Transfer Pricing - EY Pricing Current issue. INDONESIA ... Transfer Pricing Alert June 2015 3 ......

EY Han Young newsletterJune 2015

Transfer Pricing Alert

2Transfer Pricing Alert June 2015

Transfer PricingCurrent issue.INDONESIA / CANADA / THAILAND


TP Current Issues

INDONESIA

Regulation of the Ministry of Finance of the Republic of Indonesia Number 7/PMK.03/2015, Guidelines for Establishment and Implementation of the Advance Pric-ing Agreement (“PMK- 07”) contains the framework that will guide the DGT’s implemen-tation of Advance Pricing Agreements (“APAs”) in Indonesia as well as provides further clarity on the criteria for Indonesian taxpayers applying for an APA. PMK-7 is effective on 11 April 2015, i.e. 90 days after its enactment date on 12 January 2015. Any exist-ing APA process currently submitted to the DGT will be processed further based on the PMK-07 regulation.

The DGT first released guidance on the APA application and implementation process in Indonesia through the DGT Regulation PER-69/PJ/2010, Advance Pricing Agreement (“PER-69”). Since the release of PER-69, there have been a number of APA applications filed by taxpayers in Indonesia and negotiations between the Indonesian Tax Authorities and Foreign Country’s Tax Authorities have occurred in relation to certain of these APA applications. However, as an implementation guideline had not yet been released to enable the DGT to implement agreements arising from APA negotiations no APAs have been formally agreed since the release of PER-69.

Some of the key elements of PMK-07 are:

Parties authorized to apply for APA in Indonesia

PMK-07 specified that there are two parties that may initiate an APA application, being:

▶ An Indonesian domestic taxpayer or a foreign taxpayer conducting business through a permanent establishment; or

▶ Taxpayer in foreign country or jurisdiction through the foreign country’s tax author-ity.

In the case of foreign country taxpayer lodging a bilateral APA application through the foreign country’s tax authority an APA application will also need to be submitted by the Indonesian domestic taxpayer or permanent establishment. The preliminary discussion or pre-filling process for the proposed APA will then conducted in accordance with the Indonesian APA regulation irrespective of where the APA is initiated.

Operating history

PMK-07 establishes a new criteria in that an Indonesian taxpayer who wants to apply for APA in Indonesia must have been in operation or conducting business activities for at least three years before they can file for an APA.

APA is possible in Indonesia


TP Current Issues

APA process according to PMK-07

PMK-07 stipulates the APA process along with the corresponding deadlines to be ad-hered by taxpayers and foreign country’s tax authority when applying for APA in Indo-nesia. The corresponding deadlines in the APA process in more detailed than stipulated under PER-69 and are outlined below:

Fiscal years covered under the APA

According to Article 4, an APA can cover three fiscal years or four fiscal years when foreign country’s tax authority is involved. PMK-07 is silent on whether the four fiscal years for a bilateral APA includes a one year roll back as stated in PER-69.

Additional APA pre-filing requirements

PMK-07 states additional APA pre-filling requirements on top of the requirements con-tained in the PER-69. The additional documents needed to be filled for pre-filling APA are as follows:

▶ Explanation on the reasons to submit an APA application;

▶ Detailed explanation on the taxpayer’s business plan; and

▶ Details on the related party transactions for the last three fiscal years.

INDONESIA

To be submitted to DGT at least 6 months before the start of the fiscal year that the taxpayer applied APA for

DGT will provide formal invitation to submit the APA at the latest, 1 month before the end of fiscal year of the application of pre-lodgment is filed by the taxpayer

To be submitted to the DGT through DGT II, at least at the end of the fiscal year before the fiscal year subject to the APA begins

Discussion team would conduct analysis on the related party transactions, which are then to be provided to quality assurance team for further review

Pre-lodgment Formal invitation Formal application APA discussion



TP Current Issues

INDONESIA

APA discussion stage

The APA discussion stage would be led by the discussion team selected by the DGT, where the discussion team would among other steps:

▶ Conduct economic analysis on the fiscal years in question;

▶ Conduct discussions and request further information from the taxpayers; and

▶ Propose an audit for an alternate purpose in analyzing and evaluating the APA ap-plication on factors deemed necessary.

It is unclear at this stage as to what any additional audit would comprise of.

The result of the analysis from the discussion team shall be reviewed by quality assur-ance team chosen by the DGT in order to assist DGT in deciding whether to accept the APA recommendation from the discussion team.

Article 15 (1) of PMK-07 stipulates that the APA discussion stage should be conducted within one year after the formal APA application is lodged with the DGT.

The outcome of the APA discussion stage with the taxpayer (for unilateral APAs) and the other taxing authority (for bilateral APAs) will be an agreement on the APA or disagree-ment and cancellation of the APA

Formation of discussion team and quality assurance team

Under PMK-07, the DGT specifically mentioned that the Director General of Taxation shall form a discussion team and quality assurance team for the purpose of the APA application.

The DGT stipulated that the discussion team and quality assurance team shall comprise members within the DGT without providing any further explanation whether these team members should not be conflicting with any involvement in the taxpayer’s tax audit pro-cessing. It is expected that the provisions under PER-69 regarding the segregation of tax audit and APA processing will remain as further guidance is issued by the DGT on this point (see below).

Authorized party to sign the APA

PMK-07 has provided the Director General of Taxation with the authority to sign the APA and issue a decision detailing the APA and its implementation.



TP Current Issues

INDONESIA


APA annual compliance

PMK-07 also introduces the annual compliance requirements for taxpayers that have an agreed APA. Each year, the taxpayer will have the obligation to submit a compliance report prior to four months after the end of the fiscal year. In the case that the agreed APA covers fiscal year prior to the signing of the APA agreement, a compliance report must be submitted within four months after the APA is signed.

The annual compliance report should cover critical assumptions facing the business and related party transactions during the fiscal year. When these critical assumptions change, the taxpayer would have to submit a notification to the DGT.

A taxpayer can apply for re-evaluation or cancellation of APA when critical assumptions under Article 20 paragraph 4 are altered, within thirty days of such occurrence.

APA renewal

PMK-07 allows APA renewal to be conducted in the last fiscal year of the APA enact-ment. The APA renewal application shall be treated the same as the filing of APA ap-plication.

Further regulations revolving the APA in Indonesia

PMK-07 indicated that further regulations from the DGT will be issued to explain the formation of the discussion team and quality assurance team. Further DGT regulations would also cover the renewal and evaluation of APA.


TP Current Issues

CANADA

Canada Revenue Agency releases guidance on role of multiple-year data in transfer pricing analyses

Recently, the Canada Revenue Agency (CRA) released new transfer pricing memoran-dum TPM-16, which reaffirms the CRA’s existing positions and provides guidance on the use of multiple-year data in determining an arm’s-length price.

Taxpayers may need to spend additional attention and effort to ensure that their trans-fer pricing policies and documentation take this guidance into account. TPM-TTPM-16 refers to the Organisation for Economic Co-operation and Development (OECD) guid-ance from paragraphs 3.75 to 3.79 of the OECD Transfer Pricing Guidelines for Multi-national Enterprises and Tax Administrations (the OECD Guidelines), which is generally supportive on the use of multiple-year data and states that “It is the CRA’s policy that the determination of arm’s-length prices used in related party transactions for Canadian taxpayers should be established for each individual tax year using the results obtained from comparable transactions in the relevant tax year.”

Thus the CRA states its view that the dates of comparable transactions or financial data are particularly relevant for establishing the level of comparability to a related party transaction.

TPM-16 makes an explicit exception for Advanced Pricing Arrangements (APAs), in which historical data is often averaged over multiple years within the application of a transfer pricing methodology in order to benchmark a reasonable outcome in future years.

The CRA then states categorically, “Comparable arm’s-length transactions undertaken in the same tax year as the controlled transaction are expected to provide the most pertinent data for use in a comparability analysis.”

Furthermore, the memorandum makes clear the CRA’s position that while multiple-year data may be relevant for evaluating comparability in certain circumstances, the data derived from the taxation year under evaluation will be “of the greatest value” when determining the appropriate transfer price for that year.

However, It is often not possible to determine whether such comparable transactions that were entered into in a past taxation year continue into the current taxation year. For example, certain categories of transactions, such as royalties for the license of intangi-bles, are usually benchmarked by finding comparable agreements in databases. Despite the positions expressed in TPM-16, there are often characteristics of such transactions, such as the nature of the intangible being licensed, that are more relevant to the assess-ment of comparability


TP Current Issues

CANADA

Canada Revenue Agency releases guidance on role of multiple-year data in transfer pricing analyses

Statistical Tools

The memorandum is clear in its declaration that the use of an interquartile range is not appropriate in establishing an arm’s-length range of results,

The memorandum asserts that the use of such statistics does not consider the eco-nomic characteristics of the transactions in making the determination that the first and last quartiles of observations are not part of the arm’s-length range of results.

As an example, the application of a transfer pricing method using a three-year weighted average interquartile range of results would not be acceptable in the view of the CRA, which states, “Since comparability cannot be expressed in numbers, It is not possible to apply a statistical tool to arm’s-length data to improve the comparability of the underly-ing transactions or to improve our understanding of the comparability.”

In these ways, the analysis in TPM-16 seems a poor fit for many situations.

Contemporaneous documentation

The very idea of documentation being contemporaneous means that it should be pre-pared concurrently with a transaction that occurs during a given year. However, the challenge that most taxpayers and practitioners have is that current year comparable data may not always be available within the time allowed to document transactions oc-curring during the taxation year. Unfortunately, TPM-16 does not provide insight or guidance on this important issue.

In light of the release of TPM-16, taxpayers should be particularly wary of relying solely on US or multi-jurisdictional reports for Canadian documentation purposes.

Taxpayers need to carefully review the analysis performed in their transfer pricing docu-mentation to ensure that it either uses same year comparable data or clearly explains why not doing so enhances comparability. In addition, taxpayers should not average the tested transaction over multiple years and should be prepared to present the standalone results of the transaction during the taxation year in question.


TP Current Issues

THAILAND

Thailand releases draft transfer pricing act

On 7 May 2015, the Thai Cabinet approved the draft transfer pricing act (draft Act) that will add specific transfer pricing provisions to the Revenue Code. In 2002, the Thai Rev-enue Department (TRD) issued internal departmental guidance, Departmental Instruc-tion No. Paw. 113/2545 (Dl 113), to tax officials for tax audit purposes. The proposed provisions will provide better guidelines on implementation and enforcement of transfer pricing regime in Thailand.

This Alert summarizes the key features of the draft Act.

Authority to assess transfer pricing adjustments

The TRD is granted full authority to make adjustments to taxable income and deductions associated with related party transactions that were not at arm’s length. Two or more entities are related if they form a special relationship, whether directly or indirectly, with regard to ownership, management or control.

Statute of limitations on tax refund claims for corresponding adjustment

To mitigate double taxation, taxpayers who have overpaid taxes on related party trans-actions as a result of transfer pricing adjustments can file a tax refund claim within:

▶ 60 days after receiving notification of tax assessment, or

▶ 3 years from the due date for filing the tax return

Disclosure statement requirements and penalties

Taxpayers are required to prepare and file a disclosure statement with the tax authori-ties within 150 days from the taxable year end, i.e., a due date of the CIT return filing. The required statement must include:

(i) descriptions of relationships of relevant related parties in terms of ownership, man-agement or control; and (ii) the method used in calculating transfer prices on related party transactions. Failure to provide the required disclosure statement or file incom-plete or false statements in the disclosure statement will result in monetary penalties not exceeding THB 400,000 (US$ 12,000).


Transfer Pricing

Sang Min Ahn Partner 02.3787.4602 [email protected]

Stella Kim Director 02.3770.0980 [email protected]

Dong Hoon Ha Director 02.3770.0936 [email protected]

Hoon Seok Chung Director 02.3770.0924 [email protected]

Kyoung Bae Han Director 02.3770.0970 [email protected]

Jae Seong Yun Senior Manager 02.3787.4265 [email protected]

Ki Se Kim Senior Manager 02.3770.0918 [email protected]

Business Tax Service

Min Yong Kwon Partner 02.3770.0934 [email protected]

Dong Chul Kim Partner 02.3770.0903 [email protected]

Jae Cheol Kim Partner 02.3770.0961 [email protected]

Chanyeon Hwang Partner 02.3770.0971 [email protected]

Won Bo Jung Partner 02.3770.0945 [email protected]

Young Ro Bae Executive Director 02.3770.0951 [email protected]

Song Min Oh Executive Director 02.3770.0983 [email protected]

Transaction Tax

Jin Hyun Seok Partner 02.3770.0932 [email protected]

International Tax Service

Jaewon Lee Partner 02.3787.4601 [email protected]

Kyung Tae Ko Partner 02.3770.0921 [email protected]

Yeon Ki Ko Partner 02.3787.4637 [email protected]

Nam Wun Jang Partner 02.3787.4539 [email protected]

Financial Services Organization

Jong Yeol Park Partner 02.3770.0904 [email protected]

Jeong Hun You Partner 02.3770.0972 [email protected]

Dong Sung Kim Partner 02.3787.4238 [email protected]

Human Capital

Danielle Suh Partner 02.3770.0902 [email protected]

Min Ah Kim Executive Director 02.3770.1019 [email protected]

Contacts

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APAC No. 05000257 ED None

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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