Transfer Pricing in Indonesia: An Obligation to Implement Arm's Length Principle

Transfer Pricing in Indonesia: An Obligation to Implement Arm’s Length Principle

InCorp Editorial Team

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When a company performs an internal transaction within the same business group or when a company transacts with its subsidiary, another company or an individual, a transfer price occurs to determine costs and fulfill accounting and tax purposes. When being compared to a market price, a transfer price usually does not differ much. Transfer pricing, then, refers to prices of transactions between associated parties or organisations that may be different from transactions between independent parties or organisations. This article specifically discusses the Arm’s Length Principle, in relation to transfer pricing, in Indonesia.

Transfer Pricing Documentation in Indonesia

In Indonesia, every affiliated local or international transaction is required to comply with the transfer pricing requirements by providing documentation known as TP Doc that comes in three tiers, namely Master File and Local File (must be made available within four months following end of fiscal year) as well as Country-by-Country Report/CbCR (must be made available within 12 months after tax year end).

Transfer Pricing and Arm’s Length Principle in Indonesia

As the standard of transfer pricing method, the Arm’s Length Principle (ALP) must be implemented. The Arm’s Length Principle cannot be separated from Arm’s Length Price, which, in general, is the price to be charged to parties that perform transactions, but these parties are not related to one another.

For affiliated business transactions in Indonesia, it is mandatory to apply the ALP. The following is the ALP guideline that is designed specifically for Indonesian Tax Payers, in accordance with General Tax Directory (DJP) Regulation No. Per-32/PJ/2011.

In Indonesia, the ALP is the governing rule of conditions of a transaction with affiliated party that should be equal or comparable with the conditions of a benchmarked transaction with an independent party. Then, the price or profit of a transaction with an affiliated party should be the same as or within the Arm’s Length Range (ALR) of price or profit of a transaction with an independent party.

The ALR is the price or profit range that comes from testing comparative data during the first and third quarters of a fiscal year by using the same method of transfer pricing.

The following transactions and parties are subject to the ALP:

1. All transactions with affiliated non-resident tax payers

2. Transactions with affiliated resident tax payers that fulfill at least one of following conditions:

  • Both parties are applying the final and non-final income tax of the year, respectively
  • Both parties are applying different rates of sales tax on luxury goods
  • One party or both parties are oil and gas contractor taxpayers


To implement the ALP, it is important to define an independent transaction benchmark , so that the ALP is valid. The following are the general guideline to define a reliable benchmark:

1. There should be no material different conditions of  two compared prices. Or if any, then it should be adjustable to a particular price to eliminate the material difference.

2. If internal and external benchmark data that are available have the same comparability level, then the internal data are preferred to be used as the benchmark.

3. The internal benchmark data from incidental (ad hoc) transactions are only usable as a benchmark for incidental (ad hoc) affiliated transactions.


The affiliated transactions should consider the implementation of the ALP if the comparability is correct and meet the requirements in the regulation. A comparability analysis between affiliated transactions and independent transactions should consist of the following:

  • Goods or service characteristic analysis
  • Functional analysis
  • Contractual analysis
  • Economic analysis
  • Business strategy analysis


Nevertheless, tax payers are allowed to propose an Advance Pricing Agreement (APA) to the tax office in order to avoid any possible issues in the future that come from the affiliated transactions. An APA is an agreement between tax payers and the Indonesian Tax Office or between the Indonesian Tax Office and the tax authority of another country to determine the transfer pricing in advance before the transaction takes place.

How Cekindo can Assist

Comply with the statutory requirements in Indonesia and international practice of transfer pricing to seamlessly run a business in Indonesia. Whether you need assistance with transfer pricing compliance or simply require a transfer pricing advisory, our team of transfer pricing experts is at your disposal.

Complete the form below to have a further discussion with us. 

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Daris Salam

COO Indonesia at InCorp Indonesia

With more than 10 years of expertise in accounting and finance, Daris Salam dedicates his knowledge to consistently improving the performance of InCorp Indonesia and maintaining clients and partnerships.

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