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“Independent transactions influenced by special relationship” and clarifications of other (new) concepts in the recently introduced revised transfer pricing regulations in Indonesia

The Ministry of Finance ("MoF") recently issued MoF Regulation No.22/PMK.03/2020 ("PMK 22/2020) concerning advance pricing agreements ("APA"). Although the title and preamble of regulation concerns APA, thereby mentioning the need for renewal of the previous procedural rules concerning APA in MoF Regulation No.7/PMK.03/2015 and BEPS Action Plan no. 14 on improving tax related dispute resolution between jurisdictions, nevertheless PMK 22/2020 has also brought fundamental changes in the scope and application of the arm's length principle which arguably1 also applies outside the context of APA.

Independent transaction influenced by special relationship

One such important change/clarification is the inclusion of "independent transactions influenced by special relationship" in ambit of transfer pricing rules. Previously it was widely assumed that only related parties transactions were included, nevertheless careful reading on Article 18 (3) Income Tax Law suggest that the scope applies to "transactions between parties that have a special relationship". As such, Indonesia applies the concept of "special relationship" which is further defined in Article 18 (4) Income Tax Law to also include de facto control, besides the commonly understood concept of de jure control that is mainly determined by share ownership or voting rights thresholds.

As result, the scope of transfer pricing rules is in fact very wide because de facto control has no precise threshold.2 A potential implication is that for example procurement of raw materials from independent parties that are negotiated on global basis under a master agreement could fall within the scope of transfer pricing rules or for that matter virtually all transactions under guidance of master agreement that are negotiated on global basis.3

Presumably PMK 22/2020 is to clarify further, rather than change, the existing scope of transfer pricing regulations. Still, these developments would indicate that double taxation may occur more frequently because of Country's mismatch of the notion of associated enterprise in tax treaties that could lead the other Country to reject corresponding adjustments.4 The prevention of double taxation in the context of APA's in these transactions would also be questionable since the scope of APA in PMK 22/2020 is limited to "Affiliated Transactions"5 and is silent with regard to independent transactions influenced by special relationship.

Endorsement on secondary adjustments but silence on corresponding adjustments

On that note, it also noteworthy that PMK 22/2020 is silent on the topic of prevention of local double taxation, despite that under the current transfer pricing regulations domestic transactions (i.e. transactions between tax residents in Indonesia), which now also includes independent transactions influenced by special relationship, are subject to the risk of transfer pricing adjustments. Even before the extension of the scope of transfer pricing rules in PMK 22/2020 in practice this has resulted in many local double taxation cases, where a transfer pricing adjustment on a domestic transaction is conducted by tax office A, while the same adjustment is not always recognized as corresponding adjustment in tax office B despite that both tax offices are part of the same government institution.6

On the other hand, secondary adjustments have gained a separate provision in Article 22 (8) PMK 22/2020. It is now emphasized that excess profits by a transfer pricing adjustment that are not represented in the actual accounts of the Company will be treated as deemed dividend distribution. As consequence such dividends will be subject to a withholding tax under the Income Tax Law. Frequently this has been already done in practice, and as matter of fact also impacted VAT related secondary adjustments (for example in transfer pricing adjustments in import purchase transactions or local sales transactions). The secondary adjustment provision is further silent on whether such deemed dividend distribution is subject to the precondition of existence of share ownership relation or not.7

Market access or market share as comparability factor

Other noteworthy change in PMK 22/2020 is the inclusion of "market access" or "level of market share" as comparability factor. Previous regulations and tax audit guidelines are silent on this and typically would only account for the traditional five comparability factors in a transfer pricing analysis.

The inclusion of "market" as comparability factor could be viewed in line with the overall global trend, first lead by the OECD BEPS Action Plan that resulted in an update to the OECD Transfer Pricing Guidelines 2017 that includes substantial changes in Chapter VI concerning Intangibles, particularly on Marketing Intangibles and more recently OECD's Unified Approach in Pillar One work in progress that is intended to overhaul the allocation of taxing rights more in favor of market jurisdictions.

Even before OECD BEPS project, tax authorities and courts around the world has already started to apply these principles on marketing intangibles.8 Among other countries judicial decisions from India have often been an inspiration for tax auditors in Indonesia to impose transfer pricing adjustments based on the so-called bright-line test.9 PMK 22/2020 has not however provided further guidance, while further guidance is urgently needed to prevent multi-interpretation issues in practice.

Number of samples required to use interquartile ranges

The use of interquartile ranges has long been recognized in practice and previous transfer pricing guidelines in Indonesia. Article 8 (7) PMK 22/2020 now clarifies the number of samples required to be eligible to use interquartile range calculation to be of minimum three samples.10 While, in case of two samples a full range may be used. Further the use of a single sample (or more) may justify the use of a single arm's length point provided that "the comparable(s) price value indicator is/are the same".

The above language in PMK 22/2020 is not very clear.11 There is however a Tax Court decision issued in 2015 concerning the question whether the use of a single comparable is allowed in the context of a TNMM analysis. In case Put-65598/PP/M.IIIB/15/2015,12 the Tax Court concurred with the taxpayers' arguments that single comparable in a TNMM analysis is not practically possible, since the use of a single comparable implies that the comparable must be perfect and there is no such thing as a perfect comparable in transfer pricing.


PMK 22/2020 could be viewed as how Indonesia has reacted to update its transfer pricing regulations following the OECD BEPS project, while at same time also as opportunity to clarify the existing regulations. Some elements, such as inclusion of "market" as comparability factor are clearly influenced by BEPS, while others, such as inclusion of "independent transaction influenced by special relationship", endorsement of secondary adjustments, and the use of interquartile ranges are not necessarily new. It would be desirable that the updates in PMK 22/2020 would be further clarified perhaps as amendment on the existing transfer pricing guidelines that were issued before PMK 22/2020 that remain valid as of this date.13 These guidelines could be further substantiated by case examples thereby considering past Tax Court decisions.

Lastly, a general statement in the regulations that transfer pricing is also a matter of prevention of double taxation14 could also provide more certainty for taxpayers to obtain corresponding adjustments.

1. Indeed, it would be very unlikely to assume that there are two separate arm's length regimes applicable in Indonesia, i.e. a regime for related party transactions in general and one separate regime specifically for related party transaction under APA's. On the other hand, the existing guidelines in DGT Regulation PER-43/PJ/2010 as amended in PER-32/PJ/2011 and tax audit guidelines in DGT Regulation PER-22/2013 and Circular letter SE-50/2013 that as of today remains valid.

2. Carmine Rotondaro, "The Notion of "Associated Enterprises": Treaty Issues and Domestic Interpretations – An Overview, International Transfer Pricing Journal (IBFD, January/February 2000), 2-9.

3. F.Y. Jabanto, "Belajar dari Kasus Kodak India", DDTCnews (17 April 2020) available at

4. D.S. Macquarie, "Makna Internasional dari Konsep Hubungan Istimewa: Apakah Ada?", DDTCnews (25 February 2019) available at:

5. Article 2 (2) PMK 22/2020 states "Affiliated transactions" can be covered under APA, while Article 1 (15) PMK 22/2020 defines "Transactions Influenced by Special Relationship comprise of (a) Affiliated Transactions and/or (b) independent transactions influenced by special relationship". Thus suggesting a difference in the scope of transactions that could be covered under APA. Otherwise, Article 2 (2) PMK 22/2020 should just state that "Transactions Influenced by Special Relationship" can be covered under APA.

6. The transfer pricing tax audit guidelines in SE-50/2013 only recommends tax auditors to confirm to the other party registered local tax office to check whether the transaction is genuine and whether there is a risk of tax avoidance by utilizing differences in tax rates or by other means, but there is no general obligation to provide for a corresponding adjustment to prevent double taxation for domestic transactions.

7. In contrast the elucidation of Article 4 (1) (g) Income Tax Law while recognizing the concept of deemed dividends states that "dividend is the share of profit received by shareholders". In Tax Court decision No. Put-58181/PP/M.IIB/13/2014, the Tax Court recognizes deemed dividends to the indirect shareholder (grand parent Company) thereby quoting the Income Tax Law, but crucially to be noted here is that share ownership relationship is still required. Arguably therefore is whether deemed dividends could still be recognized for adjustment in transactions between entities under common control (sister companies) or transactions with independent companies influenced by special relationship, where no share ownership relationship exist at all.

8. A. Fedi, "Transfer Pricing Aspects of Transactions with Marketing Intangibles in a Post-BEPS world", International Transfer Pricing Journal (IBFD, November/December 2019) 407-419.

9. S. Ahuja, "Marketing Intangibles and the bright-line test – an Indian perspective", BNA Transfer Pricing International Journal (2011).

10. it is still questionable whether three samples are sufficient to warrant a reliable application of interquartile ranges, see: D.R. Chairunnisa, "Polemik Jumlah Pembanding pada Penerapan Rentang Kewajaran", DDTCnews (23 April 2020) available at

11. In the context of the use of single comparable Art. 8(6) PMK 22/2020 states "the comparable(s) price value indicator is/are the same", while in the context of the use of ranges Art 8 (7) PMK 22/2020 states " the comparables price value indicators are different". It is unclear whether the language refers to the comparability level of the values or the comparability level of the selected comparables.

12. F.Karyadi and Darussalam, "Indonesia – Transfer Pricing, Country Tax Guides IBFD (accessed 4 June 2021).

13. Supra no.1

14. At the moment transfer pricing regulations is still mainly viewed as anti-avoidance rule in Indonesia. See elucidation of Article 18 (3) Income Tax Law.