of this paper that
Indonesia could still benefit from more
detailed regulations as evidenced by the
Australia’s approach to transfer pricing
rules and guidelines. After all –
according to an Indonesian economist,
Faisal Basri – ‘[t]he devil is in the
details…’.119
119
Hudiono, above n 89.

BIBLIOGRAPHY
1. Articles/Books/Reports
Hudiono, Urip, 'Tax laws still
complicated, have grey areas:
Analysts', The Jakarta Post (Jakarta),
16 November 2005
'PMA Nakal Harus Dikenai Sanksi
Pidana Penghindaran Pajak Melalui
Pola Pengalihan Keuntungan',
Kompas (Jakarta), 28 November
2005
Célestin, Lindsay C., The Formulary
Approach to the Taxation of
Transnational Corporations: a
Realistic Alternative? (Ph.D. Thesis,
University of Sydney, 2000)
Chalmers, Kerrie, International Transfer
Pricing - Determining an Arm's
Length Price (2003)
<http://pandora.nla.gov.au/pan/2352
4/20030304/CHALMERS.doc> at 19
April 2006
Cockfield, Arthur J., 'Formulary Taxation
Versus the Arm’s-Length Principle:
The Battle Among Doubting
Thomases, Purists, and Pragmatists'
(2004) 52(1) Canadian Tax Journal
114
Darussalam and Septriadi, Danny,
'Upaya Menangkal Praktik
Penghindaran Pajak', Bisnis
Indonesia (Jakarta), 12 December
2005
Deutsch, RL et al, Australian Tax
Handbook 2004 (2004)
Elliott, Jamie and Emmanuel, Clive,
'International Transfer Pricing' in
Andrew Latymer and John
Hasseldine (eds), The International
Taxation System (2002) 157
Ernst and Young, Transfer Pricing Global
Reference Guide (2005) Ernst and
Young
Transfer Pricing Regulations in Indonesia:
Some Thoughts for Reform
<www.ey.com/transferpricingreferen
ceguide> at 27 March 2006
Gunadi, 'Mampukah ASW Atasi Transfer
Pricing?' Bisnis Indonesia (Jakarta),
30 January 2006
James, Simon, 'The Future of
International Tax Environment' in
Andrew Latymer and John
Hasseldine (eds), The International
Taxation System (2002) 105
Leibfritz, Willi, Thornton, John and
Bibbee, Alexandra, Taxation and
Economic Performance (1997)
Lewis, David and Lane, Diane, 'Transfer
Pricing: Recent Practices,
Perceptions, and Trends' (2004) 7(5)
The Tax Specialist 249
Li, Jinyan, 'Global Profit Split: An
Evolutionary Approach to
International Income Allocation'
(2002) 50(3) Canadian Tax Journal
823
Neighbour, John, Transfer Pricing:
Keeping it at Arm's Length (2002)
OECD Observer
<http://www.oecdobserver.org/news
/printpage.php/aid/670/Transfer_pric
ing:_Keeping_it_at_arms_length.html
> at 4 January 2006
OECD, Model Tax Convention on
Income and Capital (2005)
OECD, Transfer Pricing Guidelines for
Multinational Enterprises and Tax
Administration (2001)
Pagan, Jill C and Wilkie, J Scott, Transfer
Pricing Strategy in Global Economy
(1993)
Plasschaert, Sylvain R.F., Transfer Pricing
and Multinational Corporations: an
Overview of Concepts, Mechanisms,
and Regulations (1979)
43
JAP Vol. 3, No. 1, September 2008

PricewaterhouseCoopers, Indonesian Tax Turner, Liane and Apelt, Christina,

Flash (2003) 'Globalisation, Innovation, and
PricewaterhouseCoopers Information Sharing in Tax System:
<www.pwc.com/id> at 27 March The Australian Experience of the
2006 Diffusion and Adoption of Electronic
Lodgement' in Rodney Fisher and
Riahi-Belkaoui, Ahmed, Significant
Michael Walpole (eds), Global
Current Issues in International
Challanges in Tax Administration
Taxation (1998)
(2005) 221
Sadiq, Kerrie, The Fundamental Failing
of the Traditional Transfer Pricing
Regime - Applying the Arm’s Length 2. Legislations
Standard to Multinational Banks
Income Tax Assessment Act 1936 (Cth)
Based on a Comparability Analysis
(2003) Law Number 16 of 2000
<http://pandora.nla.gov.au/pan/2352
Law Number 17 of 2000
4/20030305/Kerrie%20Sadiq.doc>
at 28 April 2006
Stiglitz, Joseph, Globalization and Its 3. Other Sources
Discontents (2002)
Nota Keuangan dan Rancangan
Tanzi, Vito and Zee, Howell, Tax Policy Anggaran Pendapatan dan Belanja
for Developing Countries (2001) Negara Tahun Anggaran 2006
International Monetary Fund (2005)
<http://www.imf.org/external/pubs/ft <http://www.depkeu.go.id/Script/Dir
/issues/issues27/index.htm> at 27 ectLink.asp?url=http://www.djapk.de
March 2006 pkeu.go.id/APBN/NK%20RAPBN%2
02006.pdf> at 14 March 2006
The Economist Intelligence Unit Ltd.,
Indonesia Risk: Tax Policy Risk Australian Taxation Office, TR 98/11:
(2006) Dow Jones Reuters Business Income tax: documentation and
Interactive LLC practical issues associated with
<http://global.factiva.com.dbgw.lis.c setting and reviewing transfer pricing
urtin.edu.au/ha/default.aspx> at 27 in international dealings (1998) The
March 2006 Australian Taxation Office
<http://law.ato.gov.au/pdf/tr98-
The Economist Intelligence Unit Ltd.,
11.pdf> at 30 April 2006
Indonesia: Tax regulations (2006)
Dow Jones Reuters Business
Interactive LLC
<http://global.factiva.com.dbgw.lis.c
urtin.edu.au/ha/default.aspx> at 27
March 2006
Toumi, Marika, 'Anti-Avoidance and
Harmful Tax Competition: From
Unilateral to Multilateral Strategies?'
in Andrew Latymer and John
Hasseldine (eds), The International
Taxation System (2002) 83

44